Business Breakdown ChickfilA Ep 470



In this episode, the host delves into the remarkable success of Chick-fil-A, emphasizing the company's strategic focus and steady growth. Chick-fil-A's founder, S. Truett Cathy, is celebrated for his missionary approach to business, prioritizing a cause over profit, which has led to unparalleled year-on-year sales growth for 76 years. The host admires Chick-fil-A's decision to grow slowly, maintain a simple menu, and uphold strong company values, such as closing on Sundays, which aligns with Cathy's Southern Baptist faith. The franchise model is also highlighted, where operators are deeply invested in their single locations, fostering a culture of exceptional service. These strategies have resulted in Chick-fil-A outperforming competitors like McDonald's and Starbucks in per-restaurant sales while operating with a fraction of their menu items. The host draws lessons from Chick-fil-A's focus, long-term vision, and compounding growth, applying these principles to his own business endeavors with

Summary Notes

Chick-fil-A's Financial Success

  • Chick-fil-A has a higher revenue than McDonald's, Starbucks, and Subway combined.
  • The company's sales have consistently increased year over year for 76 years.
  • Chick-fil-A's per restaurant revenue is significantly higher than its competitors, averaging about $5.2 million, which is more than twice the sales of a McDonald's location.

"Chickfila makes more money than McDonald's, Starbucks, and subway combined. [...] They make over 5 billion." "Chickfila makes more per restaurant than McDonald's, Starbucks, and subway combined. [...] They make about $5.2 million per restaurant, top line."

These quotes highlight Chick-fil-A's impressive financial performance in comparison to other fast-food giants, emphasizing its exceptional revenue both overall and on a per-restaurant basis.

Founder Esther Cathy's Business Philosophy

  • Esther Cathy started Chick-fil-A 76 years ago and operated it for 68 years until his death.
  • Cathy's business approach focused on long-term growth rather than short-term profits.
  • He was driven by a mission rather than purely financial motives, aligning his business with his Southern Baptist Christian faith.
  • Cathy's consistent focus on selling chicken sandwiches exemplifies his dedication to a singular business goal.

"Esther Cathy, the founder, who started it 76 years ago [...] he sold them for 68 straight years of his life." "The sales of the company have never gone down year to year. They have literally only gone up and to the right for 76 straight years." "Esther Cathy is one of those pure examples."

These quotes describe the founder's lifelong commitment to his business and his success in achieving consistent sales growth, illustrating the effectiveness of his mission-driven approach.

Business Growth Strategy

  • Chick-fil-A chose a slower growth model in contrast to the rapid expansion strategies of competitors.
  • The company's focus on quality and consistency led to a stable and sustainable business model.
  • Esther Cathy's strategy was to build a business that would last and continue to thrive beyond his lifetime.

"They decided to grow slower." "He wasn't thinking on a five or a ten year time horizon. He literally sold chicken sandwiches from the time he was 25 until the day he died."

These quotes underscore the deliberate choice of Chick-fil-A to prioritize long-term stability over rapid expansion, reflecting the founder's vision of lifelong commitment to the business.

Efficiency and Product Offering

  • Chick-fil-A maintains a limited menu, which leads to higher efficiency and profitability.
  • The company operates with fewer products than competitors but achieves higher sales.
  • The focused menu allows for faster service, fewer mistakes, and reduced food waste.
  • Chick-fil-A applies the Pareto principle (80/20 rule) to its business operations.

"They have twelve [products on the menu]. And they don't iterate that menu." "They follow Preto's principle of 80 20."

These quotes highlight Chick-fil-A's strategic decision to offer a refined menu, which contributes to operational efficiency and aligns with the founder's business beliefs.

Ownership and Franchise Model

  • Chick-fil-A corporate owns all locations, ensuring control over the brand and operations.
  • The company receives a high number of franchise applications but awards franchises to less than 1% of applicants.
  • Franchisees are often individuals who have worked within the company, fostering a culture of internal growth and opportunity.
  • The franchise model requires operators to invest and participate actively in the business but does not allow them to own the profits or sell the franchise.

"He owns every single location. All right? Corporate owns all the locations." "They get 60,000 applications a year to open a chickfila." "You own the franchise, you are an operator, except you can get fired and you can't sell it, and you don't get the profit."

These quotes explain Chick-fil-A's unique franchise model, which emphasizes corporate ownership and provides a pathway for employees to advance to franchise operators, albeit with certain restrictions that align with the company's values and long-term goals.

Chick-fil-A's Business Model and Profitability

  • Chick-fil-A corporate receives 15% of the top line revenue from each store weekly.
  • The franchise's high profitability allows it to sustain a 15% top line royalty fee.
  • Chick-fil-A also benefits from real estate by owning the building and land, paid through a lease by the franchisee.
  • After expenses and royalties, franchisees can earn approximately $200,000 to $250,000 annually.
  • The business model offers a significant American Dream story, where hard work can lead to substantial earnings.

"52 weeks, 5.2 million, $100,000 a week. Now, Chick-fil-A corporate gets 15% of top line. So $15,000 every week gets clipped straight to corporate. That's what they get off top line. 15%."

This quote explains the revenue structure of Chick-fil-A, where corporate takes a 15% cut of the weekly revenue generated by each franchise.

"So the Royalty, if they were in an inferior franchise or inferior business, would be the entirety of the profit. But because their stores are so darn profitable, they can do it this way."

The profitability of Chick-fil-A allows it to maintain a high royalty fee without consuming all of the franchise's profits, which would be the case for less profitable franchises.

"And then after doing all that stuff, because that's also making corporate money, there's profit left over. Now you're like, okay, so that goes to the franchisee. Half of that profit still goes to corporate."

After royalties and expenses, remaining profits are split, with half going to the franchisee and the other half to corporate, illustrating the shared profit model.

The Compounding Wealth Vehicle in Brick and Mortar

  • Chick-fil-A's model includes a reinvestment mechanism for profits, acting as both a cash-earning and cash-reinvestment machine.
  • A high return on capital is a crucial aspect of a successful brick-and-mortar business model.
  • The ability to reinvest profits into opening new locations can lead to exponential growth.
  • Operational constraints can become a limiting factor in expansion, not just capital returns.
  • Tax efficiency is achieved by reinvesting profits at the corporate level.
  • Brick and mortar chains are attractive to private equity due to their high returns on reinvested cash.

"And the beautiful thing is that they actually have a compounding vehicle of wealth within their business."

Chick-fil-A's business model is designed to compound wealth by reinvesting profits into the business to fuel growth.

"If you have a business model that works... Every year you can double."

The quote illustrates the potential for doubling the number of store locations annually through reinvestment, showcasing the scalability of a successful business model.

Investment Strategy and Market Analysis

  • Investing in companies with high returns on capital and low price-to-earnings ratios can yield significant long-term returns.
  • Market volatility can deter short-term investors despite the potential for high returns.
  • Chick-fil-A's profitability surpasses major competitors, even with being closed 52 days a year.
  • The scarcity created by not being open seven days a week generates customer desire.
  • Chick-fil-A's commitment to culture and values is integral to its business model.

"So if you're somebody who comes in mopping floors, you have the potential, if you're exceptional, to someday be able to make 200 to 250,000 a year operating your own Chick-fil-A location, which I think is awesome."

This quote highlights the upward mobility within the Chick-fil-A franchise system, where even entry-level employees can aspire to high earnings as franchisees.

"So when I'm looking at businesses that I want to own for a really long time, I want things that compound in and of themselves."

The speaker emphasizes the importance of investing in businesses that have the inherent ability to reinvest and compound profits over time.

"There's a wonderful book called the little book that beats the market by, I think, Joel Rosenblatt... He gets 20% a year."

The quote references an investment strategy focused on companies with strong fundamentals, specifically high returns on capital and low price-to-earnings ratios, as a path to substantial returns.

Chick-fil-A's Operational Strategy and Cultural Values

  • Chick-fil-A's decision to remain closed on Sundays is a strategic move that creates customer desire through scarcity.
  • The company's values and culture are deeply embedded in its operational decisions, reflecting the founder's principles.
  • Despite being closed one day a week, Chick-fil-A's profitability is significantly high, indicating efficient cost management and strong demand.

"Desire is created through lack. You only want something you do not have."

The speaker explains the psychological aspect of Chick-fil-A's operational strategy, where limiting availability increases customer desire.

"Values matter more than just about anything, in my opinion, if they are true to the founder, true to the business, and they operate in that way."

This quote emphasizes the importance of aligning business operations with core values and principles, which has been key to Chick-fil-A's success.

Company Values and Authenticity

  • Chick-fil-A embodies its Christian values consistently across its operations.
  • The decision to remain closed on Sundays is seen as a reflection of their commitment to these values.
  • The strength of their values potentially compensates for the revenue lost by not opening on the seventh day.

"And they practice what they preach, pun intended, with all of their workforce. And if they were to say, we believe in these values, we have this christian backing, and then they were open on Sundays, after they were to reverse it, it would seem like they were swapping their values for a little bit more money."

This quote emphasizes the importance of a company's adherence to its stated values, suggesting that Chick-fil-A's decision to close on Sundays reinforces their authenticity and may contribute to their success on other days.

Audience Engagement and Growth

  • Esther Cathy asks listeners to support the podcast by rating, reviewing, and sharing it.
  • The growth of the podcast relies on listener engagement to help more entrepreneurs.
  • Audience support is crucial as the podcast does not run ads or sell products.

"The only ask that I can ever have of you guys is that you help me spread the word so we can help more entrepreneurs make more money, feed their families, make better products, and have better experiences for their employees and customers."

Esther Cathy is requesting listener support to grow the podcast's reach, which in turn aims to assist entrepreneurs in succeeding in their ventures.

Differentiation and Competitive Advantage

  • Chick-fil-A's VP of Growth emphasizes the importance of not just competing but creating a competitive advantage.
  • The company focuses on what other fast-food restaurants aren't doing, which is 20% of the operations that differentiate them.
  • Chick-fil-A has cultivated a culture of service by learning from the hospitality industry and implementing it company-wide.

"I wasn't hired here to do the same thing that the other 80% are doing. I'm hired to do what the 20% are not doing, not to just compete, but to create a competitive advantage."

This quote highlights the strategic focus on differentiating Chick-fil-A from competitors by concentrating on unique service aspects that other fast-food chains may not prioritize.

Culture of Service and Leadership

  • Chick-fil-A studied the hospitality industry to enhance customer experience.
  • The company faced resistance when implementing the phrase "my pleasure," but it became ingrained through the CEO's example.
  • The CEO's change in language patterns took years to trickle down through the company culture.

"It wasn't until the CEO himself changed his own language patterns that it then permeated through."

The quote illustrates the top-down approach to cultural change within Chick-fil-A, showing that leadership behavior can significantly influence company-wide adoption of new practices.

Operational Excellence and Long-Term Vision

  • Chick-fil-A practices continuous improvement, focusing on efficiency and accuracy.
  • They conduct drive-through practice runs in an indoor arena for real-world testing.
  • Esther Cathy reflects on the importance of having a long-term approach to business, focusing on a singular problem for extended periods.

"Because if we change nothing about this business, we sell the same twelve items. You just get better and better and better at the same thing."

This quote conveys the philosophy that specializing and refining a core product or service over time leads to mastery and competitive advantage.

Sustainable Business Practices and Values

  • Chick-fil-A's founder, Truett Cathy, focused on a singular product and mission, leading to the creation of a lasting empire.
  • The company's commitment to their core values and long-term vision allowed them to outperform competitors.
  • Esther Cathy emphasizes the importance of building a business with the intent to last for decades or even centuries.

"And he built an empire, and he built a mission behind it that I think millions of people are happy and frequent every day compared to their alternatives that were just mercenaries that were just in it for the money."

The quote underscores the success derived from having a strong mission and values, which can lead to greater customer satisfaction and financial success over time.

Focus on Core Products and Incremental Improvement

  • Chick-fil-A has maintained a focus on a limited menu, prioritizing quality and incremental improvements.
  • The company's philosophy is that excellence in a few core products can lead to significant leverage and outsized returns.
  • Comparisons are made to Olympic runners, where small improvements can have life-changing outcomes.

"Number one is that they sold chicken sandwiches for 76 straight years, and I don't think they're going to stop."

This quote highlights the company's dedication to their core product and the belief that long-term focus and incremental improvement are key to success.

Legacy and Mission-Driven Business

  • Truett Cathy's vision for Chick-fil-A was not just about financial gain but building a legacy that would outlast his lifetime.
  • Esther Cathy aspires to create businesses that grow beyond their founders, driven by a mission rather than just profit.
  • The concept of being a "missionary" rather than a "mercenary" in business is presented as a more sustainable approach.

"And for me, honestly, that's my dream. My hope is that whatever we build can continue and not only just stay alive, but grow beyond us."

The quote reflects Esther Cathy's personal aspiration to build a business that endures and thrives beyond the involvement of its founders, driven by a strong mission.

Ownership and Investment in Business

  • Chick-fil-A limits franchise owners to one store to ensure focus and investment of heart and soul into their location.
  • This policy is seen as a wise decision to maintain quality and dedication across franchises.

"The fact that they don't let anyone have more than one store. I think there's a lot of wisdom to this."

The quote suggests that Chick-fil-A's policy of single-store ownership per franchisee ensures a high level of commitment and quality control, contributing to the overall success of the brand.

Ownership and Profit Sharing

  • Esther Cathy discusses the concept of treating each store as a separate business line within a corporation.
  • Encourages ownership mentality among employees through profit sharing.
  • Employees have the potential to earn more, which is motivating.
  • The focus is kept on individual store performance for maximum effort and results.

"And he has profit sharing. Now, mind you, he doesn't share the whole profit, but after he takes his pieces off, they have an ability to make more money."

This quote highlights the strategy of incentivizing employees through profit sharing, which allows them to earn additional income based on the store's performance. It's an approach that motivates employees by giving them a stake in the success of their specific location.

Upholding Values Over Profit

  • Saying no to profitable opportunities that conflict with core values.
  • Entrepreneurship often presents lucrative options that may not align with the company's values.
  • Chick-fil-A's decision to stay closed on Sundays is an example of prioritizing values over additional profit.

"And imagine how hard it is to say no, because in the beginning, he had to say no to an extra 13%."

The quote illustrates the difficulty in rejecting significant revenue increases in order to stay true to company values. It exemplifies the commitment to values even when faced with substantial financial gain.

Leadership by Example

  • The importance of leaders embodying the values they want to instill in their team.
  • People learn more effectively by observing actions rather than listening to words.
  • Leaders must live by the values they set to ensure their team follows suit.

"Esther Cathy noted that when he wanted everybody in his team and his company to start saying my pleasure, when someone said thank you to them for doing something, that it didn't change until he changed how he spoke."

This quote demonstrates that behavioral change within a team begins with the leader's example. It underscores the impact of a leader's actions over their words in influencing team culture.

Compounding Growth Within the Business

  • Building a compounding vehicle of capital for sustainable business growth.
  • Chick-fil-A reinvests profits to open new locations, buy land, and expand, which yields high returns and tax benefits.
  • The strategy involves reinvesting in the business to create a self-compounding effect on capital.

"And so chick fil A has a compounding vehicle of capital within their business."

The quote refers to Chick-fil-A's method of reinvesting generated profits back into the company to fuel expansion and further financial success. It highlights the concept of using a business's own operations to generate increased returns over time.

Ruthless Prioritization and Consistency

  • The power of maintaining a focused and consistent product offering.
  • Avoiding frequent changes to the menu or product line maintains customer trust and allows for continuous improvement.
  • Ruthless prioritization leads to better performance and profitability.

"Ruthless prioritization on the essential few items that they need to sell."

This quote emphasizes the strategic choice to focus on a limited number of offerings to ensure quality and consistency, which has proven successful for Chick-fil-A. It suggests that entrepreneurs should concentrate on perfecting a few key products or services rather than diversifying too broadly.

Simplified Product Ingredients

  • Chick-fil-A's chicken sandwich has fewer ingredients than its competitors' signature products.
  • Simplification leads to faster preparation, consistent quality, and economies of scale.
  • Over time, this approach builds a strong, unbeatable market position.

"Chick fil A's chicken sandwich. It's chicken, bread, butter, two pickles. That's it."

The quote illustrates Chick-fil-A's commitment to simplicity in their product offering, which allows for operational efficiencies and a consistent customer experience. It highlights the benefits of a simplified product in terms of preparation and ingredient management.

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