Church's Is Taking Off
Church's Chicken is making a tidy profit opening restaurants here and abroad.
By David Farkas, Senior Editor -- Chain Leader, 4/1/2007
|
|
Within a minute of opening a bag of powdery flakes and whisking them into hot water, Alexis Igor Kobernyk has made a batch of mashed potatoes. He scrapes them into a stainless steel pan in a Church’s Chicken in Atlanta before turning to his next task: dropping Jalapeño Cheese Bombers into hot oil. It’s all part of his 10-day executive training program.
The company he works for, European Active Corp., has agreed to open 100 units within the next 10 years in Russia, Belarus, Ukraine and Kazakhstan. The first opens this month in St. Petersburg, the second on Red Square in May. Kobernyk, an operations specialist, will run the franchise. “Next week I’m sending three managers here,” he says in perfect English. “They all speak English or Spanish.” Most of the crew, including the general manager, are Hispanic.
Kobernyk is a part of Church’s ambitious expansion plan, which includes populating Europe, Asia and the Middle East with its fried-chicken restaurants. Plans also call for aggressive growth in company markets, particularly in central and south Texas, where a single unit can ring up $1 million.
“We would like to be company-centric and allow franchisees to be franchise-centric,” says CEO Harsha Agadi, sitting in a unit 10 miles from his office in Atlanta. A map displaying the chain’s budding global empire is tacked to a wall near one of the entrances.
The company already boasts 400 international branches—all franchised—in 20 countries, making it the second largest chicken chain after KFC outside the United States. Privately held Church’s won’t disclose what portion of last year’s $285 million in revenues came from international royalties and franchise fees. Estimates are unreliable because foreign deals vary due to franchise laws and types of agreements (master, sub, etc.).
Officials expect to grow their international business by 50 percent, with foreign franchisees opening 60 units in 2007, 10 more than last year. Says Aslam Khan, one of Church’s largest U.S. franchisees: “International is booming.”
This year, outlets will pop up in Bahrain, Qatar and Oman, part of a recently signed 40-unit agreement. Separately, a franchisee will also open a restaurant in Jordan. The company is also pursuing agreements in China, India and Korea.
The American Way
In Muslim countries, the restaurants go by the name “Texas Chicken” to avoid offending anyone. “We use Texas Chicken in countries that are Islamic because ‘Church’s’ might create a stir,” Agadi explains.
The name change, however, won’t stand in the way of touting the brand (founded in Texas 52 years ago) as purely American—key to keeping locals pushing through the doors. “We are unabashed about being made in the U.S.A. We say, ‘If you want an American experience, come to Church’s or Texas Chicken,’” declares Agadi, a Hindu.
He believes a blatant link to all things American will be particularly effective in his native India, especially in cities like fast-growing Bangalore, known as an outsourcing powerhouse. “A big outsourcing population is good for us,” he says. “They are very American, wearing Levis, drinking Coke and using Dell computers. They want to be American quick.” The chain may have a restaurant up and running by the end of the year, according to Agadi, who visited the subcontinent in March.
Bitter Rivals
Agadi became chief executive on Dec. 26, 2004—a date he dubs “Independence Day.” It was the day the deal closed on the sale of Church’s, a $390 million transaction that shifted ownership from AFC Enterprises to Crescent Capital (now called Arcapita), a private-equity firm based in Manama, Bahrain, which once owned Caribou Coffee.
Church’s had finally won the freedom to enlarge its menu with a spicy jalapeño-cream sauce and sandwiches. Under former owner AFC, spicy menu items were the sole domain of sibling rival Popeyes Chicken & Biscuits, despite the fact they have been extremely popular among fast-food consumers—particularly Latinos and African-Americans, Church’s heaviest users—for years.
“When Church’s wanted to do spicy chicken, it was denied,” recalls Atlanta public relations executive Ellen Hartman, who was vice president of corporate communications for AFC until shortly before the acquisition. “There was a stiff rivalry there.”
Today, officials are broadening the menu even more, adding jalapeño-spiked cheese and Buffalo ranch and barbecue sauces. “Our [menu] strategy centers on line extensions,” says Chief Marketing Officer Farnaz Wallace, whose TV budget to promote the spicy food combinations totals $17 million. To put that figure in perspective, KFC reportedly sunk $200 million five years ago into an ill-fated campaign that featured actor Jason Alexander.
Despite playing catch-up, the gambit seems to be working. Same-store sales have remained positive since spicy chicken was introduced in July ’05. Comparative sales rose 2.4 percent in ’06, and Agadi predicts a 2 percent to 3 percent increase this year—slightly below most estimates for the quick-service sector.
No Love Lost
Still, ill feelings between the chains apparently remain well-entrenched. AFC-owned Popeyes sued Church’s in February, alleging that Church’s officials “induced or procured the responsible franchisees and guarantors to unilaterally, and illegally, attempt to terminate their contracts with Popeyes.” Popeyes is seeking $20 million in damages.
Church’s declined to comment on the lawsuit for this story. In a press release, however, a spokeswoman denies wrongdoing: “Church’s purchased vacant assets in a competitive bid situation, which is a common and accepted proactive.”
“This [type of lawsuit] doesn’t happen a lot,” says Jordan Krolick, a lawyer and former chief development officer for Arby’s. “But a [franchise] contract doesn’t mean servitude. You can break it and the other is also entitled to break it.” If, however, Church’s encouraged the franchisee to break the contract, “that’s not a good thing,” Krolick warns.
The action was prompted by Church’s sudden acquisition of 10 Popeyes and the subsequent conversion of six in the Texas Rio Grande Valley, a move that caught Popeyes by surprise and left only Church’s and KFC sharing the lucrative fried-chicken market in the three-county area. Agadi claims several existing units in the area ring up $1 million-plus. It’s a huge number, considering the system average for the chain’s 1,210 domestic restaurants is $700,000.
Still, the deal eliminated a competitor. As a result, Church’s has 39 units there, three times as many units as KFC.
Before Popeyes filed the lawsuit, Church’s Chief Franchise Officer Doug Pendergast described the acquisition in a press release as “aggressive and creative” and “only one example of that thinking.” Agadi, who is munching on Jalapeño Cheese Bombers as he skips from topic to topic, can think of others. “We do encourage franchisees to acquire stores,” he says.
Khan, for example, who operates Church’s in Chicago, Detroit, St. Louis and Akron, Ohio, is eyeing units in Toledo, where he has already performed fee-based management services for the local franchisee. The company, on the other hand, wants to hang on to its core markets, among them Atlanta, Dallas, San Antonio, and McAllen and Austin, Texas, where it operates many of its 245 stores. “I’d like to acquire more units in McAllen,” muses Agadi. Later, he adds, “The word on the street is that Church’s is looking.”
Cost Cutter
Sales haven’t been Agadi’s only path to profitability. Since arriving, he has aggressively cut costs. Today fewer than 100 employees work at headquarters. Accounting and IT have been shipped to India. Payroll is off-site. Rents have been re-negotiated. Says Pendergast, a former AFC executive who recommended Agadi to the new owners: “I saw that Harsha had the willingness to make changes and tough decisions.”
Arcapita has also been supportive, according to Agadi, who says the equity sponsor refrained from piling debt onto the company books, which would have constrained his efforts to, say, acquire units in lucrative markets or add more field supervisors. Arcapita, however, did insist that the senior leadership team sink an undisclosed portion of its own money into the business as an incentive to increase value. They will own about 15 percent of the business if and when Arcapita decides to exit, Agadi says.
He estimates that if the company can keep a lid on costs and open a projected 117 restaurants here and abroad in ’07, the balance sheet will show a debt-to-equity ratio of merely three times EBITDA on target revenues of $300 million. “That’s a pretty nice situation to be in,” Krolick declares.
It would put an increasing amount of free cash at Agadi’s disposal, adding to the roughly $50 million he’s already made in capital improvements, sprucing up older company restaurants and designing a prototype that seats 45 to 60 people in 1,600 square feet, smaller than most existing Church’s.
“We have shrunk from 2,400 square feet. The last 50 or so restaurants, all prototypes, have averaged $900,000 in sales,” he claims, adding freestanding Church’s units cost just $400,000 to build.
The total investment including equipment, signage, soft costs and franchise fees is more like $620,000, acknowledges Restaurant Research Principal Wally Butkus, who tracks the unit economics of large chains. Using $1 million in sales as a marker and a building-only cost of $628,000 (both supplied by Church’s), he calculates a sales-to-investment ratio of 1.68 times—a ratio higher than either Popeyes (1.4 times) or Bojangles’ (1.3 times).
“Church’s benefits from having a smaller building,” Butkus concludes, citing Bojangles’ units, which run from 2,500 square feet to 3,500 square feet. That benefit is clearly seen in a 26.4 percent EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) margin, a compelling return on investment by most standards, according to Butkus.
Declares Pendergast: “That number has gotten our phone ringing.” From Russia and beyond.
View All Blogs
