Based on the case study (“Firehouse Subs”), determine which of the three options executives are considering would be most beneficial to a single franchise owner. Explain your rationale.
Case 10 Firehouse Subs
How can the owners of a franchise reverse declining sales?
Robin and Chris Sorenson are the owners of Firehouse Subs, a chain of submarine sandwich shops with more than 400 locations in 21 states. The Sorensons, both former firefighters, opened their first Firehouse Subs restaurant in 1994 in Jacksonville, Florida, and used a firehouse theme and authentic firefighting gear to decorate it. Their menu followed suit, featuring sandwiches with names such as the Hook and Ladder, the Firehouse Hero, and the New York Steamer. In 2001, the Sorensons operated 30 Firehouse Subs restaurants across Florida and began selling franchises to expand across the Southeast and beyond. Their goal is to have 2,000 locations by 2020.
Sales at Firehouse Subs restaurants were growing until 2008, when year-over-year sales declined throughout the chain by 3.4 percent. “In our entire history, we had never had a period like that when our entire system was running negative sales,” says Don Fox, the company’s CEO. “It was something completely foreign to us.” The sales decline was particularly puzzling because lower-priced restaurants such as Firehouse Subs normally are well-positioned in economic downturns to attract customers who continue to dine out but look for less expensive options. Something besides the recession was causing sales to decline.
Firehouse Subs provides franchisees with a complete business system, strong brand name recognition, and the opportunity to own their own restaurants with investments that range from just under $200,000 to $425,000. In return for the franchisor’s support, Firehouse Subs charges franchisees a $20,000 initial franchise fee, a royalty of 6 percent of sales, and a 3 percent advertising fee (2 percent goes toward local advertising). When the executive team met to discuss the company’s declining sales, Robin Sorensen had an unconventional idea: eliminate the 2 percent local advertising fee and allow franchisees to create and execute their own marketing strategies. The Sorensons and Fox presented the idea to franchisees, who approved it overwhelmingly. “It was pretty radical,” admits Fox. “Some people thought it was insane to give the money back. We didn’t have an ego about who has the money. We wanted results.”
Six months after giving franchisees control over their local advertising budgets, the sales decline at Firehouse Subs had worsened. System-wide sales were down 6 percent from the previous year. The chain’s top managers believed that the problem stemmed from a lack of brand awareness and a very successful “$5 Footlong” campaign that Subway, the largest company in the submarine sandwich business with more than 33,000 restaurants around the globe, had launched.
Firehouse Subs’ executive team discussed their options and narrowed them to three: continue the existing local marketing efforts by franchisees, begin discounting sandwich prices, or launch a new marketing campaign. They were hesitant to continue the local marketing campaigns, because over 6 months sales had continued to decline. Discounting sandwich prices would cut into the company’s already thin profit margins and might damage the reputation for quality ingredients that the company had built over the years. The management team began exploring a new marketing campaign and met with an experienced advertising company based in Fort Lauderdale, Florida. The advertising agency showed them that other submarine sandwich chains, including Subway and Quiznos, spend more on advertising per store and collect higher royalties and advertising fees. The agency recommended that Firehouse Subs not only reclaim the local advertising fee but that they double it to 4 percent! That would increase the payments that franchisees make to Firehouse Subs from 9 percent of sales to 11 percent of sales. The executives wondered whether franchisees would resist the move when many of them already were struggling with lower sales and profits.
Questions
What advantages do franchisees gain when they buy their franchises? What disadvantages do they experience?
Develop a list of advantages and disadvantages for each of the three options the managers at Firehouse Subs are considering.
Which of the three options do you recommend managers at Firehouse Subs choose? Explain.
If the managers decide to create a new marketing campaign, what should be its unique selling proposition (USP)? What key points should the campaign emphasize?
Discuss the advantages and disadvantages of being a franchisee of the franchise of your choosing. Provide specific examples to support your response.