Growth Economics Hit the Next Level
Sam Ballas has a lot of epiphanies.
The CEO of East Coast Wings & Grill, a North Carolina-based chain in the high-flying wings segment, attributes his success with unit-level economics to strategic brainstorms about how to translate his background in family restaurant management into a franchise system.
The result: East Coast slows down growth to speed up sales. Last year, Ballas’ efforts at the brand yielded an average unit volume of $1.5 million for East Coast—not too shabby for a 28-unit chain.
Ballas is religious about key performance indicators (KPIS) and benchmarks that drive the bottom line with unit-level economics. He insists that studious understanding of KPIs is the magic formula to fruitful growth—not chasing a high store count. Unit-level economics drill down into the profits of each location based on thorough market research, demographics, real estate, and other factors. The end result ensures each store opens at the best site, but the stretch required to unveil a new site means only a handful of East Coast units open annually. Ironically, the slow growth is surpassing the competition.
Through unit-level economics, “each restaurant individually becomes extremely profitable very quickly,” says Jason Moser, senior analyst at financial services firm Motley Fool One. “It allows the business to essentially self-fund its own growth, so it’s the slower method of growing, maybe, but it can certainly be more financially rewarding.”
“You can Google brands in the last 10 years, emerging brands, that have said, ‘we’re going to open 30 or 40 units this year,’ and they’ll open three,” Ballas says. “We’ll say 10–12 in a year and we’ll open six or seven. The reason we don’t hit those unit opens is because in the course of that year, we’ve had to slow down to restructure or iron out any wrinkles of KPIs that we feel help us drive unit-level economics.”
The franchising model usually lends itself to lower profitability than a company-owned format, because the company isn’t making money on each store. “They’re just collecting a royalty,” Moser explains, “whereas focusing on stronger unit economics can result in a much more profitable entity for the company itself, as opposed to looking toward external forces like franchisees to do the growing for them.”
East Coast had only two company-owned locations in 2013; the other 26 were franchised. The franchisees boasted a healthy EBITDA (earnings before interest, taxes, depreciation, and amortization) of 18 percent in 2013. Given the 5 percent royalty fees and 2 percent marketing fees per franchisee, stores must make about 25 percent earnings before arriving at their individual 18 percent profit.
The success didn’t come overnight or through a sudden flash of inspiration, but through dogged strategies implemented over the last five years. First, Ballas turned his Micros point-of-sale system into its own division at the Winston-Salem, North Carolina, corporate headquarters; then, he used it to track daily and weekly sales at each franchise to confirm profitability and see if any slips into dangerous waters; and most recently, East Coast created a loyalty system that upsells the items on the menu with the highest profit margin.
One of Ballas’ first epiphanies came in 2009, when Micros got a promotion from a super-sized cash register to its own division. “It might sound kind of cheesy, but if you really think about it, it makes total sense,” Ballas says. “Why are we not asking that director of POS, so to speak, even though it’s a computer, to spit out specific things we need to know day in and day out: menu mix, movement, specific-item mix, and things like that?”
The data that Micros provides East Coast includes pinpointing which patrons are loyal customers. That information helps East Coast concentrate marketing efforts on retention—another one of its KPIs—and also indicates when it is time to acquire new customers.
“We spent the last four and a half years through the recession not putting a lot of dollars and cents into new acquisition of customers,” Ballas says. “We spent all of our marketing dollars in our communities and on retention, based on what our POS system was telling us.”
Ballas says he learned he was on to something in 2012, when he spoke at the International Franchise Association as a panelist and had CEOs from 1,400-unit chains and 700-unit chains come up to him afterward to chitchat about strategy. “One of the CEOs from a 1,400-store chain was asking me questions about specific KPIs and benchmarking, and I’m thinking, ‘Wow, you’d think 1,400 stores later, they’d have that nailed.’”
Through slow growth, East Coast is able to safely control its brand identity. “One of the downsides of franchising is the company doesn’t have as much control over the store, whether it’s quality control or cleanliness, just because it’s a franchised operation,” Moser explains. “In utilizing franchising yet going slow, it takes some of that financial risk off of East Coast’s plate. It allows them to maintain the quality of the offering and ensure they are vetting the franchisees appropriately and opening those stores in good locations.”
The next epiphany in Ballas’ timeline was creating an entire unit-level economics division. He brought in a handful of people who know nothing about franchising, but are number crunchers. Every morning, they crunch the previous day’s numbers and benchmarks of every East Coast location. They then compare that data to the same day at that location in the week prior.
One proprietary benchmark East Coast has is the Red Zone: Data that signal a store slipping into dangerous sales territory.
The number crunchers hand over Red Zone statistics to the field operations team, who dig deeper into those units to find if anything has changed recently—management or kitchen changes, community events that might affect traffic, high turnover rates, even food truck delivery mistakes—and learn how to help sales turn around.
“We’re looking for patterns,” Ballas says. “It’s the first element of what we do to help drive unit-level economics.”
Finally, Ballas had an epiphany about making the patrons feel special and installed a loyalty program, attaching a survey to it.
East Coast learned a high percentage of loyal customers stay within one or two items on the menu. Using the survey results, East Coast sends targeted messages to loyal consumers, asking for their valued feedback on another product.
“We know you think our Mongolian Steak Salad is killer because you’ve eaten it nine out of your last 12 visits,” an email might read. “We’d love for you to try our ribs and give us some feedback so we can know if our ribs are up to par or if they need some re-engineering.”
The loyalty experiment yields three impressive results. “I’m getting continued, sustained sales,” Ballas says. “I’m getting you to try a new product and give me some marketing feedback on the quality of my product. Oh, and I’ve pushed you to eat the highest-grossing-profit item on the menu.”