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Franchising Dominates Jack in the Box Brand’s Expansion Plan

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Jan. 18 2016, Updated 10:07 a.m. ET

Franchisee model

With an intention to expand and improve its profit margin, Jack in the Box (JACK) adopted franchising as early as 1982. As of September 2015, the company’s Jack in the Box brand owns 2,249 restaurants, with 1,836 franchises. From 2011 to 2015, franchisee-operated locations increased from 71.7% to 81.6% of all restaurants.

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Peer comparison

By the end of September 2015, of the total restaurants operated by McDonald’s (MCD), 82% were franchisee-owned. Similarly, Wendy’s, a subsidiary of The Wendy’s Company (WEN), had franchised 86.9% of its restaurants, and Burger King, a subsidiary of Restaurant Brands International (QSR), had franchised 100%.

Franchise agreements for Jack in the Box

Franchisees must pay $50,000 for a 20-year term, with 5% of gross sales as a royalty fee and 5% as a marketing fee. However, some of the existing agreements provide variable royalty rates and holidays. The company also offers, for a particular fee, development agreements to franchisees for the construction of one or several restaurants in a certain area and within an allotted time. According to the agreement, fees will be credited against the franchise fees of the restaurants that are scheduled to open in the future. For the sale of company-owned restaurants to franchisees, the aggregate price of the restaurant varies depending on its location, history, cash flow, and sales.

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Jack in the Box’s franchising model

Jack in the Box has implemented a unique seeding strategy. The company enters new markets by opening new restaurants. After developing the market, it sells those restaurants to local franchise partners. This strategy helps franchisees by eliminating the efforts required to develop the market from scratch. Under this strategy, the franchisee can buy an established restaurant and carry forward the expansion process through refranchising.

When selling restaurants, the company chooses franchisees carefully. In regards to franchisees, Jack in the Box chairman and CEO Leonard A. Comma stated that “with both financial and human resources dedicated to building our brand and reaching new markets, we are now recruiting best-in-class franchisees to join the organization. These individuals are key to expanding our brand and achieving our long-term strategic goals. Taking care of our franchisees and doing what we can to ensure their success is a top personal priority of mine.”

You can get exposure to Jack in the Box (JACK) stock by investing in the Direxion All Cap Insider Sentiment ETF (KNOW), which has invested 1.4% of its portfolio in Jack in the Box.

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