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Business Observer Friday, Apr. 9, 2004 15 years ago

Cherished Values: More About Families Than Cows

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Chick-fil-A Inc. President Dan Cathy discusses corporate values and why the second generation of quick-service restaurateurs is just getting it wrong.

Cherished Values: More About Families Than Cows

Chick-fil-A Inc. President Dan Cathy discusses corporate values and why the second generation of quick-service restaurateurs is just getting it wrong.

By Sean Roth

Real Estate Editor

Dan Cathy, 51, says the "Thank God it's Friday" philosophy represents a moral shame to America and its business people, and Cathy, president and chief operating officer of the Atlanta-based Chick-fil-A Inc., has the background to back up that argument.

For more than 40 years Cathy has worked in the restaurant business, watching the company his father founded reach and surpass the $1 billion sales mark.

Chick-fil-A has become one of the juggernaut brands. The company has grown from one restaurant in 1967 to 1,134 stores so far this year, including 473 freestanding locations. It has experienced double-digit sales increases the past 11 years including an 11.77% increase to $1.53 million in 2003. Last year, QSR Magazine named the restaurant company its "2003 Best Drive-Thru in America" for its service and timeliness. In 2002, Chick-fil-A became the first quick-service restaurant to win the National Restaurant Association's Employer of Choice award. The company, with little marketing, sells more kids meals per $1,000 of sales than even McDonald's.

Cathy is the son of S. Truett Cathy, who founded Chick-fil-A. Cathy ran his first restaurant - Bradenton's Desoto Square Mall location - in the mid-'70s after graduating with a bachelor of science degree in Business Administration from Georgia Southern University. Cathy then moved into the corporate office, where he was worked in various jobs from director of operations to director of purchasing. From the '70s to the '90s, Cathy took Chick-fil-A from five mall locations to 1,000 stores. He became president in 2001, after his father's business partner Jimmy Collins retired.

Cathy, who was recently in Sarasota to promote the opening of a new store on Clark Road, sat down with GCBR to discuss Chick-fil-A's business strategy and growth goals.

"We try to offer our employees another paradigm (than the typical franchise restaurant)," Cathy says. "It is absolutely possible to fall in love with your work. My role now is more of a carrier of the culture."

That paradigm starts at the top with its franchise structure. Aside from a few locations where the corporation licenses its food, the Chick-fil-A company retains ownership of the property and equipment of its franchises. Operators, who are heavily screened, contribute only $5,000 for the franchise. The corporation then builds the restaurant building and equips it at an average cost of $2 million per location.

Once the franchise is open, the operator pays Chick-fil-A Inc., 15% of the gross sales and 50% of net profits monthly. At the same time, the company assures operators that they will make a minimum of $30,000 annually. Operators do not build equity in the business, and their contractual agreement is not transferable.

"Our franchises are available to people without regard for financial status," Cathy says. "These people don't have to have a million dollars like most of the other brands. This enables us to attract really high-quality people. It also allows these operators to make incomes that are virtually unheard of in the industry. The typical mall operator makes about $70,000 a year. In the freestanding stores, they average about $160,000. We had one operator who made half-a-million a year."

Even with the ability to change operators, the corporate office is highly selective on whom it selects.

"I'm glad I got in when I did. I hear its easier to join the CIA," Cathy says. "We get thousands of resumes a month. They go through dozens of interviews, including of their spouses. From the maybe 12,000 candidates a year, we select about 150 people to either operate the 80 or so new stores or to work on the corporate staff. We devised our incentive plan so that there is more opportunity to make money as an operator rather than on the corporate staff."

Chick-fil-A also incorporates biblical teaching at almost every level of its business plan from its work schedule and management style to corporate motto and philanthropy. You will see no reference to shareholders or ownership in the company's corporate purpose: "To glorify God by being a faithful steward of all that is entrusted to us. To have a positive influence on all who come in contact with Chick-fil-A." The company also widely promotes the fact that it is a family-friendly work environment and that all the stores are closed on Sunday.

"It really comes from dad hating to work on Sunday," Cathy says. "He used to have to do the dishes in the family boarding house on Sundays. He figured if it was part of the job that he didn't like doing than he wouldn't make anyone else do it either. This is about impacting people's lives. It is about having an attitude of forgiveness. It is not about religion, but about treating people the way they ought to be treated. It's an attitude of respect. We want our employees to have an emotional connection to the company. Every job here is important. We employ a lot of young people that have never had a job before. We tell all the employees that if it is a quite night and your friends are here, go ahead and talk them on a tour in the back. We want our employees to be proud of where they work. We want to create something that is enduring."

Cathy also said that biblical principals promote an engaged active corporate leadership. "It means you are beholden to someone," Cathy says. "Just because this is a family business is not an excuse to sit on your rear end or go out and play golf. The more consistent your actions the less you have to talk about them."

The Chick-fil-A structure also incorporates some of the employee management style of the Ritz-Carlton, Cathy says. "From them, we know that the first 40 hours of a new employee's time on the job is the most important," he says. "So when we open a new store, we have a family night where the management buses the tables and the employees get to eat here with their family."

That family-values philosophy has brought the company the greatest success in the area of kids' meals. Instead of the usual movie-based action figures, Chick-fil-A's kid meals have featured education and family-oriented toys such as science experiments and even classic children's books. "We are not involved in the monster of the month," Cathy says. "We have a guy named Steve Nedvidek who makes corporate decisions as to what products are including. ... He has three kids. We asked him to make decision as if his children were sitting down and using those products."

Overall, Cathy is worried for the health of the quick-service industry and their well-known brands. "We are now seeing how the brands are being run in the second generation," he says. "Dave Thomas (founder of Wendy's)... Col. Harland Sanders (founder of KFC) ... Ray Kroc (who started the McDonald's franchises) these were amazing restaurateurs. They had a passion for cleanliness and customer service. Today, accountants are running these businesses. People that are more comfortable in the boardroom than making up recipes in the kitchen. I like to see enduring brands, like Coca-Cola and McDonald's. These are American icons. If you look at the business headlines; you hear about WorldCom and Enron. These business didn't fail on their own it was the personal choices of the people at the top that brought them down. Millions of dollars was just decimated because of these private personal choices. That is why we choose to go back to timeless principals."

Cathy, his brother and sister have all signed a 'Covenant of Understanding' to keep the company private and not to sell. As for the third generation of the Cathy family, Cathy says they are all required to work for two years outside of the family business. "We only want them if they feel this is where God is calling them," he says.

The current business decisions and management is obviously working. After Sarasota, Cathy headed off to a grand opening for a new store in Disney Corp.'s Celebration in Kissimmee. Chick-fil-A is one of the first branded chains to be allowed access to the highly-regulated company town. South Florida, Phoenix and California are the three main focuses for new franchise growth, but Cathy reinforced that the growth would continue at a more deliberate pace than its competitors. "We fund all of our growth through internally generated cash," he says. "So we have to be highly selective."

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