FIREHOUSE SUBS CEO DON FOX INTERVIEWED BY FOODSERVICE & HOSPITALITY MAG, HIGHLIGHTS CANADIAN FRANCHISING

Rising Above: Insights from Franchisors on Operating During COVID-19

COVID-19 has ricocheted positives into some unlikely crannies. Take franchised restaurants — a fortunate subset of the beleaguered dining industry, which has endured serious injury for all the weeks and months the deadly virus gripped the world — except when it hasn’t.

If someone had told Don Fox, CEO of Firehouse Subs and Firehouse of Canada, that sales in his Canadian restaurants in the December of the pandemic would be 25-per-cent higher than the one a year before, he says he wouldn’t have believed it. But he does now.

Certainly, things looked grimly different in the first weekend of the pandemic, in March 2020, when sales plummeted by 25 per cent. At his organization, a flurry of internal analysis determined a 30 per-cent drop would be all it could sustain. On Sunday, March 22, the ninth day of the crisis, Firehouse sales were down 53 per cent from the year before. “It was a shock to the system,” says Fox. “[We couldn’t] keep going and have the majority of our stores survive.”

He never had to test the conjecture, as the numbers began climbing again in short order. Firehouse stabilized after about the first two weeks, which Fox credits to franchisees, whose strength, he says, sustains a franchise.

Three days into the crisis, the company stopped collecting royalties and advertising fees from its franchisees. “We wanted to make sure [they] had as much money in their pockets to survive.”

This fast-casual restaurant’s almost 1,200 franchisees also excelled at accommodating customers’ comfort levels — the government’s variable and evolving restrictions notwithstanding — with operators applying social distancing. “Someone may be willing to go to a restaurant, but not to a crowded restaurant,” says Fox.

Beyond franchisee sensitivity, Fox says the operations that survived and thrived were those that could pivot. Better still if they’d been pre-emptive about it, like Firehouse, which had already seen its dine-in business begin to shrink pre-pandemic.. At its annual franchise conference at the end of 2019, with dine-in business down to just 37 per cent, Fox indicated the ski-slope descent on a chart and facetiously told his operators, “Look, folks, it’s not like it’s going to go down to zero.” Still, with the majority of its business off-premise, “We realized we had to do something to make off-premise better.”

That meant signing up with third-party delivery companies, creating online-ordering platforms and improving packaging, its online ordering experience, its app and on franchisees’ use of third-party delivery apps — all of which took place pre-pandemic. The timing is key, says Fox, who points to franchisees’ readiness to shift into a no-contact operation as indicative of their ability to weather this revised universe.

Then, when the pandemic hit, these assets were in place, though there did need to be some operational changes to become more touchless. For example, the dispensers of proprietary Captain Sorensen’s Datil Sauce, had to be removed (restaurants switched to take-away cups) and the franchisor identified suppliers for Plexiglas for franchisees to purchase and sent them digital files of signage and stickers to print and save on shipping.

The company really had two missions for Canada, where it operates 41 restaurants: to let people know they were open and to re-assure them they could take care of their off-premise dining needs. “Our franchisees did a superb job in Canada, adds Fox. We have an excellent reputation for the level of food quality, customer service.”

The company also quickly introduced curbside service alongside various other franchisee-led innovation, including “pop-up drive-thrus,” where interior restaurants erected parking-lot tents with mobile-payment systems and food runners. In some cases, stores also sold grocery-type items on that pavement. “We quickly enabled it for operators to sell bread, bulk deli meat, anything they had in the restaurant, which, prior to the pandemic we would never have done,” says Fox. “At the heart of it was embracing creativity, allowing flexibility.”

The Art of Innovation
Innovation has also saved the day at Gabby’s. Todd Sherman, president of Urban Dining Group, which operates District Eatery and Hey Lucy! in addition to its 17 (soon to be 19) Gabby’s restaurants, just signed a new lease on a 6,400-sq.-ft. former restaurant in Mississauga, Ont., and will build two unique concepts — a Gabby’s pub and a Thai restaurant — inside the space. They’ll share a corridor, bathrooms, a POS system, service contracts, a purchaser and some management. Tucked in the middle of the dining-room is a granite handwashing station, freeing guests from having to visit the washroom to wash up. “We feel this is a post-COVID feature that’ll stick around,” says Sherman. This new design also features a full-blown liquor store at the front door, whose reach-in refrigerator is stocked with all the wine, liquor and cold beer both concepts sell to spare customers an after-dinner trip to the LCBO. “This is a huge consumer convenience and an opportunity to increase sales.”

Gabby’s also stopped collecting franchise royalties and ad-fund submissions from its franchisees last March and helped its franchisees with graphic and communication support, including floor stickers, sidewalk decals, front-of-house foam-core boards to communicate COVID-19 protocols to guests and a COVID-19 task list for guests and operators to follow.

Those of Gabby’s 16 sites that were closest to downtown cores have fared the worst in the pandemic, but the more suburban stores have done well. All told, Urban Dining Group has lost about $10 million in sales to COVID-19 but, says Sherman, “we’ve found ways to adapt to new opportunities that we feel will make us stronger as we move forward.” With eyes on distressed locations with reduced rents that might be viable for his new dual concept, the leader of this 32-year-old family-run business, whose stores are primarily in the GTA, is hopeful. But he acknowledges the pandemic has impacted the interest level of would-be franchisees, killing the interest of about 10 per cent of would-be investors.

In the meantime, communication has been revealed as critical to survival. From the start, Fox began communicating with his franchise community every day, a significant bump from the posts he would send out every two weeks before. He started a daily blog whose content was not only regular but regularly positive. “You think back to those early days and, from my perspective, optimism had to prevail. If we were in a situation where everybody was expecting the worst and fearing for the worst, [they’d] carry that into their restaurant every day and nothing good would come from it. Optimism has to start at the top. So, I would set that tone, share the good news, share the good practices. My message was simple. I said, ‘Look, we’re going to go one day at a time and figure out what we have to do to generate more sales than we did the day before, even if it’s just a dollar. And we’re going to succeed at that today. And tomorrow, we’re going to beat that — day after day, at every restaurant.’ And it worked.”
When COVID-19 hit, says Fox, “Our number -1 fear was that we would have restaurants close. It costs money to close a restaurant, but even more money to re-open one. The most efficient thing to do is to keep restaurants open. That’s why we stopped collecting royalty and advertising fees.”

In Canada, not a single Firehouse restaurant closed. “Achieving that took a lot of sacrifice, a lot of hard work and a lot of determination on the part of the franchisee. In many respects, forgiving those royalties was my way of saying thank you. By keeping those restaurants open we kept the brand open.”

“I’m very, very grateful,” says Carlos Lopez, a Firkin franchisee whose franchisor extended the same gift of relaxed royalties. Lopez, whose seven Firkin pubs in and around Toronto make him the organization’s biggest franchisee, has had to shut his two downtown locations, but is staying afloat with his remaining five.

In addition to losing in-house dining, he’s lost about 20 per cent of his staff — who considered government relief offerings preferable to hanging around — and a shameful stash of food. Food waste has been an issue as restaurants struggle to be responsive to the government’s whiplash changeups that don’t give enough notice about impending openings and shutdowns, Lopez says. “If the keg was already tapped and you just put it into the line, you don’t get a full refund on it. And, if you close for three months, the beer goes bad.”

Takeout sales, meanwhile, have been marginal, while delivery apps skim so much off the top that delivery’s been a constant challenge. “The situation right now is very difficult,” says Lopez. “Uber and Skip taking 25 or 30 per cent of what we sell doesn’t work when you’re only doing takeout because it doesn’t cover what we have to pay for overhead expenses. And sometimes we spend days where we’re here with kitchen staff and the tablets don’t ring.”

Along with waiving the usual franchising fees, head office has been “extremely helpful,” Lopez says, in helping franchisees grasp rules and guidelines, including insisting on records of every person who enters the premises, negotiating rent subsidies with landlords and interpreting government support. Additionally, the franchisor has helped franchisees adjust their menus to feature popular, delivery-friendly items. “As a franchisee, it makes me feel like I have someone behind me who’s supporting the brand and helping us to stay in business.

“I’m nostalgic for what we used to have,” says Lopez. “I believe we’ll have it again, which will be awesome. People will go out and party again.”

Firehouse Subs’ Fox is equally optimistic. “We’ve already shown that we’ve done very well in the worst conditions, so I’m bullish that we’ll continue to perform.” For one, he says, there will be less competition.

The company’s January sales in Canada are 18 per cent above last year’s sales for average-unit volume; it hasn’t closed any stores and has opened 10 units in Canada in the pandemic.

“In our brand history, there was already a shift in traffic from on- to off-premise. The entire industry was in decline for dine-in business. The big question was where that decline was going to stop. Now the question isn’t how far will dine-in business fall but how far will it rise and where will it level off? It’ll take at least the next few years to get the dine-in business at the point to which it would have otherwise fallen before the pandemic. We’ll reach a point of equilibrium that, given entertainment, technology, all those factors that go into consumer behaviour, will stabilize. And restaurants will have adjusted their business models accordingly. Those restaurants whose concepts are in line with consumer needs will succeed. But we probably won’t be at that settling point until 2023.

“Overall, our franchisee partners are hanging in there,” says Marie-Line Beauchamp, COO for the casual-dining division with MTY Group, which has 7,200 sites. “I’m trying to send a positive message because COVID-19 could be very depressing for a lot of people. As a company, we have a lot of great stories for our franchisees and there are some brands that are doing phenomenally because of COVID-19.” For example, sales at Yuzu, a sushi brand that’s mainly in Quebec, have exploded. “Why?” Beauchamp ponders. “A few reasons. Anyone can cook a pizza or a chicken, but they rarely make their own sushi,” she says, adding MTY’s sushi brands have excelled over the last 10 months.

So, too, says Beauchamp, have those brands that had perfected their online ordering systems before the pandemic. “They were ahead of the game. The speed at which you were able to implement or convert your channels was key. We have brands that had never done online ordering and delivery, but they went into it and were able to capture a part of their market. The willingness of franchisees to pivot was important.”

The franchisor helped with procurement, recruitment, digital support, ongoing menu engineering and safety. For some brands, MTY adjusted its royalty structure. Some of the units in downtown urban centres have closed, but sales in rural regions have been steady. “We haven’t lost a lot of franchisees,” Beauchamp says. “As a matter of fact, there are opportunities. The government, with labour and rent subsidies, it’s a game changer. We had to be agile and to adapt all the time because we were facing challenges all the time. You had to be on the tip of your toes. I have some franchisees who had decided they were going to make it work and they were able to retain 60 or 70 per cent of their delivery in the breakfast space. Some really went out of their way to make sure an eggs Benedict could travel properly. Our breakfast chains, that had been open 6 a.m. to 3 p.m., were very busy serving breakfast from 8 a.m. to 10 p.m. What COVID-19 did was increase the need for speed to make [things] happen. We’re testing different types of equipment, doing drive-thru with franchisees who’d never done that before. The franchisees were willing to do all kinds of things in order to survive.

“Clear and frequent communication with franchisees was critical,” says Beauchamp. “We were cheerleaders.” From day one, MTY’s management team increased communication efforts, trading annual national meetings for weekly and, in the early days, twice-daily check-ins. The franchisor, Beauchamp says, is there “to simplify operations, to stay top of mind by making sure their marketing continues to be involved in the community. Making sure people don’t forget about them and they have all the products they need — that they have the protocol for consistency and the proper tools to support health-and-safety regimes. To support them to stay open in at least one channel. To remain open. And to accompany them throughout.”

Early in the pandemic, she asked her franchisees what was important for them and they said being heard. “People want to know that you’re there to listen and bring turnkey solutions, to know they’re not alone. As a franchisor, they’re my partners. We want to make sure we’re there for franchisees to do whatever we can in order for them to succeed.”

To that end, MTY invited franchisees to submit new recipes with a promise to share the winners across the network. “We’re interested in increasing creativity, motivating franchisees,” Beauchamp says. “We’re trying to focus on the good, because there’s so much bad right now. It’s a daily validation. Some of our people were afraid they’d lose everything.”

You bet, agrees Bryan Burke, owner of Toronto-based Loaded Pierogi, which has six locations (three franchises) in Edmonton, Winnipeg and Ontario — and soon Vancouver Island, Regina and P.E.I. “Communication was the biggest thing for keeping everybody calm. Everyone was in panic mode. We had to project strength and confidence.” Head office went from its once-weekly franchisee meeting to five. “Every time there was a new regulation, recommendation or concern, we would research what was going on and reach out to our franchisees before they could digest [it]. We always tried to stay one step ahead of them before panic could set in.”

The company waived royalties at the beginning and provided franchisees with PPEs and Plexiglas safety barriers. It also stepped in to maintain supply chains and advised franchisees they would not be in breach of any agreements for adjusting operating hours. From an operational standpoint, pivoting to reduced or zero dining in was a challenge, Burke concedes, and a quarter of its franchisees — particularly those in malls — suffered dips in sales, but three quarters saw spikes. Burke credits that to consumers whose dining-out impulses were stifled, turning to delivery and takeout. “The pandemic drove people to delivery platforms who hadn’t used them before. And, as the main focus of our business was always takeout, we were only hit by one of our revenue streams.

“How strong some of the locations stayed and how they grew was a shock,” Burke admits. “We anticipated that everybody’s sales would drop 50 or 60 per cent. And some did, as the government stoked fear in the public. But, overall, more than two thirds of our stores grew, with all three franchisees wanting to do second locations during the pandemic. We looked at how we could drive more takeout business. We didn’t focus on dine in. From the beginning of the pandemic, we took our tables out and tried to create an environment where staff felt safe coming to work, tried to promote that through social media. We put a big push on that in the beginning, before anyone else was doing that. Public safety is what pays our rent and mortgages. We didn’t put any marketing or time into trying to drive dine-in business. We just focused on takeout and looked at how to adapt to delivery platforms. We had specials on takeout orders so we could help franchisees save on delivery commissions. We really tried to gear customers to come in, while, at the same time, pushing how safe it was. We got some amazing feedback from guests very excited to see that we were being so proactive and putting their safety first.”

Going forward, Burke says, “our anticipation is of continued growth, as people start to feel more safe, mobile, with vaccines coming out, government restrictions loosening. It’s about making sure we’re listening to our franchisees. They’re our most important customers as a franchisor. We look at what we were able to give back to them above and beyond what we normally would. Don’t look at your business as finite, as this is all you’ll ever be. Every business should have the ability to pivot and make changes to help them grow and stay strong. It’s a very challenging time, but you [must] always keep the entrepreneurial positive outlook. All of this is out of our control, so let’s find ways to make it work. That was always the image we projected to franchisees. They would call and complain about the latest government requirement; we would say going against the government isn’t going to increase your sales. Let’s take this as the new normal, the new reality, and make the best of it.”

By Laura Pratt