Cary Albert is sold on the value in unit economics. The Dallas, Texas-area multi-unit franchisee operates Schlotzsky's and Cinnabon locations and says there's no question his operation benefits from keeping an eye on unit performance numbers.
"Any restaurant concept or quick-serve restaurant, has to have compelling unit economics. Each unit needs to generate significant cash flow (unit-level EBITDA) showing a significant return on investment," explains Albert, who has been in franchising for 16 years and does $3.7 million annual revenue at his three stores. "My rule of thumb is looking at unit-level cash flow in the 15 percent or higher range. A reasonable level of cash flow is critical for a threshold investment. Hence, our company has no interest in owning restaurants that generate less that $1million in annualized revenues. This is where we work and look the best."
Multi-unit franchisees like Albert understand the numbers game and know what numbers it takes to win. He knows what he's doing and it must be working because he's on the grow. Two more locations are already under construction and he says he's actively searching for another "four to six additional sites."
Albert agreed to answer a few questions related to unit economics and, more broadly, offer some insight on how he operates his stores. Here's what he said.
What are the essential components of unit economics?
Location, location, location! For us, we found that tremendous daytime population is best for our concept, Monday through Friday. Also, nearby shopping malls for that evening traffic and weekend business helps greatly.
Exactly how do you improve the performance and survivability of your business?
Invest in your people! Provide "over the top" customer service. If your customers can "eat off the floor"...you are in great shape!
Do you have any financial training/background? How has that helped?
I own several companies. I've had B2B electronic test and measurement business since 1992, started in the restaurant franchise business in '94, then commercial real estate in '99. Mostly self-taught and asking a lot of people "smarter than me" a lot of questions.
Do you review your financials frequently? How often? Which numbers/reports?
- Top line growth (year over year)
- Customer counts "increases"
- Ticket averages
- Cost of goods sold
- Labor - Hourly
- Net income
Does reviewing the financial data help you identify what's right and what's wrong? Explain.
Yes. By monitoring our customer counts and ticket averages, it gives us a very good sense of "traffic" through our restaurants. Traffic count is very important. It's just not "the current" customer that is coming in, it's about "everyone" else they are going to talk to about "us." And ticket averages help us determine if we are suggestive selling where and when we need to be. With the Cinnabon component in our restaurants, it helps drive that average upward, and the bottom line as well.
Which financial data is most important? Explain.
Several work in tandem. Labor, COGS, ticket averages, top line growth....all point to an increased bottom line. If one gets out of whack...it throws a wrench in the cog.
Do you have a financial "scorecard" (a 1-page financial report card) that helps you measure your efforts? Explain.
Yes. Each store location is equipped with its internal P&L that it must complete monthly. They have budgets to hit. As long as they achieve their goals we're happy.
Overall, for the company, we are aggressively growing right now, so we achieved 50 percent bottom line growth last year, and are looking to accomplish that again in 2010. We're achieving it by not only increasing same store sales, but growing externally by adding additional units.
Discuss the importance of understanding the balance sheet/cash flow?
For me, the importance of this is knowing how much I can grow externally this year. We are growing with cash flow, so structuring debt accordingly is very important. Cash is king in this market, and the banks like to see it, so it's always good to keep as much as possible handy.
How do you manage your credit line and "bankability?"
Having several "positive" cash flowing companies helps me a lot. If it weren't for my diversification it would not be as easy. Right now, we are in a good position. We have several banks jockeying for our business, so we are getting very favorable financing terms and rates. Personally, I don't like debt. We pay it off as rapidly as possible. Having said that, with today's rates being as low as they are, and the return on capital that we can get from one of our units, we can put 20 to 25 percent into the deal, the landlord finish out allowance makes up about 20 percent, so we are financing around 60 percent of the total deals. Basically, my rule is to get 100 percent of my investment (that 20 to 25 percent I put into the deal above) back in my pocket in year 1. I've been able to do it thus far.
How has keeping an eye on unit economics benefited your business?
You can't manage the big number unless you manage the little numbers. It starts with your cost of goods sold and labor, and making sure each individual location "works" for the big picture. I won't own units doing less than $1million annualized sales? I've owned units that had $8,000/week in sales, $12,000/week in sales. It doesn't work for me. I have just as many headaches with a store generating $600,000 a year in sales as I do with one doing $1.5 million annually. I'm sure this is no secret, we all hear it all the time, but it amazes me how few franchisees get this point. It's all about those "incremental dollar" sales. For every dollar I can bring in above and beyond my breakeven, I can push about $.40 to $.50 to the bottom line. Going from $900,000 to $1 million in annual sales, will throw $40,000 to $50,000 to the net income. That one works for everyone!