S. Truett Cathy was a successful entrepreneur almost from birth. He started by selling Coca-Cola door to door, then magazines and newspapers, before finally entering the restaurant business. Several successful years later, he began working on a chicken sandwich for his restaurants and customer response was so great that Cathy knew he was on to something special. Cathy initially wanted to license the sales of the product to other restaurants, but saw that it could created quality control issues and damage to the Chick-fil-A brand. Therefore, Cathy developed a unique franchise opportunity that he deployed first to malls and then to stand alone stores based on his core values of conservatism, encouraging corporate social responsibility, and entrepreneurship (Cathy, 2013). It allowed others to cover the majority of the variable costs of running a restaurant, while he assumed much of the fixed costs of building the restaurant so he could retain more control than competitors.
Unique Franchise Model
After making it through a strenuous interview process, a person can become a Chick-fil-a franchisee or “Operator” for only $5,000 which is substantially lower than the industry average (Cathy, 2013).What Chick-fil-A gives up in terms of initial fees, it makes up for in other areas. In general, Chick-fil-A requires operators to cover between $250,000 and $900,000 for the location's variable costs such as inventory, as well as fixed costs such as equipment rental, insurance, location leasing fees, and other operation fees (Malloch and Grem, 2010). This allows the corporation to have minimal variable costs as most are covered by Operators. The only variable costs the corporation may incur are due to fluctuations in construction, land, or interest rates. However, Chick-fil-a rarely borrows money as Cathy has a conservative philosophy towards growing his business, and tries to build all locations off of profits to keep debt low. Chick-fil-A selects a site and builds the restaurant, which it then leases to the operator for a monthly fee. All of this leads to higher fixed costs for the corporation. To offset the high fixed costs, Chick-fil-A receives a greater percentage of gross sales (15%) and a greater percentage of net profits each month (50%) from each operator (Malloch and Grem, 2010). Chick-fil-A is willing to assume the higher risk that comes with fixed costs because if for any reason the Operator does not meet expectations in terms of sales or personal performance, Chick-fil-a has the right to replace the Operator, and simply refunds the initial $5,000 fee. To Cathy, the high fixed costs are worth the control over decision making, brand awareness and name, and over quality assurance (Hattwick, 2010).
As far as salary structure for “Operators”, Chick-fil-A provides a $30,000 base salary, but what the operator takes home beyond that depends on performance (Malloch and Grem, 2010). Specific income statements are not available as Chick-fil-A is a privately held company, but it would make sense for these commissions to be based on contribution margin rather than sales dollars. Commissions based on sales dollars can lead to lower profits for the corporation because operators push products with higher prices to raise commissions. This is great for the operator, but it would be better for the company if the operators pushed cheaper products because the commission would be lower and the contribution margin would be higher. Basing commissions on contribution margin is a good solution because it encourages operators to sell the mix of products that maximizes contribution margin and in turn raises commissions and company profits.
Summary
S. Truett Cathy’s unique franchise model with its mix of variable and fixed costs and its pay structure for operators, helped make Chick-fil-A the successful business it is today. Chick-fil-A can retain control over each franchise location, while allowing others to become profitable Operators. It requires operators to cover the majority of operation expenses, both vairable and fixed, while Chick-fil-A assumes the risk that incurred from buying the land and building the locations. This may seem unconventional, but it all works together to ensure Cathy can maintain his high standards for the brand, and for quality.