Jack in the Box has a secret weapon to spur unit growth: Company-owned restaurants.
The San Diego-based burger chain plans to open company-operated locations in underpenetrated markets, a strategy it hopes can spur more development while demonstrating to its franchisee base that it, too, is impacted by its marketing and operational decisions.
“We will absolutely ramp up new company-owned restaurant growth in underpenetrated markets to enhance the pipeline,” CEO Darin Harris told investors on Thursday, according to a transcript on the financial services site Sentieo. “The company-owned growth supports our franchisee expansion efforts in a few ways. Most importantly, by signaling to our franchisees that we have skin in the game.”
This is a radical departure for Jack in the Box, at least from recent history.
The burger chain has been selling company stores to franchisees for about two decades. In 2005, for instance, the company operated about two-thirds of the chain’s 2,000 restaurants at the time, or about 1,500 locations.
Today Jack in the Box operates just 144 of the chain’s more than 2,200 restaurants, or about 6%. Such refranchising strategies have been common as restaurants, pushed by investors to cut corporate overhead and capital costs, opt for the more profitable business of franchising restaurants rather than running them.
In Jack’s case it also generated new revenue because the company kept control of the real estate and charged operators for rent at higher than the leases it was paying for the restaurants.
That refranchising has not necessarily translated into unit growth. Jack in the Box has about the same number of restaurants as it did a decade ago. “Annual net restaurant growth has been roughly breakeven for the last 10 years,” Harris said. “And frankly that shouldn’t be the case.”
Harris blamed the problem in part on the way the company refranchised its units, saying that the company sold too many locations at high multiples to undercapitalized operators.
“The restaurants were sold at high multiples with rent spreads, many to undercapitalized franchisees with intensive capital requirements for remodels and new restaurant development,” Harris said. “That led to delays in many of the remodel commitments and new builds that, in too many cases, just didn’t come to fruition.”
That likely played a role in the deterioration of the relationship between the company and its franchisees, which had come to a head in 2018 and 2019 in the form of lawsuits and a demand by franchisees that Harris’s predecessor, Lenny Comma, resign.
Harris has spent much of his first year on the job working to repair that relationship. Three quarters of the company’s franchisees started in one of its restaurants, Harris said. “From my viewpoint, this is a competitive advantage for Jack in the Box,” he said.
The best way to get franchisees to open new locations is by improving store-level profits. Jack in the Box plans to start reporting restaurant-level economics both internally and externally.
“My goal is to generate returns so strong franchisees can’t wait to build more Jack in the Box restaurants,” Harris said.
Jack in the Box has been working to build its development process and its pipeline. It has also developed a new prototype designed to be more flexible, including some drive-thru-only locations, in a bid to take advantage of growing demand for takeout and give operators more options for building new locations.
Its big focus will be on existing markets, Harris said. While Jack in the Box operates largely in the Western half of the country and has two dozen states it could expand to, its more immediate opportunity is in the markets it’s already in.
“We have potential for just over 1,500 restaurants within our existing footprint alone,” Harris said. “Growth in our existing footprint is realistic.”
“Our primary growth strategy is fortressing,” he added. “Our objective is to reach more guests in markets where we already operate.”
Overall, he said, Jack in the Box has the potential for more than 6,000 restaurants. The company plans to get unit growth to 4% a year by 2025. The company modified internal policies that Harris called “barriers to growth,” with 80% of the chain’s operators now approved to add locations. It has also given operators access to mapping tools and market plans.
And the company added support for franchisees to help them expand, including real estate personnel and someone dedicated to help with financing in addition to franchisee recruitment.
Jack in the Box is also opening itself up to more nontraditional locations and ghost kitchens. It recently signed a deal with the ghost kitchen company REEF to open eight locations.
And while franchisees will open most of the new locations, Jack in the Box plans to open some, too. “We will absolutely ramp up new company-owned restaurant growth in underpenetrated markets to enhance the pipeline,” Harris said.