Development of Chick-fil-A | Business Analysis

Chick-Fil-A

How does a fast food restaurant break the mold of perfect competition, working less hours, entering resistant markets, and still come out on top? Many in the industry have tried to copy the Chick-fil-A model and continue to ask for their secret to success. The story is of a man and his personal beliefs, strong entrepreneurial instincts and leadership. Chick-fil-A will not only motivate but will inspire you to positively effect change.

How It All Started

Returning from World War II, Truett Cathy, along with his brother, Ben, opened his first diner in Hapeville, Georgia, called The Dwarf Grill. With $10,000 and four tables, the Cathy brothers opened for business in May of 1946, with the grill directly across from Atlanta Ford Motor plant. The Dwarf Grill’s profits increased each year with a modest menu (Ellis, 2017).

Their diner ran twenty-four hours a day, six days a week, closing Saturday at 12:00 pm and reopening Monday morning.

The Entrepreneur – S. Truett Cathy

Cathy, born in 1921, in a poor, humble and very religious home, he recalls vividly how his family struggled in 1929 and the years thereafter. The financial struggles moved him to start his first small business at eight years old buying cokes, pulling a wagon, and selling them to neighbors for a nickel each. At this young age, he realized a profit, created a service, and learned to network (Hattwick, 2015).

As a child, after his father died, Cathy’s mother turned their home into a boarding house as a family business that provided for the family. In interviews, Cathy reflects on his mother as a Christian servant steadfast in her southern Baptist religious convictions. One might conclude that Cathy’s entrepreneurial spirit and proven people-focused fundamentals began at an early age that led to his servant attitude in his company (Hattwick, 2015).

Timing – Embracing Economic Change

Cathy recognized the economic post-war economic changes in the country as this time was considered by many as the “post war prosperity miracle.” Remarkably, resources no longer needed for the war were used in new manufacturing plants and private firms. The reallocation of these resources began generating a new market power. America’s GDP was climbing, soldiers were coming home and returning to work, personal investments were rising, and more than 16 million people secured jobs immediately after the war.

Government spending had fallen as the war ended all the while the economy was growing exponentially. Bohanon (2012) pointed out that “it seems that the postwar prosperity that America enjoyed after World War II was less the result of a carefully crafted political agenda than a by-product of what government stopped doing.”

The Cheese and the Chicken Sandwich

About the early 1960s, a local poultry contacted Cathy and asked if he would be interested in receiving scraps of their boneless, skinless chicken that came out too small for airline-meal sales. At such a cheap price, he accepted and started experimenting with his mother’s recipes, seasonings, methods of cooking, brines, and served samples between pieces of bread as a test-product to diners. The response was life-altering for Cathy; hence, the iconic chicken sandwich was born in 1965 (Hattwick, 2015). It was mid 1963 when he trademarked “Chick-Fil-A” that began the development of the chain in 1964 (Ellis, 2017).

Keep in mind, Colonel Sanders had been serving fried chicken since 1935 and had already sold hundreds of franchises by 1964 just before his company became public in 1966 (Editors, 2017). Cathy’s invention of the chicken sandwich did not make him the first mover that the worm according to Boyes (2012), but he was the second mouse that took the cheese.

The Chain Begins

Cathy changed the name of The Dwarf Grill to The Dwarf House. With his continued success, he opened a second restaurant nearby in Forest Park, George, five years later in 1957. Just three years after opening, the second location was destroyed by fire and Cathy did not have enough insurance on the building to reopen. This motivated Cathy to focus his efforts on his strong customer base and developing the Hapeville location by changing the menu (Hattwick, 2015). Working with the words “chicken” and “fillet,” Cathy came up with Chick-Fil-A, making use of the “A” to convey the concept of being the first. The logo was incorporated with the company in 1964 (Chick-fil-A, About Who We Are, n.d.).

Principles of Guidance

Irrespective of changes in the company’s goals or their strategies, Truett Cathy’s values and biblical principle-foundation shaped the culture of Chick-fil-A as we know it to be today. As a high-performing restaurant, Cathy’s principles influenced his owners and employees to serve each other and their customers as a good steward always remembering the “golden rule” (Inam, 2016).

Based on Beliefs

Cathy always asked in his speeches what the difference is between a public company and a private company. He would always follow with an answer that “a public company is profit conscious and a private company is people conscious” (Cathy, 2012). He reiterates all business people will first view bottom of line to identify success, but emphasizes that this difference between a public and private company is what separates Chick-fil-A from the industry norm. He has remained candid over the years that he would rather cater to a loyal customer base and reward employees for their success than try to keep stockholders happy. For this reason, Chick-fil-A has never become a publicly traded company (Cathy, 2012).

Statement of Purpose

From the beginning, Chick-fil-A has operated under the belief that human capital will generate the company’s profit. Chick-fil-A displays their written purpose statement in each restaurant, “to glorify God by being a faithful steward of all that has been entrusted to us and to have a positive influence on all who come in contact with Chick-fil-A” (Chick-fil-A, About Who We Are, n.d.). The Cathy family consistently maintains that chicken is just a catalyst that allows people to change the world (Ellis, 2017).

Invested in Employees

During a convocation speech in Dallas, Cathy shares that “two thirds of career people work at Chick-fil-A and began working there in high school” (Cathy, 2012). Chick-fil-A built their company in not just training employees, but also training them to be visionary leaders. The fast food industry carries an approximate turnover rate of 107%. Chick-fil-A reports their operator turnover is 5% and hourly employee turnover at 60% (Ellis, 2017). Managers feel like the family-oriented culture, compensation, and incentives offered to employees is why employees choose to work for Chick-fil-A (Ellis, 2017).

Excellence in Service

The company’s position on treating customers with honor, dignity, and respect is the primary goal. Campouts for new store openings is now a trend with Chick-fil-A customer base and new customers. Dan Cathy, son of Truett Cathy and CEO, joins customers in many campouts jokingly responding in an interview that “one really connects with your customer when spending the night with them in a parking lot” (Dan Cathy, 2009). Chick-fil-A has an inside motto of “second mile service” derived from a Bible scripture, that Jesus said, “if someone asks you to go one mile, go a second mile” (Dan Cathy, 2009).

Typically, in perfect competition, customers have shown to be elastic as there are many substitutions, and price changes would normally change the demand. McDonald’s began the $1 menu items, to draw in more customers. Ironically, the Chick-fil-A customer base is inelastic. The chain does not focus on attracting the consumer with price or a $1 item, nor do customers visit the chain to save $1. Customer loyalty, arises from the quality of the product, the experience, and the honored values of the company (Hattwick, 2015). Boyes (2012) reiterates that knowing the customer is the key to understanding the demand on a firm that will identify when changes and improvements with service or quality is warranted (p. 8). As of 2016, consumers choose Chick-fil-A over other chicken restaurants in the food industry (Fig. 1).

Fig. 1 is the market measure of favorite chicken chains (Force, 2016)

Organizing for Performance

Surprisingly, Chick-fil-A’s business model that emphasizes less about chicken and more about people has never disappointed the industry norm. When Cathy and family also leaders in the company, are asked repeatedly what their secret is, their replies shift to people (Dan Cathy, 2009). “Chick-fil-A averages $4.41 million per sales compared to $2.55 million for McDonalds” (Dierickx, 2018). While the popular happy-meal food chain tries to take on Chick-fil-A’s chicken sandwich in creating a new recipe, they are far from the reasons that consumers choose to dine at Chick-fil-A.

Franchisees/Owner-Operators

Cathy and Chick-fil-A leadership understand that the behavior of the people in the firm, and their goals, make and form the culture of the organization (Hattwick, 2015). One of Cathy’s most repeated leadership principles that he engrains into his staff is that “success of an organization is determined by its talent” (Inam, 2016).

With each new store, the company receives about 30,000 franchise applications and only select on average 100 to interview. Chick-fil-A retains ownership of all restaurants with operators in their franchise agreement that is renewed year-to-year allowing the operator to walk away at any time, but also allows the company to choose a new operator if necessary (Chick-fil-A, 2018).

The sole cost for an operator is an upfront fee of $10,000. The agreement does not allow the operator to sell or pass on the business to an heir or another buyer (Hattwick, 2015). With minimal risk and capital up front, operators pay 15% royalties on all sales, rent on the building, and Chick-fil-A shares all remaining profits at 50%. The arrangement is attractive to operators as their risk is minimum with little capital required. Likewise, to the company, using a profit-splitting arrangement with shared ownership has motivated operators and reduced stress of a new business that has allowed them to excel in their locale (Hattwick, 2015).

Supply Chain and Information Sharing

The suppliers are bound by a confidentiality agreement with the chain. So that the recipe is never revealed, one company mixes the dry ingredients and one company mixes the wet ingredients. The chicken is prepared at another company that collects both and distributes to the chain’s locations (Hattwick, 2015).

Chick-fil-A practices ongoing information sharing annually through face-to-face meetings with their suppliers. Prior to meeting, they ask their suppliers to score the company, and in turn, they score their suppliers with performance surveys. They also choose to recognize those suppliers that may need more growth in the upcoming year, and will focus on allocating more business to them. At the same time, this method has fostered a relationship of transparency in that the suppliers share their ideas of acquisitions, new developments, and planned changes that may directly impact Chick-fil-A (Dan Cathy, 2009). Chick-fil-A demonstrates what Boyes (2012) points out in that “private property rights of decision makers must be clear and secure” in order for exchange to flow efficiently (p. 69).

Being First

In the 1960’s, the company began catering to consumers in suburban shopping malls as the first mall-food restaurant for the shop-and-eat experience. During the 60s, more mothers stayed home with children and would spend time walking around in a mall. Families and teens would frequent the indoor shops on weekends and Chick-fil-A could cater to dynamic market (Dan Cathy, 2009).

Continuous Change

To rebrand themselves, the company launched their first media strategy in 1995 using cows in outdoor advertising with billboards and radio (Fig. 2). The results were profound. The company’s overall sales results were more than 5 times the sales of the fast food industry combined by the end of 1996 (Dan Cathy, 2009). To date, this fully integrated marketing program has made history and continues to reap revenues of reach consumers of all ages which is also now utilized in their smartphone apps and free-food incentives (Dierickx, 2018).

Fig. 2 Chick-fil-A launched the cows branding their image 23 years ago (Chick-fil-A, Chick-fil-A, 2015)

Social Responsibility

Truett Cathy (n.d.) stated, “Nearly every moment of every day we have the opportunity to give something to someone else our time, our love, our resources. I have always found more joy in giving when I did not expect anything in return” (Chick-fil-A, About Who We Are, n.d.). Regardless of your role, your job in the company is to generously give of yourself and time.

The company is known locally for their generous donations to food to shelters in product and volunteers and their response to disasters to those who need help. Even among the ongoing protests against their conservative ideology, they chose to serve by opening their restaurant in Orlando on the Sunday just after the shooting at Pulse in 2016. Staff arrived at work, unpaid, and served food to victims, first responders, and to those waiting in lines to donate blood. Nothing was sold this day (Sperance, 2018). During working hours, they also over-staff so that employees can donate time to local food banks or volunteer as needed in their community while being paid on the clock (Chick-fil-A, About Who We Are, n.d.).

The company continues to invest in their employees by awarding college scholarships to their team members. To date, Chick-fil-A has awarded “more than $45 million to 42,400 employees” (Chick-fil-A, About Who We Are, n.d.). With the Chick-fil-A Foundation starting in 2011, the company partners with Junior Achievement in order to teach kids life skills that incorporate financial literacy and entrepreneurship. The focus is to “grow knowledge” and expand the workforce with leaders (Chick-fil-A, About Who We Are, n.d.).

Success

In May of 2009, even with a slow economy and the struggle with the housing bubble, Chick-fil-A had reached $3 billion in sales the earliest in any year of operation which was a 9% increase in sales overall. They recognize their sales in shopping malls hit a -1% in the same year.

Market Lessons

The company’s most successful promotion was at their own as they promoted the chicken sandwich in a buy-one-get-one-free sandwich as a new campaign in the 80s. That year, the company overall lost more revenue from the giveaway. Truett Cathy called operators together to work on a plant to recoup the loss. Consequently, as the steward he is, Cathy forfeited his salary for one year rather than operators eliminating jobs (Dierickx, 2018).

Chick-fil-A has remained unwavering in their values and beliefs despite market influence and societal pressure. Their President was asked in an interview about same-sex marriage. He responded as any southern-Baptist Christian man would, in opposition of it and as a proponent of traditional marriage (Hattwick, 2015).

Following, officials began pushing back on the company’s efforts to enter new market areas. Mayor Rahm Emanuel told Chick-fil-A in a press conference to stay out of Chicago and subsequently tried to block construction of the restaurant. Boston’s Mayor, Tom Menino, repeatedly pressed the chain to stay out of the city. Even with Mayor Bill de Blasio’s efforts to get New Yorkers to boycott the company, “Manhattan’s store averages sales of more than 3,000 sandwiches per day with lines around the corner building most of the day” (Sperance, 2018). The public adversity and efforts to keep the chain out of the north bolstered their reputation and sales by $1 million in the following year (Ellis, 2017).

Adapting as Needed

A firm’s willingness adapt and innovate will keep them moving forward. Upon entering the northern markets, Chick-fil-A found their stereotypical floorplan was not conducive to the predominant foot traffic with rooftop dining in their New York and Chicago locations. As a result, they designed a new footprint (Sperance, 2018).

In keeping up with millennial demands, their menu add-ons have added healthier options, included app ordering, and encouraged the company to update their décor to a more urban dining experience.

Conclusion

From a southern kid that learned service and sales with cokes that becomes a billionaire with chicken, not only has Chick-fil-A proven that human capital is a firm’s greatest resource, but they have also pushed the boundaries that define the theory of perfect competition in the fast food industry. With their unconventional approach to leadership, service, their perpetual growth has catapulted the chain as the leader in the industry, in business, in service, and has become a model for companies in all industries to adopt.

Since the company remains privately owned, their financials are not published. The overall economic profit is inconclusive as no information is available on capital, assets, costs, etc. Nevertheless, one can follow their success by watching consumer feedback in the market. On that note, eat more chiken.

References

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