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CHICK-FIL-A: INTERNATIONAL EXPANSION CHALLENGES1

Bertrand Guillotin wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality.

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Copyright © 2020, Ivey Business School Foundation Version: 2020-03-20

September 6, 2019, marked the grand opening of the “first Chick-fil-A franchisee-owned restaurant outside of the United States,”2 in Toronto, Canada. A month later, Chick-fil-A opened its second international franchise, in England.3 Chick-fil-A’s international expansion was accompanied by excitement from fans and anger from members of the lesbian, gay, bisexual, transgender, and questioning (LGBTQ) community and their allies.4 The US-based fast-food company’s international expansion came at the same time as the company had lost two US airport store deals within two weeks due to criticisms about its corporate donations to anti- LGBTQ groups and public comments opposing gay marriage made by its chief executive officer (CEO).5 As the US protests became a global movement, England’s first Chick-fil-A was forced to agree to relocate by April 2020,6 and a number of questions emerged about the company’s internationalisation strategy.

CONTROVERSIAL GROWTH

Chick-fil-A, whose titular A stood for “Grade A,” top-quality food,7 opened its first location in 1967 in a 384-square-foot retail space in Atlanta, Georgia’s Greenbriar Mall. It was founded by Samuel Truett Cathy, who had established a diner in 1946 called the Dwarf Grill before starting Chick-fil-A, where Truett was credited with having invented the boneless chicken sandwich, which went on to become a fast-food staple.8 In 2013, Truett Cathy was succeeded as Chick-fil-A’s CEO by his son, Dan Cathy.9

Chick-fil-A was anchored in the United States’ Southern “Bible Belt” region.10 From its first tiny store, it expanded to include approximately 2,400 restaurants that generated US$10 billion11 in system-wide sales (see Exhibit 1), earning a reputation as a family-owned chain whose stores were always closed on Sundays. In 2018, it was ranked the third-largest fast-food chain in the United States, after McDonald’s Corporation (McDonald’s) and Starbucks Corporation, and its sales were growing at a rate of 16.7 per cent annually. Moreover, in 2018, it had average per-location sales of $4.6 million (up from $4.2 million in 2017), as compared to McDonald’s $2.8 million.12

However, Chick-fil-A’s extraordinary growth was controversial. In 2012, Chick-fil-A became the “culinary symbol of one of the country’s major social issues” due to the Cathy family’s public opposition to same- sex marriage. The Cathy family, who self-identified as Baptist Christians, had donated millions of dollars to organisations that opposed same-sex marriage and that promoted “conversion therapy” for LGBTQ individuals. In 2012, Dan Cathy also stated publicly that Chick-fil-A supported “the biblical definition of a

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marriage.” This public relations (PR) battle became political during the 2012 presidential campaign, and Mike Huckabee, the former governor of Arkansas, declared a Chick-fil-A Appreciation Day. The controversy spilled into a wider media campaign (even the Muppets got involved), and protests erupted, with one LGBTQ group staging a “same-sex kiss-in day” at Chick-fil-A locations.13

Despite the protests, Dan Cathy stated that Chick-fil-A would “stay the course” and would continue to “operate on biblical principles.”14 The Chick-fil-A Foundation also continued to fund anti-LGBTQ organisations,15 with donations totalling more than $1.3 million in 2015 and increasing to more than $1.8 million in 2017, according to tax filings.16 The Human Rights Campaign’s Buyers Guide gave Chick-fil-A a rating of zero due to the company’s lack of pro-LGBTQ workplace policies,17 and Dan was discretely dropped from a 2018 conference on inclusive economic development.18 The controversy again made headlines in the spring of 2019 when, within a two-week period, two airports (in San Antonio, Texas19 and Buffalo, New York20) banned the opening of Chick-fil-A stores in their terminals. In response, in May 2019, Texas passed a “Save Chick-fil-A” bill (Senate Bill 1978) that supporters argued would provide religious protections to companies like Chick-fil-A, although critics contended that the bill allowed discrimination against LGBTQ individuals.21 The polarised debate continued in September 2019, when faculty at Kansas University characterised Chick-fil-A as a “bastion of bigotry” and sought its removal from campus, while some students petitioned to keep it.22

Despite these tensions, Chick-fil-A sales continued to grow. Eating at Chick-fil-A was generally perceived as a more pleasant and friendly experience than at other fast-food chains due to the politeness of Chick-fil- A employees, who were required to say “my pleasure” instead of “you’re welcome” and who generally signalled that they were well-treated.23 The negative press and boycotts since 2012 did not have a noticeably negative effect on the company’s business;24 between 2012 and 2019, Chick-fil-A sales more than doubled, and the chain opened an additional 700 restaurants.25 In 2018, the company was rated “America’s most beloved fast-food chain” in the American Customer Satisfaction Index’s annual survey.26 Chick-fil-A diners .were clearly willing to separate their dining experience from the company’s politics; this was perhaps best summarised by openly gay US presidential candidate Pete Buttigieg, who stated in March 2019, “I do not approve of their politics. . . but I kind of approve of their chicken.”27 Moreover, Glassdoor had repeatedly listed Chick-fil-A among the Best 100 Places to Work (#43 in 2014, #72 in 2018) and as having a Top 100 CEO (#26 in 2013, #37 in 2017, and #70 in 2019), and in 2017, it also listed the company as among the Best 100 Places to Interview (#37).28

COMPANY ORIGINS

Lucky Timing

Chick-fil-A’s founder, Truett, was born in poverty. He got his start in the restaurant business in 1946, when he opened the Dwarf Grill diner in an Atlanta suburb. The business received a boost in December 1947 when the Ford Motor Company opened an assembly plant next door, providing a steady stream of customers and revenue.29 Later on, the restaurant also added a pressure fryer to its kitchen lineup, which “allowed cooks to churn out fried chicken sandwiches as quickly as fast-food chains like McDonald’s or Burger King could make hamburgers.”30

Following a slow and steady expansion strategy, Truett opened the first Chick-fil-A franchise restaurant in 1967, in Atlanta’s Greenbriar Shopping Center, in addition to its Dwarf Grill.31 This was another lucky move, as shopping malls experienced a boom for the next several decades. Over time, Chick-fil-A became famous for both its unique chicken sandwich and its “closed on Sundays” rule, which required all of its franchises to be closed on Sundays in order to allow employees to worship.

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From Humble Beginnings to National Fast-Food Giant

By 2019, Chick-fil-A franchises could be found in every US state except for Hawaii, Alaska, and Vermont.32 Although the company was most famous for its chicken sandwiches—whose secret recipe remained locked in a vault at the company headquarters in Atlanta33—its waffle fries were the most-ordered menu item.34 Each restaurant also made their pickles on-site.35 Chick-fil-A was the largest buyer of peanut oil, a key ingredient in its food, in the United States, another demonstration of its scale and market power.36 Over the years, the company also experimented with new products, such as grilled nuggets, which took seven years and $50 million to create,37 and new business models, such as an 8,000 square foot Hawaii- themed dine-in restaurant, called Truett’s Luau, in Fayetteville, Georgia, that served seafood, pork, and chicken.38 Still in existence today, this unusual Chick-fil-A location confirmed the interest of the chain in something else, something exotic and international. Chick-fil-A also became known for its humorous advertising on highway billboards—a creative but unconventional way to build brand recognition with a

39, 40 limited budget—that encouraged people to “eat mor chikin” and featured cows as the messengers. Chick-fil-A even opened a location inside Atlanta’s football stadium, despite the fact that the store remained closed on Sundays, when most football games took place.41

All Chick-fil-A franchisees were selected extremely carefully, and each franchisee was only permitted to operate a single store; however, franchise fees were only $10,000,42 and Chick-fil-A paid for all operational start-up costs, which it later recovered through services fees (see Exhibit 1). This unique revenue model attracted more than 60,000 franchising applications per year, although only 75–80 were approved.43 For comparison, McDonald’s franchises typically cost $1–2.2 million in start-up costs, including a $45,000 franchise fee, as well as a requirement that the franchisee have liquid assets of at least $500,000. In contrast, Chick-fil-A did not have any net worth or liquid asset thresholds.44

Founding Values and Corporate Culture

Caution, top-down control, and regular in-depth employee trainings were the cornerstones of Chick-fil-A’s success.45 The company also became known for its culture of caring, and strong values were inherent to the company’s corporate fabric.46 “Your culture is your co-founder,” says subject-matter expert Javier Munoz; Chick-fil-A’s “co-founding” culture, which was strongly influenced by Truett’s values, provided its groundwork and DNA to guide the company to its purpose and impact.47 Truett’s values were, therefore, crucial to the company’s success, making it critical to take a deeper look at them.

In 2008, Truett discussed his values in a public interview:

I’ve been in the restaurant business serving the physical and emotional needs of people, and oftentimes their spiritual needs. I feel like it’s a high calling to have that position of furnishing the essentials of life, and not just food, itself . . . I started out at eight years old buying Cokes, six for a quarter, and selling them for a nickel apiece and recognizing a 5-cent profit. I was a pretty good salesman. . . We’re still a private company, and I intend to stay that way. We give out a lot of things we couldn’t do if we were a public company. We have a scholarship program for our part-time team members, where we give them $1,000 scholarships if they work for us for two years. Our average work schedule is 20 hours a week. We’ve devoted $40 million toward that, and the other scholarship programs we have. We have a boy’s camp and a girl’s camp, and I have 12 foster homes where we try to identify those kids who do not have any serious behavior problems, just victims of circumstances . . . I have a moral and corporate compass to glorify God by being a faithful steward. That means to give back a portion of God’s blessings to others, and to help the people we come in contact with.48

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Truett’s values and religious beliefs also led him to establish Chick-fil-A’s WinShape Foundation in 1984, which aimed to “shape winners by helping young people succeed in life through annual scholarships (more than 20 worth up to $32,000) and support programs.”49 In 2010, the WinShape Foundation made significant donations to politically conservative groups with a history of anti-LGBTQ work, including a donation of $247,500 to the National Christian Foundation.50

Before his death in 2014, Truett made his three children, Dan Cathy, Don “Bubba” Cathy, and Trudy Cathy White, sign a contract agreeing that the family-owned business would never go public, although the children retained the right to sell the company.51,52 In 2019, the family was America’s 15th richest, with an estimated $11 billion in wealth.53

CHALLENGES

In 2019, many industry experts argued that the fast-food market was saturated:

Fast-food chains are increasingly relying on discounts to get customers in the door. Only recently, Burger King started selling 10 chicken nuggets for $1. This week [October 2018], Wendy’s announced a $1 any-size-fry deal, and many other chains are seeing what they can fit in a $5 box. . . . If you get growth, it can only come from an existing provider. You would have to work harder than ever to get customers in your door and any success could be fleeting.54

Competition was fierce, and many smaller fast-food chains had filed for bankruptcy, including the New England–based Papa Gino’s and D’Angelo Grilled Sandwiches and the Texas-based chain Taco Bueno, which had 169 restaurants. Declining fast-food sales were attributed to declining football viewership, immigration rates, and construction activity, as well as to increased consumer demand for healthier alternatives to hamburgers and pizzas.55 Despite the broader market challenges, however, Chick-fil-A enjoyed a dominant and profitable position in the US chicken sandwich market segment (see Exhibit 2), and its 2018 system-wide sales were more than those of its next three competitors combined.

Chick-fil-A was nonetheless at risk from its competitors. McDonald’s, the fast-food market leader, saw a 13th straight quarterly rise in global same-store sales, especially in international markets (led by sales in the United Kingdom, Canada, and Australia) in 2018.56 McDonald’s had renovated its 12,000 restaurants and had invested in technology, such as delivering meals via Uber Eats, improving customer experiences via high-tech ordering kiosks, and investing in a $300 million acquisition of the artificial intelligence company Dynamic Yield—its largest acquisition in 20 years.57 Popeyes, another fast-food chain whose parent company also owned Burger King, had also experienced success abroad; already present in 25 countries, it launched in China in 2019 with a plan to open 1,500 outlets there over the next decade, seeking to follow in the footsteps of the internationally successful fast-food chain KFC.58

THE CHICKEN SANDWICH WAR: A TIMELINE

December 2018

By the end of 2018, Chick-fil-A had $10 billion in annual system-wide sales and higher per-location profits than any other fast-food company. McDonald’s recognised Chick-fil-A as a very serious threat and began discounting its meals to attract more customers.59

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July 2019

McDonald’s franchisees reported that “McDonald’s carries chicken nuggets and the McChicken sandwich but does not have a premium chicken sandwich” and requested a new chicken sandwich product to compete with Chick-fil-A.60

August 2019

Popeyes’ launched its own (spicy) chicken sandwich on a buttered roll with pickles—the first chicken sandwich to be sold by the chain nationwide. The sandwich enjoyed an “inexplicably inescapable” success as the “Tickle Me Elmo of sandwiches,”61 and the sandwich sold out two weeks after its launch. A “chicken sandwich” war ensued on Twitter and other social media.62

September 2019

On September 6, 2019, Chick-fil-A opened its first franchisee-owned, full-service international location, in Toronto, with plans to open at least 15 more restaurants in the Toronto area by 2024.63 However, there was no poutine (a local food staple) on the menu, a sign that Chick-fil-A was staying true to its successful and standardised US formula and not seeking local adaptation when venturing abroad. At the same time, McDonald’s launched a “Spicy BBQ Chicken Sandwich”64 to compete with Chick-fil-A in the United States.