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Jack in the Box Plants ‘Seeds’ in Heartland for Franchise Growth

For Jack in the Box Inc., business growth stems in part from territorial growth.

There are still parts of the United States that have never seen a Jack in the Box restaurant or the company’s other format, Qdoba Mexican Grill. The $1.55 billion corporation is working to establish those eateries on new turf.

Physical expansion isn’t the only strategy, though. Kearny Mesa-based Jack in the Box is also attempting growth by reshaping its business: by converting company-owned stores to franchises, and by pursuing better ways of doing business — such as outsourcing distribution.

At its last count, Jack in the Box reported 2,255 Jack in the Box restaurants in 21 states — mostly in the West and South. Additionally, it operates 636 Qdoba quick-service restaurants in 44 states and the District of Columbia. Qdoba recently opened its second Canadian location.

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The two chains cater to different demographics. While Jack in the Box serves a younger crowd that spends a limited amount, Qdoba serves an older clientele with higher incomes, which tends to spend more on its checks.

Franchise-Heavy Business Model

As the U.S. economy has transformed over the last several years, the corporation’s business model has morphed.

In 2005, franchisees ran 25 percent of Jack in the Box stores. Today 76 percent of Jack in the Box outlets are franchise operations, and the company is working to get the figure up to 80 percent.

A franchise-heavy business model lowers cost structure and brings with it a stream of franchise revenue, royalties and rental income, noted company spokesman Brian Luscomb.

Jack in the Box gets 5 percent of gross sales as royalties from its franchise stores, the spokesman said.

At 90 percent of its franchise sites, Jack in the Box holds the master lease on the property and subleases the site to the franchisee at market rates, he added.

For Jack in the Box, expansion means a push into America’s heartland.

The company opened 37 Jack in the Box stores in 2012, including the chain’s first stores in Indiana and Ohio. The company plans to open 20-25 new Jack in the Box locations in 2013.

The plan is to grow by 2 percent every year, Luscomb said.

Part of Jack in the Box’s strategy is to “seed” new markets. Under that model, the company builds a group of stores which it operates in the near term. At the same time, it searches for a suitable franchise operator.

Under their temporary corporate ownership, the new stores gain a sales history and cash flow, so the prospective franchise operator can get financing more easily, Luscomb said.

There is no set amount of time between the stores’ opening and a franchisee taking over. The company transfers the stores when the time is right, the spokesman said.

That happened in Oklahoma City in September, when Jack in the Box sold seven stores to a franchisee.

Outsourcing Distribution

Meanwhile, the company is developing other seed markets in Tulsa, Okla.; Kansas City; Indianapolis; and Cincinnati.

Jack in the Box has approved franchise development plans for Wichita, Kansas; Omaha, Neb.; Little Rock, Ark.; Fayetteville, Ark.; and Champaign, Ill. These markets will not be seeded, Luscomb said.

Business processes are also getting a critical look. The first quarter saw Jack in the Box Inc. wrap up its plan to outsource distribution to a third party. Luscomb said Jack in the Box was able to negotiate a deal with North Carolina-based MBM Foodservice Distribution (part of McLane Co. Inc., which in turn is part of Berkshire Hathaway Inc.). The level of service is comparable to in-house distribution, and the cost to the company is lower, the spokesman said. Jack in the Box took a $3.3 million charge for the move.

Shares of Jack in the Box trade on the Nasdaq as JACK.

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