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CARPINTERIA, Calif. – Andrew F. Puzder, CEO of CKE Restaurants Inc. and the recipient of numerous leadership awards, speaks with Blue MauMau on the art of leading franchise owners. No stranger to being plunged into a firestorm, the former attorney led the about-face of the troubled CKE Restaurants and Hardee's brand nearly a dozen years ago as a new CEO.
In a Wall Street conference over two years ago, I listened for two days to CEOs of some the largest quick service restaurant chains making presentations to analysts and reporters. The word franchisee was hardly heard. While many of the speakers treated their chains as if they were wholly company-owned, Mr. Puzder mentioned franchisees over and over again in his presentation, speaking about how he was working with them to carry out strategy. Franchisees seemed central to CKE Restaurant's focus.
Twenty years ago Puzder was hired to be the personal attorney for Carl Karcher, the founder of Carl's Jr, after Karcher was fined $690k by the SEC for insider trading. The case was settled. Puzder rose up the ranks. In 1997 he became general counsel for CKE Restaurants as the company bought Hardee's, a distressed brand that burdened CKE with $700 million in debt after its acquisition. The board appointed Puzder as president and CEO of the struggling company in 2000. In July of 2010, the private-equity firm Apollo Management took CKE private in a transaction valued at $1 billion. Apollo retained CKE's management team, including Puzder, who remains as CEO.
The company has 3,219 Carl's Jr. and Hardee's restaurants, generating $1.4 billion in annual revenue. In a tough year for the QSR sector, Carl's Jr. and Hardee's saw a solid same-store sales increase of 3.4% year to date in December of 2011. The franchisor's EBITDA margin was 16.9%, down 30 basis points compared to the prior year.
This is part of Blue MauMau's ongoing series seeking to understand what sort of leadership and environment it takes for franchise owners to flourish.
BMM: Give me an example of how you gain franchisee support and acceptance. That's no easy feat.
Summary: Creating an engaged independent franchisee association was one of the first steps in turning the chain around.
Puzder: The first thing we did at Hardee's when our company took over was that we encouraged them to set up a franchisee association [the Independent Hardee's Franchisee Association]. I know a lot of franchisors do not like that. But if you have a franchisee association, you have a group of somewhere between five and ten franchisees who represent the entire franchisee community. Then you can effectively communicate with the franchisees.
We have almost 200 franchise entities out there and to try to talk to every one of them every time we need input on an issue would be impossible. By having a franchise board, by having a group that represents the franchisees, and a president of that association, we can communicate with the franchisees much more effectively and we can get more effective responses from them.
The second thing is that franchisees need to know that you are listening to them. They are smart men and women. They are small business people. They are entrepreneurs. They are in the trenches day to day trying to run their businesses and make themselves successful, which makes you [the franchisor] successful. They need to know that you hear them.
When franchisees come up with an idea that we end up implementing, and that happens frequently, we make sure that we give them credit for it. In other words, it doesn't matter to our management team or me where ideas come from. It only matters that we succeed. I think franchisees respect that.
That doesn't mean that every time they come up with an idea, you are going to think it is a wonderful idea and want to do it. Franchisees think very restaurant level. They think very micro. They are trying to protect an individual business. As a franchisor, our job is to think on more of a macro level. We need to protect not only what goes on at the restaurants on an individual basis, but we need to protect the brand. Sometimes some things that are good for the brand may not be good for a particular group of restaurants. We have to make those macro decisions.
Franchisees do not expect the franchisor to agree to their every request. But they want to be listened to and their ideas given credence. Communication and respect for franchisee ideas are keys to a good relationship.
BMM: How do you encourage franchisees to speak up and how do you expand their thinking from experiences in their own store and neighborhood to thinking of the brand nationally?
Franchisor management participates in independent franchisee association meetings.
Puzder: Franchisees have their own association board meetings four times a year. Our management team attends those meetings and presents to their board. We also have our own meetings, which all of the franchisees are invited to attend every year, generally in a place like Las Vegas. We've had one in Tucson and one in Phoenix.
BMM: You seem to be working hard to engage franchisees through their independent organization. You present brand problems and then ask for solutions. How specifically do you solicit franchisee participation?
CKE emphasizes to its executives and managers that there are no bad questions from franchise owners and that there will be no ramifications for asking a question.
Puzder: We tell them what our approaches are and what has worked so far for the company. In each of these meetings we also have a completely open question and answer session. We have the management team sit up front. I sit with a microphone and franchisees can ask us any question. We have always answered their questions to the best of our abilities and let them know that no question ever has a repercussion. In other words, there are no bad questions. We have thick skins.
Franchisees are not going to insult us. We need to have a very open means of communication. I emphasize that in every one of those meetings every one of the franchisees can call on me or any member of the management team at any time. We will answer. We've been doing that for 10 or 11 years. It seems to work pretty effectively.
BMM: Franchisees are often very worried about the ramifications of asking a dumb question and getting on the bad side of a franchisor for fear that they will be shut down. Sometimes the franchisees are angry about an issue. They point fingers and get angry at brand managers and then a member of your management team gets mad back at them. How do you manage that process so that franchisees feel safe in being candid?
Operating 30 percent of the restaurants in the brands helps CKE Restaurants understand the bottom line. Having skin in the QSR business fosters a collaborative culture with franchisees.
Puzder: We really are not at cross-purposes here. We run the business so that the franchisees can be successful. We have a very franchise friendly company. We own 30 percent of the restaurants [in the chain], so we know what it is to run restaurants. We want the restaurants to be profitable. We are not running the network for top-line sales, from which we receive our royalties. We are running it for profitable sales. We don't make franchises stay open all night. We don't make them sell products that have very, very low margins. We work very, very hard to make sure that franchisees know that we want them to be profitable. We understand that they need to be profitable and our theory is that if the franchisees make money, then we all make money. So we are not at cross-purposes with the franchisees and we emphasize that regularly.
Since we took over the company there have been very, very few meetings in which there have been aggressively angry questions. At first there were at Hardee's when we took over, but I think that was because of past history with other management teams. Within a couple of years we worked through all of the concerns that people had. I think they began to trust us as a management team. Now I think we have friendly relationships. Franchisees may not always agree with what we do, but they understand that we are working in their best interest and our best interest. We don't consider that antithetical.
BMM: Are there real-world results for focusing on franchisees? Can you think of an example where your close ties with franchisees made a difference to your bottom line?
Hardee's popular chicken tenders was born from close franchisee collaboration
Puzder: About two years ago, one of our franchisees, Boddie-Noell Enterprises, came to St. Louis and said they wanted to meet with our president Mike Murphy and me. Mayo Boddie, who I think is 80-years old now, built the second Hardee's back in 1962. They now have over 300 restaurants. His sons are running the business and his two sons wanted to come and talk to Mike and me. So they came in and we talked about a number of issues. At the end of it, they said that they had an idea for a product. It's a chicken tenders product. They had pictures of it. They had some casual dining restaurant chains where they had already made it. They said we think we can make these in Hardee's. We tested it and put it in the restaurants. It was a spectacular product. It's been a very good seller. It lifted the average unit volume at Hardee's. It's become a permanent menu item.
That was a direct result of franchisees coming to us with an idea.
BMM: Besides ideas for new products, are franchisees involved in brand management functions such as the supply chain or national marketing?
In the CKE Restaurants system, the independent franchisee association elects franchisees to participate in all major management functions.
Puzder: We have an advertising agency and an advertising department that handles marketing. Normally, franchisees do not have those kinds of assets. However, we have a marketing committee under the franchise board that is involved and kept up to date on all marketing decisions. In fact, the marketing committee for Carl's Jr. and Hardee's were involved last year when we selected a new ad agency. They were involved in interviewing the agency with us. We discussed this at length before we made a final decision. It turned out to be a decision where the association and the company [franchisor] agreed.
We also have committees to deal with supply chain, operations and information technology, all of which deal on a day-to-day basis with corporate people on issues that affect those functions. We involve the franchisees as much as we are able.
Under our system, there is the board of the independent franchisee association and then there are committees of that board. These are not [franchisee] advisory committees. They are committees from the franchisee association itself. These committees are involved for each department. They communicate regularly.
For example, the independent franchisee association has a marketing committee. That marketing committee meets with our marketing department every couple of weeks. So there is no advisory committee.
We prefer franchisees select who they want involved in these different projects. If there are respected people in the franchise community with marketing skills who deal with our marketing department regularly, I think the franchise community has a comfort level that their interests are being represented. I think that is more important than their feeling that there is some perfunctory committee out there with people that we pick.
This is a way to get the people that the franchisees feel comfortable with, people they rely on, involved in the decision process.
BMM: In your view, where is the franchisee in the pecking order of your constituents that must be taken care of — e.g. shareholder, franchisee, employee, and consumer?
The franchise owner should be the nexus point for the chain operator. When CKE Restaurants focuses on franchisee profitability and health, its shareholders, employees and consumers are also taken care of.
Puzder: As a management team, our ultimate responsibility is to the shareholders of the company. By the way, many of our franchisees were shareholders when we were public. Now we are not public. When we were public, I was glad that our franchisees were shareholders.
In representing the interests of the investors, the people who really make a difference for the company, the people who build the most units, who grow the brand, who generate the income that outside investors or the Street value the most, are franchisees. So I think by focusing on franchisees and on franchise profitability and health, you really are focusing on everybody's interest because that is the group you want to grow. That is the group that you want to have strength. That's the group that you want the company to be built on.
BMM: How do you relate to these franchisees as you lead them? Do you think of them as CEOs and presidents of their own companies? Would that make it more difficult to work with them compared to employees?
Some franchisees just want to run their store. Others want to participate in the big picture.
Puzder: It's really on an individual basis. There are franchisees who are running large companies. One of our franchisees used to be the CEO of this company. So I can talk to them about very macro-level issues. After 11 years as CEO, before that as general counsel and before that the founder's attorney, I have a lot of friends in the franchise community. I've known a lot of these people a long, long time. I know which ones I can deal with on the macro issues.
And then you have people that run two or three restaurants. They are really not interested in the broader (brand) issues. They are more interested in the specific issues of running their restaurants. You know who the good ones are. When you have questions about how things are going operationally, whether a product can be made effectively in the restaurants, what we need to do to affect quality of service or cleanliness, we can probably call one of the guys who runs a couple of restaurants and is in his restaurant day to day.
It all depends on the person that you are dealing with and the issue you are trying to address.
BMM: I've heard it said that leading franchisees is like herding cats because they are independent business people who each want to move in their own direction.
The franchisor is ultimately responsible for brand decisions.
Puzder: For us it is NOT like herding franchisees. Our franchisees know that they all get to speak up. We are going to listen to what they say. But they know that we ultimately make the final decision. More often than not it is a decision that everyone has agreed on and supports. But sometimes we have to make a decision that they are not going to support.
I will tell you that when I introduced the $6 burger at Carl's Jr., the Carl's Jr. franchisees were not supportive of that decision. I had resistance in the franchisee community. But once we put it in, everyone got on board. It's been one of the most successful products in the past ten years in fast food. So I think over time you gain respect with the community if you make the right decisions. We the franchisor will ultimately make the decision. Franchisees are all on board with that. They all signed franchise agreements. What they want is that before we make that decision that we listen to what they think about the subject.
I do this with my management team too. Everybody needs to express their opinions. But once a decision is made, everybody has to be on board.
This is part of an ongoing series on leadership.