Jack in the Box turns to financial incentives to get operators to grow

The burger chain, eager to spur unit growth, is giving franchisees a break on royalties over four years if they agree to open at least three locations.
Jack in the Box franchise incentives
Jack in the Box is providing royalty breaks for operators who agree to build three units. / Photograph: Shutterstock.

Jack in the Box wants its franchisees to build more restaurants and is willing to give them a break if they do.

The San Diego-based burger chain said Tuesday that it would cut royalties on new units if operators agree to build at least three locations by March of next year and comply with development schedules.

If they do, the company will give those locations a discounted royalty, normally 5% of a unit’s revenues.

Royalties would start at 1% the first year, 2% the second, 3% the third and 4% the fourth before getting to 5% for the remainder of the agreement. Jack in the Box said this could save operators up to $180,000 in payments over the first five years of a restaurant’s operation.

For Jack in the Box, the reasoning is simple: It wants operators to build more locations. The company has been largely stuck on 2,200 restaurants since 2009.

The company for years devoted much of its effort on refranchising, opting to shift from a mostly company-run model to one in which 93% of its restaurants are franchised. As such, new and existing franchisees simply bought company stores rather than open new ones.

In addition, the company’s sales challenges and franchisee unrest over cuts to marketing and corporate overhead kept franchisees from developing new units. And some markets further from Jack in the Box’s California base didn’t perform well, such as St. Louis.

The lack of development has largely held the company back. System sales since 2009 have grown by just 33%. That has allowed smaller chains like the Texas-based Whataburger and the Wisconsin-based Culver’s to take market share from the larger Jack in the Box.  

System sales at Whataburger have grown 162% over that same time while Culver’s sales are up 280%. 

Jack in the Box in recent years has been taking steps to change that. It has built a franchise sales department. It has acquired stores in weaker markets to build sales and profits so it can sell them to franchisees later as part of development packages. And it has convinced some of its largest franchisees to build restaurants.

The company has signed 30 agreements with franchisees to build 106 locations in the first half of this year.

It recently signed a letter of intent with a franchisee that will acquire seven stores in Oregon, though Jack in the Box is closing some locations in the state. “We’re excited and encouraged to be placing Oregon, a territory that I’m confident can grow over time, in the hands of a top operator in our system,” CEO Darin Harris told analysts last week, according to a transcript on the financial services site Sentieo.

Harris also said the company has made some real inroads into developing new units. “We’ve approved more sites in the last six quarters than we have in the prior three years,” he said. “So we’re building the pipeline.”

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