About the Guest

Don Fox is Chief Executive Officer of Firehouse Subs, one of America’s leading fast-casual restaurant brands. Under his leadership, the brand has grown to more than 1,200 restaurants in 45 states, Puerto Rico, and Canada. Don sits on various boards of influence including the National Restaurant Association.

Episode Summary

In this episode, we talk to Don Fox, hospitality industry veteran and CEO of Firehouse Subs. Tune in to hear Don talk about how Firehouse Subs anticipated trends in off-premise dining pre-COVID and planned accordingly, positioning the brand to serve customers across channels and need states. Don also shares his team’s focus on day-by-day improvements, and the encouraging growth in sales – which are now outperforming previous years. Learn more about how a growth mindset can help restaurants navigate unprecedented challenges in this latest episode of Food Fighters!

Episode Transcript

Zach Goldstein

(00:01):

From fake meat and robot chefs to ghost kitchens and delivery drones. The restaurant industry is rapidly evolving. Welcome to Food Fighters, bringing you interviews with the leading industry trailblazers. I’m your host, Zach Goldstein.

Zach Goldstein

(00:20):

Welcome back to Food Fighters. I’m Zach Goldstein. Today I’m here with Don Fox. Don is the Chief Executive Officer of Firehouse Subs, one of America’s leading fast casual restaurant brands under his leadership. The brand has grown to more than 1100 restaurants in 46 states, Puerto Rico and Canada. Don sits on various boards of influence, including the National Restaurant Association. Thrilled to have you on Food Fighters, Don.

Don Fox

(00:43):

Hey, thanks Zach. It’s great to be with you.

Zach Goldstein

(00:46):

Well, we are recording this in late August, and as much as we wish it was not the case, we and the restaurant industry are continuing to face a pandemic and a crisis. Giving back to your community at Firehouse and especially first responders has long been important to Firehouse Subs. How have you leaned into this mission and in the middle of this unique pandemic?

Don Fox

(01:14):

You know, for us, it’s really been a matter of continuing what we were doing before. We’ve had a long history, being founded by firefighters. It’s been at the heart of our brand and our Firehouse Subs Public Safety Foundation started in 2005. We’ve now donated well over $50 million in lifesaving equipment to various public safety entities. And we continued that effort through these trying times. And, by the way, I’d say our mission becomes more relevant than ever because of the budget shortfalls that so many municipalities are going to be experiencing. And I think we’ve even just seen the tip of the iceberg that will manifest itself, whereas this year continues. And then we get into a budget issues that towns, cities will have in 2021. So for us, in terms of how we amplified it, I think it’s more a matter of what we’ve kept doing, and as keeping it there on our advertising, that was something that we’d amplified pre-COVID. As we went about our foundation work the last several years, it was mostly about what happened inside the four walls of the restaurant through our public relations effort. We didn’t in the past speak about it as much in our digital and broadcast advertising. But last year we started to change that, we thought it was important to make the public more aware of our efforts. If that leads to greater sales success, that just helps the work in the foundation leads to us fulfilling more grants, donating more equipment. And so when the pandemic hit and the way we had to pivot very quickly on some of our messaging, trying to anticipate the needs of the consumer in late March. And we made that fundamental decision to say, look, we’re going to stay with this. It’s as important as, and as relevant as ever. So that was one element we retained, we discarded other elements of our messaging, but okay. That has I think served us really well now that we’re going into our sixth month.

Zach Goldstein

(03:30):

Yeah, we’re seeing this across the industry: restaurants that view themselves as such important elements of their community. And it’s really inspiring, with restaurants being hit so hard to still be that light in the community, trying to help others. And so congrats on what you’ve accomplished for first responders. And thank you. As we think about this really unusual economic crisis, and restaurants being hit, you have the benefit of having been in the industry for a little while. And so you’ve seen some previous crises. You’ve seen the 2008 crisis. You’ve seen the uncertainty after 9/11. How is this different? And perhaps just as importantly, what is actually similar in spite of the fact that those downturns were completely unique?

Don Fox

(04:25):

Unique is the word that I would use, and it is really hard to draw comparisons to other, past economic downturns and so on. And it’s given that it’s not over. What I think is also important to know is that it is still in a constant state of flux. I can sincerely say that since March 11th, which was the night that the president first went on television and talked about COVID to the nation, no two days have been the same. Every day has been a changing set of factors and conditions, and in ways that again are unprecedented. So it’s difficult to look back at any time in history and take learnings from the past and apply it to today. I think the bigger challenge has been understanding consumer behavior during the past five and a half months, learning as quickly as you can from it. And then having those more immediate lessons make their way into your decision making for the weeks, the months. And even now as we look towards 2021, the year ahead, I think that’s something that we’ve been pretty adept at and it has helped with our success. There one point of similarity, I guess though, that I would, based on our own experience with our brand and that I would point to: in 2008, the Great Recession, we were guided by some of our core values and principles, one of which really applies to our internal team. I made a commitment in 2008 that, to best of my ability, I would not reduce staff, cut benefits, anything of the sort. We were a lot smaller brand back then than now, just about 300 restaurants. And I thought it was really important to stay the course with my people, because despite the impact of the recession, we were committed to growth. I’m a firm believer in this, the following principle, if you’re not growing, you’re dying, there is no, there is no neutral position in this industry. It’s one or the other. So you’ve got to be relentless about your attitude towards growth. And if that’s the case, if you really walk the talk and believe that, then you need your people. I mean, they’re one of the most fundamental elements for your success and your ability to grow. So at a time in 2008, when so many other businesses, not just in the restaurant industry, but across broad sections of the economy, we’re letting people go and reducing staff. We stayed committed to our team and that paid great dividends because by the end of 2009, we were repositioned. There are a whole slew of things we had to do in that economy to change our advertising strategy, help manage and lead our franchise community. But coming out of that, we had our aces in their places and had the team ready to go. And we really took off, then, heading into 2010. So even though with the pandemic, conditions are so extraordinarily different, that core value remained. I’ve a lot more people on my staff. I have about 140 some odd, headquarters team members, where back in 2008 we were less than 40. But without making any overt promise, you don’t want to promise something, there could be extraordinary circumstances where you can’t keep the promise, but I was transparent with my staff and to let them know that we were going to make every attempt, everything humanly possible to maintain our resources, to support our franchise community, which by the way, at the same time, I made that commitment to my staff, I also stopped collecting royalty and franchise and advertising fees to help my franchise community.

Zach Goldstein

(08:19):

And that’s a huge change.

Don Fox

(08:21):

It was, we basically went to zero income overnight, you know, providing that deferral to our franchisees cut our advertising funds sourcing off. So a lot of things had to fall in place. And fortunately they did. I mean, to fast forward a little bit, I’m sure you’ll ask me how we’re doing. You know, like the rest of the industry, we went through a very dire, oh, initial four weeks in particular: comp sales that were in the mid negative 40% range. Now I’m highly cognizant of the fact that being negative 45% is better than a lot of other segments of the industry. At that point, it wasn’t unusual for casual dining players to be 80%, 90% negative. But nevertheless, it was gut wrenching and talk about unprecedented. I mean, by comparison in 2008 and the recession, we have a negative comp in 2008 of negative six, and that seemed like a disaster. The industry was down about negative three to four in 2008. So it’s so unparalleled what has happened, but we started to claw our way back. You know, we changed our mission. In fact, I threw out all references to anything in the before-COVID era. We didn’t talk about comp sales, nothing. It became irrelevant. I focused on one thing and one thing only, and we talked about it every day. I started a blog that I was writing and communicating to our franchisees and our general managers, their general managers every day. And it was about one thing, what are we going to do to make today better than yesterday? And when we finish up today, it’s going to be with a plan for how we’re going to make tomorrow better than today was, and we tackled it a day at a time, with unbridled optimism.

Zach Goldstein

(10:16):

That seems to suggest that you are really treating the arrival of COVID as a complete reset on your business. We need to think rethink every element of what we’re doing, because this is so unprecedented.

Don Fox

(10:31):

Absolutely. And fortunately we had things underway in our business, especially relative to our off premise business because of work we had done in the past two to three years, because we were like much of the industry. We were already seeing a significant shift of our business from in the dining room to off premise channels. And we needed, we knew we needed to do certain things to shore up and prepare, to deal with where that trend was going to lead us in the industry. You know, for example, our dining room business used to be the majority of our business, but I have to go back to 2013 to look at the height. We were about 53 and a half percent of a percent of our business was dine in. That’s pretty extraordinary for a sandwich shop, in the sandwich business. There’s been more off premise, but starting, mid to late 2013, that dining room percentage of sales started to decline, just less than a point, maybe the first year, And closer to a percentage point the year after that, but when it nudged under 50%, that was an awakening because no longer could we say that the majority of our sales were dine in, we were by definition then just ever so slightly, but the majority of our business was off premise, and we knew we had weaknesses in our off premise business in terms of our food quality in particular. We had wrapped our sandwiches historically in what was called a quilt wrap. It was specially designed and it was intended to primarily help with some thermal characteristics, but it did not have the moisture wicking that we needed. So we had some sogginess with some of our subs. And overall appearance just was not up to par with what a customer would experience if they were dining in, because we served our food plated. It was in baskets, in the restaurant: suburb experience, all our consumer metrics, our guest evaluations gave us much higher marks for our dine-in experience, which by the way, is very frustrating when your best consumer scores are for your dining in business, but your dine-in business is still going down. And it just tells you where the consumer was headed, through technology and a variety of societal things driving those behaviors. So we made a significant investment in packaging. We went to using cartons, using a material which is a sugar cane derivative. That was of fundamental importance to improving our off premise experience. So we saw that benefiting our business in 2018 and 19. But then my gosh, was it fortuitous that was in place because if we had not made that packaging change when the pandemic hit, we would not be enjoying the success that we are today. I can say that with a hundred percent level of confidence.

Zach Goldstein

(13:31):

Absolutely. How far did the off premises percentage grow to? You said it was in the low fifties on on-premise several years ago.

Don Fox

(13:41):

Yeah. Our dining room business had dropped our system number down to 37%. And by the way, I want to talk about it more in terms of “this may seem like semantics, but it’s not,” it’s more about the dropping dine-in business than it is the growth of off premise. And that’s one thing when people talk about off premise, I think they’re mis-analyzing it, because the restaurant industry hasn’t grown proportionate to growth in off-premise business.

Zach Goldstein

(14:05):

Right.

Don Fox

(14:07):

I mean, the industry was already suffering in traffic, even with supposedly the “growth of off premise.” It was not additive for third party delivery services. They’ve never been additive to the business.

Zach Goldstein

(14:19):

Well, I want to come back to that. That is not a consensus opinion. So I do want to come back to that.

Don Fox

(14:25):

It may not be a consensus opinion, but it’s a cold, hard fact, right? It is not additive to the restaurant industry. There are individual brands and circumstances where you can point to, and there are some incrementality, but it is not adding to the use of restaurants.

Zach Goldstein

(14:42):

Right. So your point here is that these are on premise or dining room occasions that are directly shifting to off premises.

Don Fox

(14:49):

Correct, correct. So now the challenges as a brand, if you had some weaknesses in your off premise business, the quality of food, the nature of your service or digital platforms, etc., what may happen is your consumer, who’s leaving your dining room and no longer using you for dine-in. Because again, there’s other factors driving them to a need for off-premise consumption, not just for delivery, any type of off premise consumption. What they discovered is while they loved you for dine in, they no longer are as inclined to have a dining experience. And you’re just not in their consideration set for off premise.

Zach Goldstein

(15:34):

Right?

Don Fox

(15:35):

And hence you may lose that decline in dine-in because of weaknesses in your off premise channel can lead to overall erosion. But if you’re strong in your off premise business, and again, we strengthened ours up. Now we’ve greatly increased the chances of being able to recapture that lost dine in occasion and pick it up when that consumer now finds themselves increasingly in a need state of off premise.

Zach Goldstein

(16:07):

Yeah. I mean, you’re right. You’re right to highlight that this is a lifetime value question. And that that moment where a specific diner switches from dining room to off-premise, which it sounds like had been happening at a steady, but gradual pace at Firehouse, that moment is the opportunity to either capture the extended lifetime value of that customer or lose it, quite frankly. And when you’re talking about the quality of the product, etc., that matters. I would imagine what also matters is the ease of pickup and delivery. The actual fulfillment piece is so fundamental to the customers who are dining off premise.

Don Fox

(16:48):

Absolutely. I have to chuckle at something. Over the last couple of years in particular, I would speak often to my franchise community about this decline in dine-in and how we have to really ramp up our effort or investments in technology. What we’re doing with online ordering, engage in third party delivery, it is an important part of the business. So I don’t want to dismiss it at all. So I talked about how we had to really execute and invest in that area because we were seeing this steady drop. And as we dropped, I mean, think about it going from 53 down to 37%, and this is what I have to laugh about. I can’t tell you how many times I uttered the following words: “Now, franchisees, it’s not like it’s going to drop to zero. It’s going to level off somewhere. Right?” Well, there we are, at March 16th for our brand, it went to zero, because, you know, for us, the wheels really came off the wagon on March 14th. And that’s, I think a day, that Saturday, is the day that will, I think, resonate in restaurant history. In fact that Saturday and Sunday, that’s when it was really bad but it’s not the worst of it. And at that juncture, I had to, again, stop the royalty and so on, but I also made the decision to close the dining rooms across the system, which when I made that decision Monday morning, the 16th we made the decision that Sunday night, but we had to quickly turn, you know, pivot is the common word these days. That Monday morning I assembled my team. We’d already put in place our initially what we called our crisis team. But then I got rid of the word crisis, because I like to think that when you take control of things, it’s no longer a crisis. So that initial team, we’d already been meeting for a week, but we got together that morning, and said, “Okay, no restaurants.” We opened 10:30 on the East Coast. “No restaurants are going to open their dining rooms today.” So in the course of about the next three hours from when we met, we’ve got to get the word out and get this in place with all the procedural elements, everything that we need to do to make that happen. And we did.

Zach Goldstein

(19:21):

I’ll bet that kicked off some interesting franchisee conversations.

Don Fox

(19:23):

It sure did. It was not a popular decision in a lot of quarters. You know, at that point, finishing up that Sunday, there had been just a small number of states, I think if memory serves correct, maybe three or four at most, that had said, “Hey, all dining rooms are gonna have to shut down.” And it was foreseeable in my mind, at least, that this is gonna expand. And at the root of it, too, you had the Center for Disease Control coming out with a pretty strong statement about, at the time, what was the new phrase of “social distancing” and all these things now that are just part of the everyday vernacular. But, we wanted to respect that. And at that point in time there was so, so little information about COVID and so on. We said, “Look, we’ve got to have a north star somewhere, in terms of all speculation and various opinions, at the end of the day, you have to turn to some authority, and trust it.” So that’s where we decided to go. We said, all right, well, what’s the CDC recommending we’ll follow that guidance and that guidance clearly.

Zach Goldstein

(20:43):

This was a feeling that a lot of leaders across the industry facing is, especially those with restaurants across various geographies where the guidance was inconsistent, at least. Restaurant operators were stuck making their own decisions. And it sounds like your path was, we need to get ahead of this. I would imagine some of that came from confidence in the foundation you’d built in off premises.

Don Fox

(21:11):

Yes, very much so. Well, you look back on it and, boy, the things that we didn’t know heading into that, because we didn’t know what would happen when we closed the dining room. And how much worse might that make the situation? Of course looking in retrospect, it was absolutely absolutely the right thing to do, and it paid great dividends. And in fact, even my franchise community, you know, it was, I think as little as a week to 10 days before the vast majority of states in the country had embraced it and governors had come out and put in place that imposition. So it got us ahead of the curve. It made us in the eyes of the consumer, I think, it reinforced that we were being proactive, not reactive. And I think that led to a greater sense of confidence. Some of this is just my opinion. We have limited research on it, but I do firmly believe that that was the case. It was a net positive in the eyes of the consumer and honestly the history speaks volumes. We haven’t mentioned this yet in the conversation, but I put in place that approach, I talked about, which, you know, day by day better. And it works, by the way, it worked. Every day, one after another, we grew a little bit more in sales and then one week better than the next, by the time we got to the third week in May, we were comping positive over the prior year.

Zach Goldstein

(22:42):

And most of your dining rooms were open at that time?

Don Fox

(22:45):

No, no, hardly any of the dining rooms are open.

Zach Goldstein

(22:48):

So dining rooms still closed, but comping positive. And there are not that many restaurants that are saying that across the country right now.

Don Fox

(22:54):

No, we have very few drive-thru restaurants, relatively speaking. We have about 60 out of 1,180 restaurants. So drive-thrus are a modest impact on our system. So in our system right now, fast forward to today, only 10% of our sales are in the dining room. System-wide there are some parts of the country still with no dining rooms. Well, as we’ve emerged, it was a little different approach. As we got more insight about it, as opposed to, a system-wide approach to it, as we grew, as we got better understanding, as we saw that there were regional state differences in the impact of the virus with better information, we’re able to make better decisions. And so, as the states started to re-allow for the reopening of dining rooms, we followed suit and then allowed the operators, if an operator wanted to keep their dining room closed, they could, because I’m highly cognizant of the fact that even within a given state, there are a hotspot areas that are more problematic and other parts of the state where it’s much less of a factor. So we decentralized some of the decision making, coming out of it. And I think that has served us extraordinarily well. So the operating conditions vary around the system in terms of where dining rooms are accessible or not. Blend it all though, and only 10% of our businesses in the dining room. We’re right now entering our 16th week of all time record sales for the brand, despite only 10% in the dining room. And even in the markets where dining rooms have reopened, the customer is not using the dining rooms to the level that they were before. You know, I mentioned earlier about the fact that we were on this constant, more gradual drop in our dining room. And I always talked to the franchise community that, “Hey, at some point, it’s not going to go to zero, but it will reach a point of equilibrium. And who knows maybe over time longterm, it will start to go back up.” The $24,000 question was okay, where where’s that leveling point gonna be, and when are we going to reach it? So now what is fascinating to me is, well, we did go to zero and now it is making its way back up to the point it was otherwise going to decline to.

Zach Goldstein

(25:23):

Right. It’s an acceleration, a process that may have taken several years of that steady progression from 53 to the 30% range is now all the way at 10. 10 is probably not that equilibrium in your mind, it’s somewhere in between.

Don Fox

(25:42):

Correct. And by the way, and we see this manifest itself, that same concept in terms of other aspects of consumer behavior, especially as it relates to their use of channels of trade, great example. As we moved through April, our digital channels of our own online ordering system, the brand is Rapid Rescue, which is that: order and pay online, just come in, you’re just three, four steps into the restaurant in some cases, and the order’s there for you to take off the rack and head home. Very limited time in the restaurant, matter of seconds. So pre-COVID, that represented about 6 to 7% of our sales at the peak usage for Rapid Rescue; that went up 3X in dollars. It went to, at that point, we were getting pretty close to that all time record in sales, too. So we were at like 22% of sales at the peak week of online ordering, third party delivery, went up to an all time high, not a surprise. Didn’t go up as much as our Rapid Rescue, went up about 2.5X in dollars. Percentage of sales went from about about 6% to a peak of about 17%. So they both hit their peak at about same time. And then it was fascinating to watch what happened. So as consumers kind of reset their traffic patterns and their behavior, we then started to see the shifts in channels in the various channels of trade go the other way. In some respects, I would have loved for our online ordering, our Rapid Rescue, to have stayed at 3X and keep growing. There are certain economies that we get with that channel of trade, but it didn’t stay there. Now, I think we still have to fully understand all the reasons why; I don’t think it was, let’s say an execution issue, because I’ve talked to my peers in the industry and what we experienced is not uncommon, at least from my discussions with folks with some other brands. So we have seen it recede and to a point that we’re a little over 2X, which is great, but it’s not that deep. Now our sales are still at an all time high. So what people have done, they’ve shifted behavior. And this is what I find interesting: not to the dining room. The shift of behavior went back to traditional ordering for takeout. So everybody had just like we talked about where the settling point would be for dine in business. Generally, I think the exact same thing is happening in terms of people’s adoption and appetite for the various channels of trade.

Zach Goldstein

(29:00):

So when you say traditional traditional ordering for takeout, that is someone who does not place the order through a digital channel, they walk into the restaurant, order, and then consume off premises. Is that right?

Don Fox

(29:12):

Correct.

Zach Goldstein

(29:13):

And that’s now the vast majority of revenue after this reset of the “new normal,” correct?

Don Fox

(29:20):

Right, right now that traditional ordering for takeout represents about 45, 46% of our business.

Zach Goldstein

(29:29):

Wow. So yeah, a pretty, pretty fundamental shift. And I would imagine then, if your Rapid Rescue, your preorder pickups have seen a little bit of regression back to the normal, has third party delivery done the same thing?

Don Fox

(29:46):

Yes. Now keep in mind, they haven’t regressed back to what we would call the pre-COVID normal. It’s still 2X what it was, but that is probably just like our dine-in business in general. That is probably the point at which online ordering would have continued to ascend left without COVID. And this is a critical for the third party delivery business. COVID demonstrated where the peak is for third party. If I think back to various discussions in the industry pre-COVID, there was hype and speculation about third party delivery, like, “Oh, at some point, this is going to represent like 30, 40% of the restaurant traffic.” Bologna. It never will. And this has a bit of bad news in some respects for the third party delivery players, because what COVID demonstrated is where the maximum marketplace potential is. I mean, the only thing that’s going to offset that or create a broader marketplace is if there are much, much more geographic coverage, or more participating restaurants, perhaps, and then there’s probably white space in both those regards. But now I would suggest not nearly enough white space to fill in the gap between where peak COVID demand was and where it is right now.

Zach Goldstein

(31:10):

So let’s dive into that because you’ve said a couple of things that I want to tie together. The orders off premises are not incremental. And in fact, in particular delivery, are not incremental, that they are cannibalizing the in dining room occasions. And so if that’s true, the argument, and you’re right – that the overall data across the industry suggests it must be true because the industry is not growing overall. The argument that third party delivery orders initiating from those marketplaces are incremental is kind of hard to hold, right? It’s hard to argue that these are purely incremental orders if the overall industry is not growing. And so the challenge of course, is the vast margin difference between an order you initiate through any of your own channels and the third parties. How have you adapted your business and responded to what I’m sure is a pretty significant concern from franchisees about the impact of that margin hit?

Don Fox

(32:17):

Sure, well, as a franchisor, of course, we try to negotiate the best terms that we can for our franchise community. So we’ve had some success on that front, but the main offset has been in terms of pricing that is set on the platforms. If we went back to the early days of third party delivery, I would have been in the camp that would have said, “Hey, look, you’ve gotta price the same on the platform, as you do inside the restaurants.” And I don’t think that perspective was uncommon. Conventional thinking would have been that “Oh, the customer’s going to notice, they’re never going to accept paying more on that platform, especially when they’re already paying a delivery fee.” But that’s turned out to be a fallacy. So our average pricing on all the platforms combined is about 20% above the restaurant price. And we have restaurants in the franchise system, some of our own company restaurants as high as 30%.

Zach Goldstein

(33:27):

And I’d imagine given your scale without obviously sharing the details of your agreements with the delivery companies, but I’d imagine given your scale that that covers that margin hit.

Don Fox

(33:36):

Right, right. That will help offset in whole, in a lot of cases, in part in some, but yes. That neutralizes it to a great extent.

Zach Goldstein

(33:52):

You’d still rather capture that customer directly, right? You have the opportunity to remarket to them. You have the opportunity to actually increase that lifetime value. And so I would imagine, as we’re seeing, industry-wide, you’ve gotta be leaning into, well, how do we, how do we make that customer our own? Where does CRM, loyalty, or your own digital channels, how does that play key element of the strategy of off premises that’s gotten you to where you are now, and, and how is that still evolving?

Don Fox

(34:27):

On the surface, yes, I’d ideally like to be able to take those occasions and move them over to traditional online ordering, etc. But this may sound contradictory in nature, but it’s not, again, the third party delivery order, it’s not incremental to the industry, but to a great extent, I believe that customers, when they go to use third party, they are typically in a certain need state and that, I know, again, I know this is going to sound like I’m suggesting that it is additive, but again, the numbers are the numbers. The industry’s not growing. Since they’re in a certain need state, if you don’t have third party delivery, they’re going to get the third party delivery from somewhere else. I mean, the way it’s evolved, I see third party being of value to the system. It helps retain a visit, more marginal profitability than if I got a traditional location, but I think there’s ample evidence out there that if you cease to use it, those transactions are likely not to come back to you in other forms. And we had some real world experience with that in the early days, in the earlier days, of delivery, we had one franchisee who got fed up with paying the commission, and they were multiunit operator in fact, and it was just one of their restaurants. They decided to cut off delivery. I think it was loss of sales. It was gone. And they stayed with that for, I think, a couple, three weeks and said, “No, we’re not seeing any of this move back, come back to us in another fashion.” And yes, it’s marginally profitable and they put it back on.

Zach Goldstein

(36:31):

That’s a huge challenge though, because it suggests that restaurants now have to participate in third party delivery in a defensive way, not in an offensive way. It’s not an opportunity to grow revenue, because it’s cannibalization, but it does require your participation or you will lose revenue.

Don Fox

(36:51):

Yeah. And of course, it’s so hard to compare anything right now to pre-COVID. Believe me, since our delivery has gone, right now we’re running about 14% of sales and delivery. We were half that pre-COVID. Yes, we’re charging more, we’ve increased the prices, but the commission line on the P&L, now you’re starting to get towards, looking at our own company restaurants, almost 300 basis points. Delivery fee that wasn’t there now, again, we’re improving our food and paper costs because of the higher pricing. So we’re offsetting a fair portion of that. But it’s fundamentally changed. Right? I can’t emphasize this enough. It is almost impossible to compare anything that we do now to what we were doing. Pre-COVID the P&L looks different. I mean, think about what’s happened with beverage sales. For example, I love our soft drink partner, Coca Cola has been a wonderful partner for us. So we’ve been a leader in the use of Freestyle, we’re the largest brand that has an in every unit, we embraced their second generation machine that’s in place, we just helped test their new contactless pour, so that’s rolled out through the restaurants. But when you don’t have dining business or dining business is so limited, it is a lot more difficult to sell a soft drink and a pillar of the restaurant P&L, especially in the QSR and fast casual space is your beverage program. It’s where the lion’s share of your profits are, and we are still all hard at work in figuring out how best to either to recapture or somehow offset it on the P&L. And as you can imagine, it’s a challenge for the soft drink companies, and everybody’s hard at work at it, but it is a difficult mountain to climb, when the customer experience is so different with off premise usage as it relates to beverages.

Zach Goldstein

(39:01):

Right. So shifting gears then to kind of the macro trends. You’ve seen from your experience, Six Flags, Burger King, now Firehouse, you’ve seen a breadth of cultures across the industry, and you’ve set your own at Firehouse and with great success. As you’ve seen the location counts, grow what, from a management and leadership perspective in the restaurant industry, what’s going to rise to the top because of this once in a lifetime change. And what are you looking at doing differently or emphasizing more in the years to come?

Don Fox

(39:42):

Well, I think the key factor that’s going to impact performance in the industry is the change in the competitive set we’ll get through COVID. Some customer behavior will come back to where it was. I think it will be pent up demand for people to be together, to have dining experiences. In fact, maybe in some respects, there will be a little bit of a renaissance, in terms of the in-restaurant experience. I think that’ll be fascinating to watch play out. Probably won’t be until after the vaccine and, you know, a little farther down the road, but more immediately, you know, you’ve got just this massive change in the competitive set reflected in the number of restaurants that have closed and will probably remain closed, you know, permanent closures. There’s a lot of different estimates flying around there from different sources. I’m a believer that the net reduction in restaurants in 2021, you’re probably looking at at least a 15% –

Zach Goldstein

(40:45):

Wow.

Don Fox

(40:45):

– I’ll call it not permanent, but permanent for all intents and purposes. 2021 will probably be an environment where we are a net restaurant count decline of somewhere between 80 to 100,000 units less. And that dramatically changes the landscape. The brands, not just brands, independents as well, the restaurants that have weathered this, that have earned customer loyalty, that are operating well in this environment, will probably tend to thrive in a world where there’s 15% less competition. And so I’m very, obviously I’ve got a lot of reason to be bullish, we’re setting record sales, I’m very bullish on how the rest of the year’s going to play out for our brand. And I’m very bullish on how 2021 will play out.

Zach Goldstein

(41:50):

You’re making a case for a similar argument to the one that you made in 2008, which is “we need to focus on the longterm, not on the right now because there’s an opportunity to be had here.” And the proof is in the pudding with your location count. Clearly that was the right strategy then, and it sounds like you’re adhering to a very similar longterm focus now.

Don Fox

(42:13):

Certainly. You know, and actually, we’re just in the process of doing our marketing planning for next year. And as I mentioned earlier, when COVID hit, we stopped collecting our advertising fee. The co-op contribution is 4%, but the advertising fund, so we stopped it. And then we didn’t start to resume it until about seven or eight weeks in, we haven’t even been collecting it at the 4% we were collecting prior, we were collecting at 2%. So that’s our budget for the balance of the year, half of what it was going into the year. I don’t have enough time to get into it, but we’ve got perhaps a unique mechanism by which the advertising contribution is variable, never below 2%, but most years as high as four. So we’re putting in place our plans for 2021. And whether we are at 4% for next year is something that is subject to a vote of our franchise community. And we’re making the appeal that, “Hey, now is the time to strike in a world of less competitors. Yes, we have record sales right now, even with just spending 2% in our ad budget. Well, imagine what we can do with four.” So they’re great for me, it represents great opportunity and it’s a time to be more bold than ever.

Zach Goldstein

(43:38):

Well, I very much appreciate that perspective because it’s, one, this is a very hard industry. People are thinking one foot in front of the next, quite often, and a pandemic increases that, right? How do I make it one week out? But the leaders in the industry are quite clearly thinking two years out and not being penny wise, pound foolish. And that’s, that’s represented in your focus on your employees, it’s represented in your decision or your advocacy for spending now on marketing to gain share. I mean, these are long term bets that clearly you see as critical coming out of a crisis like this, and it’s worked for you before.

Don Fox

(44:23):

Yep. More of the same.

Zach Goldstein

(44:25):

Great. Well, Don, thank you for sharing your insight. Really enjoyed having you on the podcast and look forward to seeing that inevitable growth and what’s what’s to come for Firehouse Subs.

Don Fox

(44:38):

Thanks very much, Zach. I enjoyed spending the time with you.

Zach Goldstein

(44:42):

You’ve been listening to Food Fighters with me, Zach Goldstein, to subscribe to the podcast, or to learn more about our featured guests visit thanx.com/foodfighters. That’s Thanx, spelled T H A N X.com/foodfighters. This podcast is a production of Thanx, the leading CRM and digital engagement solution for restaurants. Until next time, keep fighting, Food Fighters.