It’s not often that franchisors sacrifice both revenue and unit growth. But Jersey Mike’s did both recently, and the company’s reasoning offers some insight into the brand’s success. And other brands should pay close attention.
Specifically, the company sent out mystery shoppers to each of its locations to ensure that they were doing things the right way. That employees were in uniform. That grills were on until close and stores were clean.
Franchisees whose stores failed that inspection were then told to stop growing. And if they paid franchise fees for the right to do so, the company returned the money. In all, Jersey Mike’s returned 140 fees to the operators until they went through additional training and proved they could operate well enough to run more locations.
“We didn’t like what we saw,” CEO Peter Cancro said during our recent interview. “I guess we saw some cracks in the foundation. So I immediately halted it.”
(You can check out our full interview here.)
A number of companies will not allow franchisees to grow if they don’t operate restaurants well. McDonald’s has done it for decades, for instance, and Burger King has recently attached operational performance to remodel assistance and expansion rights.
But it’s rare to see companies actually give up revenue and slow expansion. Cancro believes Jersey Mike’s is the only franchise to have done so, though we could not confirm it.
It’s easy for Jersey Mike’s to take a step like this because it’s growing rapidly. The brand has strong unit economics, so there is plenty of demand from franchisees to add new units. That made the move a strong incentive with which the company could demand training and operational improvements.
Yet it remains a rare strategy. Franchise brands historically push growth at all costs. Companies without the unit economics to back expansion keep pushing more locations so they can collect more royalties. Many sign inexperienced franchisees to accomplish this growth, with little regard to the franchisees’ ability to actually operate their brand.
And they certainly don’t return money to franchisees, even when those franchisees are facing historic challenges like a global pandemic or massive recession.
Yet operations are an underrated element in the restaurant world. Ensuring restaurants are operated the right way can be the difference between generating sales growth and going the way of some failed brands.
The restaurant business is intense and competitive. Run bad restaurants and customers may go somewhere else. It may not be immediate, but over time that bleeding can kill a chain if it’s not stopped.
That was clearly in Cancro’s mind. The founder had grown frustrated after seeing some stores had closed their grills early, meaning late-night customers couldn’t get a Mike’s Famous Philly. “We had people shutting down the grills early,” Cancro said.
He referenced three other sandwich chains in deciding to halt growth by some operators: Quiznos, Blimpie and Subway.
At one point, Quiznos had nearly 5,000 locations. It finished 2023 with fewer than 150. Blimpie 20 years ago had 1,600. By the end of last year it had 100. Subway has closed 7,000 locations over the past decade.
“You know why?” Cancro asked. “They didn’t commit to the people. They didn’t follow the basics.”
Cancro acknowledged that franchisees questioned the decision but ultimately got it. “They understood, and they see that it was the best thing for the right growth,” he said. “Everybody says they want the right growth, but that’s a good way to go and get it.”
Brands need growth. But that growth needs to be smart. When a brand has strong unit economics, it will have plenty of demand from prospective franchisees. And that gives those brands the ability to demand changes when something goes wrong.
And it’s that type of maniacal attention to operations that earned Jersey Mike’s, and Peter Cancro, an $8 billion sale.