Jack in the Box previously shared that roughly 600 of its restaurants were in need of a facelift. About 150 of those required structural enhancements, and it will move forward as planned. That’s the traditional route. But now, the company is going against the remodel grain and putting its money where the consumer is—the drive thru.
With the remaining 450 or so units, Jack in the Box chief executive officer Lenny Comma said the company is shifting focus to its biggest sales driver. Not only does 70 percent of business take place at the drive thru, but also half of the remaining 30 percent are takeout customers. So it left Jack in the Box asking a pretty simple question: How are guests using the brand? And the answer didn’t have much to do with tables or chairs.
“I don’t think the consumer is valuating all new furniture and wall treatments and lighting as much as they’re going to value enhancements to the drive thru and a more efficient pick-up system at the front counter,” Comma said during the company’s May 2 second-quarter review.
This doesn’t mean, though, Jack in the Box can present itself poorly inside restaurants. It just suggests the majority of capital should flow into the channel returning the biggest investment. And the one that best defines its brand. The company said how much exactly would be determined by which restaurants might still need both—drive thru as well exterior and interior changes.
“I look at what’s going on in the industry and try to kind of think back to the events that have happened in the past, whether it’d be with e-commerce or even when you look at what happened with Blockbuster and Netflix,” Comma said. “And I don’t want us to ever be in a position where we’re ignoring what the consumer is telling us … and we just continue to do what we want.”
Jack in the Box first unveiled its “drive thru of the future” initiative in August 2018. The test includes digital menuboards, increased use of LED lighting, and canopies that allow outside order takers to make the experience more personal, as well as facilitate speed and consistency. A strategy similar to the one Chick-fil-A uses.
Comma said the test is expanding, and once the final elements are determined, a systemwide rollout will unfurl in early 2020.
“When you look at what’s happening with delivery and order ahead and pick-up trends, it sort of begs the question: what’s the appropriate level of investment in dining rooms?” — Jack in the Box CEO Lenny Comma.
Of the 150 units in need of full refreshes, 75 are complete. Comma said Jack in the Box is seeing mid- to high single-digit sales lifts. Most of which, unsurprisingly, can be credited to drive-thru changes. This led Jack in the Box to a clear conclusion, CFO Lance Tucker said. By focusing on the drive thru instead of the full design, the brand could still capture the bigger part of those returns but do so with a smaller capital investment.
“When you look at what’s happening with delivery and order ahead and pick-up trends, it sort of begs the question: what’s the appropriate level of investment in dining rooms?” Comma asked.
He added that today’s quick-serve consumers, at least those who frequent Jack in the Box, are convenience driven and want to participate in digital innovation, like order ahead and delivery. “What they’re not telling us specifically for our brand,” Comma said, “is that they want to spend a lot of time in our dining rooms and particularly don’t spend a lot of time in our dining rooms in groups. They typically do that as individuals.”
“So from that standpoint, I just think that I’m hard-pressed to ask our franchisees to make an investment in something that isn’t necessarily going to drive the type of returns that they’re going to need,” he continued. “And I would rather take a safer bet, which is essentially to align our investments in where the consumer is going.”
Results to build on, off the market, and refining value
Jack in the Box completed its strategic review process, the company said. It spoke to potential buyers, domestic and international. In the end, the company chose not to explore a sale and instead implement a new capital structure in the form of a securitization. It will replace its existing senior credit facility, which includes a term loan and revolving credit facility, with a securitization.
Comma said the process forced Jack in the Box to flip the mirror and take a deep look at its business. “One of the silver linings of just spending that much time on our business, evaluating our business in conjunction with other folks we’re looking at is, you just start to find opportunities through other people’s lenses that maybe you hadn’t thought of along the way,” he said.
Comma said the team is “committing our full attention” on moving the brand forward.
Jack in the Box’s company-run same-store sales inched 0.6 percent in Q2 compared to last year’s 0.9 percent growth. Average check upped 2.8 percent, partially offset by a 2.2 percent decline in transactions.
Franchised units saw 0.1 percent comps growth versus a 0.2 percent decline in the year-ago period. As of quarter’s end, there were 137 corporate units and 2,103 franchises.
Earnings were $25.1 million, or 96 cents per diluted share.
Comma spoke on a wide-range of topics during Thursday’s call. Perhaps none more the value and how Jack in the Box views the hot-button topic different than its competitive set.
An interesting figure: 90-plus percent of the transaction losses Jack in the Box has weathered in recent years have taken place at the below-$5 level.
The value customer, in general, is looking for two things, Comma said. They’re targeting established meals around that price point, or they’re looking to bundle a bunch of individual items and put them together for less than $5.
“And we were not doing a good job of presenting enough of that to the consumer,” he said.
Jack in the Box’s a la carte offerings skew higher ticket. But if the chain wants to feature everyday items at a higher price than competitors, relying on unique offerings over deep discounts as it’s historically done, it’s going to have to pulse LTOs and promotional windows that present value to consumers.
“Half of our overall brand equity is really associated with more craveable food. Consumers are less concerned about the price associated with that and more concerned about the flavor,” Comma said. In other words, indulgent and on-brand items that aren’t, ultimately, driven by price.
The other half, however, looks to value, which was typically tied to tacos for Jack in the Box. And it lost some of that equity when pricing went up, Comma said.
While Jack in the Box continues to avoid deep discounting, it’s shifted to value in new items and LTOs, which minimizes the risk of diluting the equity of core products. “It’s margin friendly mainly because we’re doing it as LTOs and new products. We’re not discounting a bunch of our core items where the franchisees are making strong margins and where they have high sales mix,” Comma said. The $4.99 Spicy Chicken Strips bundle was a recent example.
In addition, he said, if Jack in the Box starts catering to the below-$5 price point as well it will bring those guests back. For the brand, it’s not a matter of those consumers trading up, as some chains court, since they’re not trading down from the higher-priced offerings to the value-oriented ones. They’re simply not the same customer, Comma said.
“Essentially, what’s happening when we don’t put value in the marketplace is the value-oriented consumer trades to one of our competitors,” he said. “That’s really what the phenomenon is. And so that’s what we’ve been sharing with our operators in the field and trying to educate them on how the consumer is behaving.”
Using bundle value is nothing new for Jack in the Box. What’s fresh is the company’s focus on the below-$5 price point. In the past, a lot of the bundle meals would run higher. “But the marketplace is pretty aggressive right now,” he said. “So we’re going to the place, the price points, where the consumer is going to respond.”
Speed it up
Comma said Jack in the Box has “been our own worst enemy when it comes to speed of service.” The reason: the breadth of the brand’s menu tacked on complexity in prep times. To simplify operations, the company tested opportunities to reduce redundant SKUs and delete some low-volume items.
Comma called it “Phase 1” of the process, and Jack in the Box saw no detrimental impact on sales at about 180 restaurants, company and franchised. Speed of service did improve, however. Training got easier. It took less time to count inventory. Food waste declined.
This pilot is expected to rollout systemwide in July. Phase 2 testing is also set to begin immediately.
The overall objective, Comma said, is to achieve a 1-minute improvement in average service time without sacrificing quality, accuracy, and friendliness rate.
Pulling out redundant ingredients was a key change. For example, Jack in the Box once had five-plus mayo-related sauces; seven-plus cheeses, and a “ridiculous number of bread carriers,” Comma said.
The chain found it could slightly modify certain products by using one ingredient over several without the consumer satisfaction dropping off dramatically.
Previously, Jack in the Box created menu items by developing what it thought was the best product for the guest. “And today, we actually have a team of people that combines operations, training, the R&D and culinary and marketing folks, supply chain folks, all-in-one team,” Comma said.