Hot Dog: Franchising with Technology

By Baselinemag  |  Posted 2008-04-30

Twenty years before McDonald’s golden arches began dotting the American landscape, Johnny Colera slathered a hot dog with his secret chili sauce and sold it for 10 cents at his lunch counter in Jamestown, N.Y. It was 1936, in the midst of the Great Depression, and Johnny’s Lunch was open for business.

By the time McDonald’s opened in 1955 under similarly humble circumstances, Johnny’s Lunch was a Jamestown institution, serving up Johnny’s Hots hot dogs and the usual fast-food fare of burgers, fries, onion rings and shakes. The company, founded by Colera and his wife Minnie, built a strong following with its commitment to low prices, good food and terrific service, along with some unique offerings such as homemade rice pudding. All the while, Colera and his successors watched McDonald’s continually expand and become a household name, with more than $22 billion in annual sales.

Could Johnny’s Lunch do the same thing? Is a Johnny’s Hot the next Big Mac? After 70 years of improving the business and sticking close to home, Johnny’s Lunch is about to find out. The company is making a big bet—much of it based on savvy, technology-driven market analyses—that it can secure a place among the leaders in the nation’s fast-food franchise industry.

Don’t let Johnny’s folksy atmosphere and throwback art deco design fool you. The company’s expansion plans are based on sophisticated mapping technology that it uses to scout locations, state-of-the art point of sale (POS) systems that speed transactions and capture trends, and inventory management systems that ensure freshness and reduce costs.

Since 2006, Johnny’s Lunch has moved beyond its single flagship restaurant, opening five locations in Michigan and one in Ohio. Its aggressive plans now call for 30 to 50 franchise restaurants by the end of this year and as many as 3,000 locations nationwide in the next five years. The expansion promises lucrative returns and good traction. In addition to a 3 percent marketing fee, franchisees pay a 6 percent royalty on sales, which is split with the area sales rep who signed them up.

However, the market may challenge these optimistic plans for growth.

“The outlook for 2008 promises only modest growth of 2 percent to 3 percent in the QSR [quick-service restaurant] segment,” says Jerry Sheldon, vice president of technology at the IHL Group, a Franklin, Tenn.-based research and advisory firm specializing in technologies for the retail and hospitality industries.

“We are seeing a tremendous slowdown in unit growth for QSRs,” adds Darren Tristano, executive vice president at Technomic, a research firm in Chicago. “That’s not going to help anyone with aggressive growth plans.”

Still, the looming recession strongly resembles the Depression-era economic climate that gave birth to Johnny’s Lunch. Amid all the uncertainty and belt tightening, the company’s executives are hoping that familiar comfort food offered at low prices will be the perfect recipe for success in a down economy.

A Foundation of Quality

Johnny’s Lunch has long been about attention to small details. A Johnny’s Hot, for example, has always been a specially made all-beef Sugarland Coney. “We tenderize each hot dog, putting slits in it to allow the sauce to meld with the hot dog meat and give it a better taste,” says Brendan Brown, general manager of the Johnny’s Lunch in Waterford, Mich.

The proprietary chili sauce that adorned the first Johnny’s Hot—a carefully guarded blend of tomato sauce, ground beef and peppers—now graces fries, onion rings, hot dogs and burgers as well. And Johnny’s Lunch set the tone for value with its “Threebees,” which allows customers to buy their three favorite items at a discounted price.

Though providing good food at fair prices has helped Johnny’s Lunch remain a local favorite from generation to generation, it hasn’t been enough to expand the restaurant into a major chain and make it a household name. So Johnny’s Lunch began to take a close look at what else was needed to make their formula repeatable.

On the plus side, management was optimistic that the market could sustain another franchise restaurant. After all, points out George Goulson, who was hired 18 months ago as Johnny’s Lunch president and chief development officer, there are only 3,300 hot dog establishments in the country—about the same as the number of McDonald locations in Los Angeles county alone. The most well-known hot dog franchises remain relatively small: the Wienerschnitzel, with 250 stores clustered mainly on the West Coast, and Nathan’s Famous, with 180 outlets located mainly on the East Coast.

“When they approached me to help develop the concept, I saw the entrepreneurship of the family,” says Goulson, who was formerly the executive vice president of franchise development for the A&W restaurant chain. “They had a look, price points and food that were unique, and they were quality- and value-oriented.”

To get an out-of-the-gate advantage, the company added a host of heavy-hitting, experienced businesspeople to join Goulson on its management team, which also includes Johnny’s Lunch CEO Anthony Calamunci and Vice President John Calamunci, grandsons of founder Johnny Colera. Both men have decades of experience with the original formula the company is hoping to franchise.

To fill the position of vice president of real estate site selection, the team brought in John Orton, who had worked with brands such as Domino’s Pizza, Marco’s Pizza, Hooters, Yum! Brands, Burger King, Wendy’s, Steak ’n Shake, Brinker International, Dunkin’ Donuts and others. Management also hired Robert Elliott as vice president of marketing. His experience includes advertising and marketing for brands that include Nick-N-Willy’s, Zoup!, Papa Romano’s Pizza, Quiznos and Mr. Pita.

“Johnny’s Lunch now has a pretty strong roster of people in terms of experience,” says Technomic’s Tristano. “They also have an attorney managing the business, which is a good sign.”

Blending Old and New

One of the first challenges the owners tackled was figuring out how to take Johnny’s Lunch national while retaining its unique look and feel. “We want Johnny’s Lunch to have, not the feeling of a typical quick-service restaurant, but more of a ‘Cheers’ feeling of going to a place where everyone knows your name,” Goulson explains.

“We discussed thoroughly how we would take Johnny’s Lunch across the country. The company was new to franchising, but we weren’t.”

Maintaining affordability for franchisees was another key challenge, so management decided to locate new restaurants in strip malls, in facilities ranging between 1,400 and 1,800 square feet. “We’re trying to control unit costs, so we’re not looking for freestanding locations,” Goulson says. “Mall locations also offer more available real estate.”

When the executives began discussing geographic locations for new restaurants, they quickly realized that taking a scientific approach promised the best chance of success. “We decided to go to one of the best companies in the world to analyze our cycle and the demographic profile of our customers, and then map various locations around the country where there was potential for Johnny’s to be successful,” Goulson says.

The aspiring franchisor turned to Pitney Bowes MapInfo to identify a geographic expansion strategy. “Johnny’s Lunch believes in technology and research, and it’s very rare to find a company that is willing to invest in that,” says Orton, who had been a vice president at MapInfo when this project began.

In the initial research stages, the Predictive Analytics group at Pitney Bowes MapInfo interviewed 600 customers at the one existing Johnny’s Lunch location, doing one-on-one interviews at the restaurant for 10 to 12 hours a day for an entire week. “Initially, it was primarily a research project,” Orton recalls. “With just one unit, we were limited in terms of observations, but MapInfo had done a lot of research and could provide an analysis.”

The research found that most of the store’s customers came from the lower-middle to the upper-middle range of household incomes. Half were families; most were either between 16 and 24 years old or over 60. The interviews also revealed how many customers were coming into the restaurant from home, work, shopping or some other location.

While useful in terms of profiling existing customers, the research didn’t provide enough of a foundation on which to make critical decisions. To close the gap, the company created an analysis that combined the aspirations of Johnny’s Lunch, the existing data from the one store, and the assumptions and experience garnered from other restaurants in the QSR category.

“They didn’t know how many units each market could support or which markets to go to first,” recalls Brian Hill, practice leader, restaurants, for the Predictive Analytics group of Pitney Bowes MapInfo. “We helped them develop a market planning tool to effectively quantify the marketplace and prioritize where they should go within those markets.”

MapInfo’s Smart Site Solution uses analytics technology to pinpoint potential markets and identify the optimal number of sites within the market to maximize sales. “Using MapInfo to break up the United States into designated market areas [DMAs] allows Johnny’s Lunch to divide the country into logical areas so management can understand the level of competition, demographics, characteristics and attributes of a particular location,” says Marcus Torchia, an analyst at the Yankee Group in Boston. “Based on that, they can put together a growth plan on how and where to grow, and then identify a logical sequence of how to make that happen.”

The technology created a predictive model based on 20 different retail concepts—including trade area size, buffer distance between stores, customer profile, etc.—to allow Johnny’s Lunch to identify sites in the absence of historical sales data.

“Smart Site can look at any intersection in the country and quantify the demand at those locations,” Orton says. “So we were able to gain an understanding of how a Johnny’s Lunch could grow there.”

This analytic information helped the executive team prioritize expansion throughout the many possible locations. Currently, Johnny’s Lunch has identified 210 DMAs and plans to appoint area representatives to cultivate relationships with potential franchisees.

“We have a contract with the area reps, and they contract with the franchisees,” says Goulson, adding that the area reps buy the rights to the name, as well the training and support, and can open stores in a particular geographic area. “It’s a very scalable model since, rather than dealing with 4,500 franchisees, we will be dealing only with the area reps.”

Powering Up With POS

Johnny’s Lunch owners also have begun investing in technology-based solutions that will enable and support the quick, extensive growth they’re planning. “We all agree that technology is the backbone of success,” says Goulson.

That’s why, once Johnny’s Lunch finalizes the right locations and the right people to run the restaurants, the company will put the right POS technology into their hands—something that many aspiring chains forget.

“In the QSR space, you see small one-store operations, or those with less than 10 stores, invest in a processor-based POS system that they’ll outgrow at 15 stores,” says Sheldon of the IHL Group. “It’s impressive that Johnny’s Lunch is looking at their endgame so early, and it is absolutely critical if they are going to scale at the pace they want to.”

The right POS system is vital to the success and competitiveness of any quick-service restaurant—for both corporate management and individual restaurants. “The point of sale technology is hugely important,” says Charles Cross, chief financial officer (CFO) of Johnny’s Lunch. “In the restaurant environment, you have food that spoils quickly and profit margins that aren’t huge. You have to watch the pennies and control ordering, waste and inventory levels.”

That’s why each restaurant will be required to buy a MICROS 3700 POS system from MICROS Systems. “The MICROS system gives us the ability to look at sales trends and quickly make necessary changes,” Goulson explains. “We can look at both products and operational techniques.”

The company’s “Keep It Simple” mantra, which requires each store to invest in the same technology, has solid strategy behind it, according to IHL’s Sheldon. “If you have 400 stores and they have three POS systems to choose from, that can create problems from a hardware platform standpoint,” he adds. “It also can create havoc in terms of data uniformity, polling, communications, PCI compliance and more.”

The MICROS system has been simple for workers to understand and use, an important feature in a business that often suffers from quick employee turnover. “For a complicated system, it’s remarkably user friendly,” says CFO Cross. “It’s also important that MICROS is a large company with deep resources and a national reach. When we are nationwide, we will need a vendor that has service locations throughout the country—and they do.”

For the day-to-day running of the store, the POS system can make the difference between success and failure. “The point of sale system allows me, as the general manager of the Waterford restaurant, to be in touch with the business numbers for ordering purposes,” Brown says. “We run a tight inventory, and controlling waste and inventory allows us to raise profit margins by keeping money in the bank, rather than putting it in the garbage or on the storeroom shelves.”

The POS system also helps franchisees adhere to government regulations and other rules. “The alert manager on the system allows the manager at Johnny’s to configure the system so that he or she will be alerted if food takes too long to prep, or if a labor law is about to be violated, or if a cashier has voided too many transactions,” says Ed Rothenberg, vice president of operations, restaurant sales for MICROS.

Brown also uses these alerts as a training tool in the Waterford restaurant: By monitoring order fulfillment, he can spot bottlenecks in the food preparation and cooking process and make appropriate staffing changes or training efforts to bring everyone up to speed.

The system also allows various sales data to be gathered and analyzed for overall trends concerning menu items, locations, store hours, inventory, waste and more. “From a management point of view, we must have the right reporting and tracking devices,” says Cross. “The POS system supplies a lot of immediate online information, and it does it in all sorts of ways so we can respond immediately to customer themes.”

For example, the POS system allows the company to track parameters such as how much food is being eaten in the establishment versus how many meals are being carried out. “We have a fixed size of restaurants, and if the amount of eating inside goes up, we need to consider whether we have to go to another type of restaurant,” Cross explains.

Beefing Up the Infrastructure

Though its geo-location and POS technologies are essential to its growth plans, Johnny’s Lunch also needs to build out its technology infrastructure. Until October 2007, the entire company was run with laptop computers and two POS systems.

Currently, the company’s infrastructure consists of a single custom-made server from Dell Direct, which can be modified and upgraded to meet the changing needs of the organization and allow the corporate users to be networked together. “In another year, we’ll add more servers to the network, with at least one for dedicated marketing data and another for use as an integrated POS server that will network all our locations’ POS systems,” Goulson says.

In addition, the company is in the process of hiring a dedicated IT person and is evaluating how well a national support organization (such as Best Buy’s Geek Squad or Joe Nerd) would respond to small local emergencies.

In its new life as a fast-food chain, Johnny’s Lunch plans to upgrade its Web site and update its marketing efforts. The enhanced site promises to offer franchisees a wealth of resources, including the ability to place orders and download pertinent information.

“We will have a portal where local franchise operators can see everything that’s available, from uniforms to marketing materials,” says CFO Cross. “At a higher level, these operators can introduce new items, and at the corporate level, we can make changes and communicate with them nationwide. This type of system lets everyone all over the country have access to the same information, and that breeds consistency.”

As Johnny’s Lunch grows, the company also hopes to invest in technology that will enable it to stop outsourcing certain tasks. This technology could include a CAD system to do architectural build-outs, as well as software to design marketing materials and radio and TV advertising in-house. The marketing materials would have a proven track record in terms of effectiveness and would make it easier for the franchisees to market individual stores, Cross adds.

The company also is looking at ways in which technology can help manage and track the gift cards that it recently introduced. “We want to figure out what technology is available to equalize gift cards on a national scale,” Cross explains. “If someone in Atlanta buys a $100 gift card for his son in Michigan, the Atlanta franchise gets the money, but the Michigan location gets the expense. So there has to be a way to make it good for the Michigan restaurant. The technology to track that has to be out there.”

Currently, Cross receives a report on gift card usage and has to manually collect and distribute the funds to address this issue. “I can handle it now, because it’s small and we aren’t getting too much overlap,” he says. “But as we grow, I can’t continue to do it this way.”

Growth is clearly the ultimate goal for Johnny’s Lunch. The executive team is betting that good food at reasonable prices will be enough to counter a slow-growth market for quick-service restaurants. And they’re counting on technology to be another “secret sauce” in the company’s recipe for success.