Three of Don Fox’s 23 years at Burger King, from 2000–2003, overlapped with José Cil. They didn’t cross paths, Fox being in field ops and Cil in legal, yet the shared history was hardly a throwaway.
About six weeks ago, Fox and Cil, now CEOs of Firehouse Subs and Burger King parent Restaurant Brands International, respectively, met to discuss a seismic deal. Fox, who left Burger King for Firehouse in 2003, rising to COO before helming the sandwich chain in 2009, says there was “instant chemistry and energy.”
“That frankly,” he adds, “wouldn’t have been possible with anybody else. And that will pay dividends in the respective performance of the business.”
Founded in 1994 by brothers and former firefighters Chris and Robin Sorensen, Firehouse Subs had been a privately held company since store one in Jacksonville, Florida, to the 1,200th.
On Monday that changed as RBI agreed to purchase the brand for $1 billion in an all-cash transaction. From a numbers perspective, it gives RBI, which also owns Popeyes and Tim Hortons, a growing player in America’s $30 billion quick-service sandwich category. Firehouse has tripled unit count since 2010 and is on track to reach $1.1 billion in systemwide sales this year, which would quadruple performance over that stretch. And as Fox points out, the brand “is stronger than ever right now,” emerging out of COVID’s depths.
Through the first four weeks of the pandemic, Firehouse’s sales were down 45 percent, year-over-year. The first Monday of COVID’s “official” landing (March 16), the chain stopped collecting royalties. A day later, it did the same for ad fees. In fact, it would be months before Firehouse asked operators for either, and even then, it came as deferred payments.
Fox says Firehouse wanted to keep cash in the wallets of franchisees given uncertainty. While the CEO admittedly couldn’t have predicted the COVID cycle, the brand’s sales returned to prior-year levels after just 10 weeks. By summer, Firehouse forgave deferred royalties and has been on a rocket ship since.
October year-to-date domestic same-store sales are 20 percent higher than 2019 levels. The main trigger is digital expansion, where 2–2.5X more dollars flow today through off-premises channels. Fourteen percent of sales in October stemmed from delivery. Firehouse’s Rewards platform boasts 3.5 million subscribers, growing at a clip of 50,000 users per month, up to 10 percent of the chain’s total transactions.
Firehouse, at 97 percent franchised, also expects to get to about $50 million in adjusted EBITDA this year.
All of these levers give RBI confidence to outline a three-and-half-year average payback period.
Beyond the near-term, though, RBI has bigger plans. Just consider recent history. On March 27, 2017, RBI acquired Popeyes Louisiana Kitchen for $1.8 billion. Like Firehouse, it offered the company skin in a growing quick-service arena (chicken) and something else as well—international whitespace.
One of the company’s defining traits since forming in the wake of a 2014, $11 billion takeover of Tim Hortons, has been net-unit expansion. Burger King was growing by roughly 170 units per year when 3G Capital spent $1.56 billion and grabbed control 11 years ago. Ahead of COVID, Burger King pushed about 1,000 locations each calendar turn. Popeyes opened 216 restaurants the year before RBI jumped in and there were 2,725 stores on December 31, 2016. Today, there are 3,607, with the brand reporting net international growth of 11 percent in the quarter that ended September 30, 2020, year-over-year (it was 5.4 percent in RBI’s most recent Q3).
Firehouse presently operates in just three countries and territories. Burger King is in more than 120, Tim Hortons north of 10, and Popeyes over 30.
There are 47 Firehouse Subs in Canada—the first opened 2015 in Ontario—and AUVs, generally, perform above the company’s system average. Subway has 2,940 in that market. RBI has 4,519 restaurants across its brands.
And on this kind of split goes.
RBI touts 27,667 total units, with close to 17,000 existing outside the U.S. It has more than 500 outposts in China (1,620), Brazil (928), Spain (897), Russia (792), Germany (744), and the U.K. (538); and more than 400 in Mexico (450), Australia (443), South Korea (425), and France (416). Firehouse has zero restaurants in any of those places.
Additionally, outside of Spain, where there are only 51, a sandwich chain not named Firehouse has at least 384 stores in every one. In Australia (1,221), the U.K. (2,211) and Brazil (1,641), there are significant strongholds.
“The opportunity exists,” Cil says. “And it’s exciting. We've been able to do just that with Popeyes and Tim's, which gives us confidence that we can do the same with Firehouse. And the common thread is it’s a great product. It’s a compelling business. … The team has done a great job from an operations and equipment and standards standpoint to do something that can be highly scalable.”
“The secret, usually, going forward is, in addition to having those things in place, you have got to find good partners. And then you have to have a really strong team locally to be able to drive it forward. And we've seen it work really well in Canada. We've seen it work really well in Puerto Rico, which gives us confidence that we can do it internationally as well.”
The domestic picture shouldn’t be glossed over, either. The reality is, Subway appreciated a net loss of 1,796 units from 2020–2021. The market is dynamic.
“It’s a shifting environment that I think is great for us,” Fox says. “For starters, our sales volumes at all-time highs—that should get [franchisees] fired up, revved up.”
And the RBI deal, he says, is something he’s informed operators is only going to balloon possibilities. “The assets, talent expertise, everything that comes with this is all additive to the potential of the brand,” Fox says.
Cil says RBI was attracted to Firehouse’s core positioning. The brand’s Public Safety Foundation has granted $62.5 million to organizations. Market Force Information, from consumer survey data, ranked Firehouse No. 1 for “food quality” and No. 3 for “value for money” in the quick-serve sandwich space. It’s a recognizable and branded concept (steamed meats) with options like the “Hook & Ladder” and “Smokehouse Beef & Cheddar Brisket.”
“The combination of all these things is what excites us,” Cil says. “And then when we look at synergies, we touched on our network of master franchisees [international whitespace] and our development model, which is quite compelling. And the additional element is being able to accelerate digital growth through our technology investments that we've made over the last many years with over 200 engineers in our team. We think we can bring a best in class mindset and approach to technology to help drive the business even further.”
On that technology conversation, RBI boast an in-house stack, including loyalty programs and a CRM engine. It’s invested in white-label delivery alongside partnerships with third-party vendors. It continues to update menuboards to dynamic digital formats and work on suggestive sell capabilities.
Firehouse has a solid digital foundation with a mobile app, including mobile order and pay and loyalty capabilities, and the rewards base mentioned earlier. But this will augment those capabilities by giving Firehouse access to RBI’s in-house developments and investments in an effort “to accelerate the brand’s digital transition,” the company said.
“To really start to bust it out and increase development, it takes a well-resourced partner with not just a matter of capital resources, but expertise, talent, and scale,” Fox says. “I mean, all those things are additive and we're looking forward to tapping into that and working collaboratively to leverage it and just improve our rate of growth.”
With the deal, expected to close “in the coming months,” Firehouse will remain based in Jacksonville and be managed by Fox and CFO Vincent Burchianti, a former assistant controller at Nathan’s who joined the brand in 2001. The current team will lead day-to-day operations.
“What we're excited about is having a fourth brand in the portfolio that's really strong, has a tremendous heritage around food quality and innovation and is strongly positioned vis a vis local communities because of the Foundation,” Cil says. “That combination with great franchises and a great leadership team, we think is powerful and to Don’s point earlier, the growth potential in the U.S. Is clear, and we're looking forward to seeing accelerated growth in the years to come.”