The Game with Alex Hormozi - Business Breakdown: Chick-fil-A | Ep 469

Episode Date: December 8, 2022

Slow and steady always wins the race. Today, Alex (@AlexHormozi) talks about Chik-fil-A’s story, interesting facts about the company, what they did to stay in the game, and some important lessons we can apply to our own businesses.Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.Timestamps:(1:26) - The difference between mercenaries and missionaries(5:24) - Longevity and staying deeply rooted in everything they did(9:09) - You have a “cash-year” machine and a “cash-reinvestment” machine(13:50) - Chick-fil-A believes in its values through and through & its culture of service(17:41) - Integral lessons to learn from Chick-fil-A’s storyFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

Chick-fil-A makes more money than McDonald's, Starbucks, and Subway combined. And their first day in business, they made $50. And today, they make over $5 billion. Welcome to the game where we talk about how to sell more stuff to more people in more ways and build businesses worth owning. I'm trying to build a billion-dollar thing with Acquisition.com. I always wish Bezos, Musk, and Buffett had documented their journey. So I'm doing it for the rest of us. Please share and enjoy.

I love Chick-fil-A. I love their sandwiches. I love their desserts. I love their milkshakes. I love their waffle fries. I love their sauces. I love their tenders. But what I love even more than that is their business. And what you can learn from Esther, Kathy, the founder, who started it 76 years ago as of today when he was 25 years old in Georgia. And so one of the things that I love the most about this business is the perspective that he took. So think about how many people you see on Instagram who are talking about their side hustles and they're like six businesses they got open. this man sold chicken sandwiches for 76. Well, he died eight years ago. So he sold them for 68 straight years of his life. And we're even more important, in fact. The sales of the company have never gone down year to year. They have literally only gone up and to the right for 76 straight years. Eight of those years after he died, showing how much he built an enterprise to stay and live on past him.

because I talk a lot about the difference between mercenaries and missionaries. Mercenaries are people who are in it for the money. And most people we saw on social media, I would argue, are in it for the money. And I don't cast any judgment on either direction. But I will say that the people who are the missionaries who are doing it because it's a cause, they build it different. There is no rush because they see it as a mission that they have a problem they want to solve in the world and they created a business and a monetization system around it

to solve it profitably. That's the difference between the mercenaries and the missionaries. The mercenaries are in it for themselves. the missionaries in it for the cause. And so Estuary O'Cathie is one of those pure examples. Now, he's a Southern Baptist, hardcore Christian, and so obviously his mission is aligned with his faith. But even the way that he built his business,

we can take a lot from it. And the reason I idolize guys like Warren Buffett and Estuaryo Cathy are because of their perspective. And so I always want to think, like, what do they see about the world that I don't or what do I believe to be true that isn't as far as they see it? And so just to give you a couple stats about why Chick-Fleight is so badass as a business. number one, they decided to grow slower.

And that's crazy. And now in today's world, everything has to be fast, everything has to be immediate payoff. And they had different competitors that came in during their period of growth that people thought were way hotter, way sexy. Some of you may remember Boston Market.

I remember Boston Market when they had their rotissory chickens and the mac and cheese and all that stuff. They took on a ton of debt, grew super, super fast, and then imploded. And the whole time, people were like, oh, they're going to put chicken fly out of business. They're going to, like the family value chicken place.

but slow and steady every year. They just kept making more. And then eventually, Boston Market shut up and then shot down because he wasn't thinking on a five or a 10-year time rise. He literally sold chicken sandwiches from the time he was 25 until the day he died. Think about that kind of focus.

And I love games where if you wait, you win, where if you just think about how can I do more tomorrow than I did today and you do that for a long enough period time, the numbers become crazy. So here's some numbers for you. Chick-fil-A makes more per restaurant than McDonald's, Starbucks, and Subway combined. Depending on the source and what you're looking at,

they make about $5.2 million per restaurant top line. That's $100,000 a week on average. And here's what's crazier. For context, McDonald's averages $2.6 million per location. So they do more than twice the sales that a McDonald's does. But what's even crazier is their profit margins. And not only do they have insane margins, they do it selling a quarter the amount of products. So McDonald's has 49 products on the menu.

They have 12. And they don't iterate that menu. The reason I love this so much is because it's so aligned with everything that I believe to be true. And so I love, and there's probably confirmation bias, but I love having the things that I believe build great businesses, build great businesses. And so they have such a refined menu because it makes the order process, have fewer mistakes. in it. It makes the drive-through process happen faster. They're able to have less food go bad because they don't have to have all these extraneous options. They follow Proto's principle of 80-20. They know that 20% of their stuff creates 80% of their sales. And so they have all of these efficiencies in there because

they're not trying to be cute. They're trying to be the best at a handful of things. And by doing that, they've been able to sell way more than anyone else does with a way more constrained menu and do it so much more profitably. All right. And so to give you context here, I'm almost certain they don't have any debt on the company today. Right. Now, during the period of time, there's a short period time where he took out loans to open a couple of stores himself. I know that because I read his autobiography. But his goal was always to keep debt within reason. And then eventually, at least when I was reading his autobiography, he said they were debt free today. But that was obviously a years ago, he's dead now. But that was at least the founders. And what's important for everyone listening is,

I think it's the founder's because sometimes corporate comes in, they change things around. But I think it's important to understand the heart of this founder that built this amazing enterprise. So he didn't take the debt because he didn't want to grow fast. He wanted to grow long. He wanted to grow deep. He wanted to have deep roots. He wanted to do everything right the first time all the way through because he wasn't in it for the money.

He was in it for the mission. Because if you open 10 more stores and the stores are shit, you detract from the mission. You might boost top line or boost bottom line in the short term to hit a quarterly earnings call, right? But not for the long term mission because the quarterly earnings calls don't matter to somebody who's trying to do this and sell-shicking standards for the rest of their life, right? So some of the things they did.

One is he owns every single location. Corporate owns all the locations. Second, they get 60,000 applications a year to open a chick-flay. And you have to have worked while he was alive. You have to have worked at a chick-fil-A. I think they loosen that up. You cannot have necessarily worked. But if they're only picking point, less than 1% of the people,

which right now is 80 people to 100 people a year get awarded a franchise out of 60,000, who do you think is going to have an advantage? somebody already worked at a chik flayers, somebody didn't, right? So you don't have to, but the majority half. Now, they pay $10,000 if they get accepted to get awarded locations. They have some skin in the game. But to open up a chick-fil-a, it costs millions of dollars. So, like, the $10,000 is more like a symbolic gesture from the franchisees, and they wanted to have a career path for the super exceptional employees because he wanted to create a way for people to come in, you know, mopping floors, flipping burgers, going all the way up, and then eventually own their own

franchise. Here's the catch, though. You own the franchise. You are an operator, except you can get fired and you can't sell it and you don't get the profit. So here's how it actually works. So 5.2 million. Let's just use that for round numbers. That's $100,000 a week, 52 weeks, 5.2 million, $100,000 a week. Now, Chick-flake corporate gets 15% of top line. So $15,000 every week gets clipped straight to corporate. That's what they get off top line, 15%. In the food business, I got to look at Subway's numbers, but I'm pretty sure they run like 12% net margins. So the royalty, if they were in an inferior franchise or inferior business, would be the entirety of the profit. But because their stores are so darn profitable, they can do it this way.

So 15% of top line goes to corporate. Then they have the mortgage that gets paid off to a lease from the store to corporate because the corporate owns the building and the dirt that it's on. So they also have the real estate play that's built into the business. And then after doing all that stuff, because that's also making corporate money, there's profit left over. Now, you're like, okay, so that goes to the franchisee. Half of that profit still goes to corporate. But what ends up happening is that the actual franchisees make somewhere in the neighborhood of 200 to 250,000-ish a year.

It changes every year, inflation, et cetera, but somewhere in that neighborhood. And so if you're somebody who comes in mopping floors, you have the potential. If you're exceptional to someday be able to make 200 to 250,000 a year operating your own Chick-fil-A location, which I think is awesome. Super cool. American Dream Story. anybody can come and do it just if you work hard, et cetera. So to put this in context, their 15% royalty, Subway's net earnings is 7.5%. So their royalty on top line, this is like, if you're

not familiar with like the food business or brick and mortar chains, anything like that, 15% of top line in the food business is twice of the entire thing of Subway's profit. That's how profitable these stores are. That's why this is so crazy. So they could take 15%, then they have the mortgage and lease that's getting paid off by the store, and then they split the remaining profit 50-50 with the store operator. They print money. And the beautiful thing is that they actually have a compounding vehicle of wealth within their business, which, by the way, one of the things that you probably don't know about me is that we open four brick and mortar locations per month at acquisition.com between our portfolio company. So a lot of people don't know that, but that's like

a big part of what we do. And so one of the things that I like with the business is that you have a cash-jurning machine, but you also want a cash reinvestment machine. So it's two sides of this. And so one of the cool things about brick and mortar that a lot of people don't appreciate is that you have a high return on capital if you have a good business model. And so like there's a, there's a big business that I'm looking at investing in right now for another deal that's like this. But if I can find a business that gets 50, 100, 150% returns on capital, and you're like, that's crazy. It happens every day if you have a business model that, works. Point is, let's say that you've got a store that generates $200,000 a year in profit.

And let's say it costs you $200,000 a year to open the store. Okay, let's just keep math simple. Every year, you can double. Now, the first year, you open one new location. Doesn't sound, now you have two. Hooray. Next year, you can open four locations. Hooray. Next year, eight, next year, 16. You know how this doubling happens. After you do it 10 times, you have 1,000. right it's a lot that's a thousand new openings okay it's a lot and the thing is is that that takes time to do now if you're falling along what will happen quickly is that the operational constraint of opening locations will become the constraint of the business not the return on capital itself all right because just because you can open a thousand locations doesn't mean that you can open a thousand

locations right in terms of the money and so one of the beautiful things though is that when you have a business like that it's actually very tax efficient because you can keep the money at the ccorp redeploy within the business in a way that you're going to be able to is reliable and gets you that 100% return. And so then you have a compounding vehicle of money. We talk about leverage, labor, money is the second level there. So if your business from labor creates cash that you can redeploy into the business, it compounds. So when I'm looking at businesses that don't want to earn for a really long time, I want things that compound in and of themselves. Some businesses don't have that. Many businesses don't have that, especially like service-based

businesses, is very uncommon for them to do that. But brick and mortar chains do have that advantage, which is also one of the reasons that they become hugely valuable for private equity and things like that, for buyers in the future, because they love seeing a business where they can inject cash and just get huge returns on it compared to the stock market. There's a wonderful book called The Little Book that Beats the Market by, I think, Joel Rosenblatt, I think is his name. And he simplified everything down to two metrics. He said price to earnings ratio, which is basically you want to buy a company for a very cheap amount of money relative to how much it makes, price to earnings ratio. And the second one is you want a wonderful company. So he defined a wonderful company

with a single metric is what is their return on capital? So if they put capital into their business, what's their return on it? And so he ran an algorithm, and he still has it. You can go check it out, where he just has the top 20 companies where they have the lowest price to earning ratio and the highest returns on capital. And he buys that stock every year, those 20 every year, and he gets 20% a year. The problem is he gets 20% a year when measured over five plus years. But in the short term, people can't handle the volatility. So they buy it for a year, the stock goes down and they freak out. part of the reason stocks will have a very low price earnings ratio is because there's some sort of strife,

there's drama, there's negative news about it. And so people see that and like, oh, I don't want to bind to that, and that's what makes good deals. So, as an aside, that's one of the reasons that I also like to play in general is that it has both assets. Now, they're 100% privately owned.

They can do whatever they want. But one of the more amazing things that I haven't even mentioned yet is that they achieve these numbers twice almost what McDonald's makes and they make more than Starbucks, Subway, and McDonald's combined at a single store. and they're closed 52 days a year.

So that may not sound like much, but think about this from a percentage standpoint. If you had one out of seven days, and I would probably argue that if they were open on Sundays, they would get so much Sunday church crowd, it would probably be a higher sales day than their normal sales days. But let's just assume it was one seventh of their sales,

which I don't think it would be. But let's assume it was one seventh of their sales. They could bump their sales by 13%. And here's the thing. With these types of businesses, their costs are fixed. They have variable cost to with food. But, like, they're incurring cost of rent, et cetera, insurance on the property that whole day, and they just take the day as a loss.

So that additional 13%, a lot of that would be contribution marks, which is going to the bottom line. So they would even further make their business more profitable. But they've been pushed many, many times on this why they don't do it. And you can summarize in two many things. One is that desire is created through lack. You only want something you do not have. So by definition, you can't always have something in order to have desire.

And so they believe that keeping it for one day gives people this craving that they would want it more the other six days. Number one. Number two is that it's the culture. Values matter more than just about anything, in my opinion, if they are true to the founder, true to the business, and they operate in that way. And I would say that Chick-Fle is a great example of a type of company that believes in its values through and through, and they practice what they preach, pun intended, with all of their workforce. And if they were to say we believe in these values, we have this Christian backing, and then they were open on Sundays after they were to reverse it, it would seem like they were swapping their values for a little bit more money. And so you could make the argument that the strength of their values makes up on the other six days for what they would have made on the seventh.

Real quick, guys, you guys already know that I don't run any ads on this and I don't sell anything. And so the only ask that I can ever have of you guys is that you help me spread the words so we can out more entrepreneurs, make more money, feed their families, make better products, and have better experiences for their employees. and customers. And the only way we do that is if you can rate and review and share this podcast. So the single thing that I ask you do is you can just leave a review, but take you 10 seconds or one type of the thumb, it would mean the absolute world to me. And more importantly, it may change the world for someone else. The last piece that makes them exceptional, I think was their VP of Growth who was talking about this. He said, 80% of what fast food restaurants do between each other is the same. He said, but I wasn't hired here to do the same thing that the other

80% are doing. I'm hired to do what the 20% are not doing, not to just compete, but to create a competitive advantage. And so one of the things that permeates any Chick-Fillay, if you've ever been there, is that they have a culture of service. And so what they did was they actually studied the hospitality industry and even hired people from Ritz Carlton to help them create an exquisite experience at Chick-fil-A. And so they say things like, my pleasure, when they do something for you. And here's what's crazy. They implemented this top-down, company-wide, had a lot of pushback from it. People didn't want to say, my pleasure, when someone says, thanks for my order, thanks for my chicken sandwich. They say, my pleasure, right? It wasn't until the CEO himself changed his own language patterns that it then permeated through. And it took years for him to realize that, and he talks about it. When he started saying, my pleasure, I think it was 03, it started to trickle its way down. And so this is, remember, 03. So we're talking 56 years or whatever it is from the time they opened. that much more efficiency has been driven into how can we improve this business? Because if we change nothing about this business, we saw the same 12 items, you just get better

and better and better at the same thing. They even do practice runs in an indoor arena for the drive-through to test in real-world scenarios to see how they can make the drive-thru more efficient and increase the accuracy. That's the level of detail that the kingpins can do because they've been doing it for 70-plus years. And so the biggest takeaways I see from the big companies that I try to apply to my own business is what is a business that I could be in for a hundred years. And I believe that if you only try and solve the same problem for a hundred years, you get pretty darn good at solving it.

And so what happens is, especially with the younger generation, in my opinion, and when I say younger, I don't mean actual age, I mean years of entrepreneurship, is it's all about the fast buck. It's all about the quick thing. But when I talk to the most successful people that I know, they all talk so long because it's almost laughable to them. They're like a decade is like their first measuring chunk of like, okay, 10 years, cool. But they're talking 20, 30, they're talking lifetimes. And after Kathy lived that, and then he, I mean, technically even died that, right? He took one concept, a chicken sandwich, which is completely commoditized. It's a chicken sandwich. And thought, how can I just do this one thing that everyone understands better than anyone else?

And he built an empire and he built a mission behind it that I think millions of people are happy and frequent every day compared to their alternatives that were just mercenaries, that were just aided for the money. And not only do they beat them at the game of customer satisfaction, but at the end of the day, they also beat them in top line and bottom line. And he has edged his way to now being number three and likely will become the second biggest food chain in the entire United States. So here are the lessons that I take away from Chick-fil-A that I've tried to apply in as many different places in the portfolio companies that we own and even just at Acquisition.com at the holding company. Number one is that they sold chicken sandwiches for 76 to eight years and I

don't think they're going to stop. And so having singular focus on the core products and not getting cute and not getting fancy and not having 49 menu items, but just saying what are the things that the most people want and how do I get better and better and better at doing those things? Because better gives you leverage. It means the same input gets you more output. And so rather than having lots of different things they have to put input in, you just put more and more and more because you only have so much juju. Like if you had two items, you can only split-test them half as much as you could want. And so the incremental returns you get on getting this much better is where the outsized returns come. For example, if you think about this like an

Olympic runner, the difference between first place and fourth place in the Olympics is a tenth of a second, right? But the difference between first and fourth for a person's life? Massively different. And so we get these outsized returns by making these marginal improvements of being better rather than being new despite our entrepreneurial desire to have not a chicken sandwich. We're like, what about tacos? What about what about burgers? Right? Like how many times could they have done something like that? But they did it because they knew that they wanted to stick to the essential few and they knew that focus is what was going to compound over the long term. Number one. Number two, he always cast out despite being publicly criticized for not taking on debt and not trying to grow faster and had

people in the short term talking years short term, just for everybody who's new in the entrepreneur space. For talking five, six, seven, eight years having somebody beat him publicly. Boston Market, and he still knew that he was a missionary, not a mercenary, he wasn't doing it to brag about his ego, he was doing it because he believed that this way of doing business was what he wanted to represent. And so I think we have these values that we have in saying, I know that the likelihood that my competitors are going to be here in 70 years is almost zero. And so if I build in a way that I'm going to be here in 70 years, I will win by default. And I think that's powerful. Because so many people want to say they're number one. The question is, when? You look at the richest man, the world, I want to be the richest man in the world. You got to respond to somebody's answer with for how long? Because eventually you die. And if you look historically, the number one guy doesn't sit there very long. Somebody else comes up, right? And so it's what are we aiming towards? For him, he wanted to build an amazing chicken franchise. And for him, his legacy outlasted his life. And for me, that's, I mean, honestly, that's my dream. My hope is that whatever we build

can continue and not only just stay alive, but grow beyond us. And that you can only do through a mission, not through a mercenary cause. Because if you're just chasing the money, people get diluted out because there's always a shiny, easy win that distracts from the core items. Number three, the fact that they don't let anyone have more than one store. I think there's a lot of wisdom to this.

So there are lots of people like, oh, let me open 100. And they're like, no, because you're not going to be able to focus. We want someone to put their heart and their soul into their location and treat it like it's their own. And so I think that if you think about each store as a business line or a product line within a larger corporation, right, then having people take ownership, right? And he has profit sharing. Now, mind you, he doesn't share the whole profit,

but after he takes his pieces off, they have an ability to make more money. And having that kind of, I'll say, uncapped, earning potential for somebody is very inspiring, but he keeps a constraint to a singular focus because they know that somebody can give it their all at one location. They've already tested that. Believe me, I'm sure they've tried to open more. They've learned over the years. And I think there's a lot of wisdom in that that we can take for our own businesses. Number four, saying no on Sundays means you have to say no to things that are obviously going to make you money, but will detract from your values. And so there are lots of opportunities in entrepreneurship and you probably have some on your docket right now that you're like, I don't know,

this is a little left of center, but like it's such an easy win. Like imagine the new CEO comes in to Chick-fil-A tomorrow and says, you know what? I found a way to make us 13% more sales and have most of that dropped the bottom line. They're like, what's your amazing idea? And you're He's like, we're going to be open also on Sunday. It would be such an easy play. And imagine how hard it is to say no, because in the beginning, he had to say no to an extra 13% on a million dollars. It makes another $130,000.

But when 13% is $650 million, and you still say no, it means that you're appealing to a higher power, something above the money. Now, I also believe that appealing to something above the money, long, makes you more money. But you have to say no in the short to get the long yet. Yes. Estre O'Cathy noted that what he wanted everybody in his team and his company, he starts

saying, my pleasure, when someone said thank you to them for doing something, that it didn't change until he changed how he spoke. And so it's so much of the same thing parents see with their kids, teachers see with their students, is that like people will learn 10 times more from watching what you do than listening to what you say. Like that's how humans learn when we're kids we observe, right? And so if you say, hey, we're all about being on time here, but you, the CEO, the CEO, or late, it will never work. And so we have to pick the very few values that we know that we will

never break, that we will always stick with, which is why values have to be true to you, not nice words on the wall, because they have to be things that you would actually live. Otherwise, they're meaningless. And so seeing that it had to come to the top down is just a continuous reminder for me that, like, I have to be better in order for my team to be better. Because if my team doesn't get better, this business doesn't grow, because it will only grow to my capacity. The only way for me to get better team is to become better. And number six, if you want to have a business that grows even longer and bigger, you want to have a compounding vehicle built within the business. And so Chick-fil-A has a compounding vehicle of capital

within their business. Whenever a store creates money, they have the cash and they can pick the next location. And not only they'd spend the money open the store, they buy the land and they buy everything itself too. So they get the highest return and they get some tax benefits. And so if there's ever areas in the business that we can get some kind of compounding effect where money compounds on itself, that is something that I always try and build in every business that I have, is how can I get this money that I'm getting today to make me even more tomorrow within the structure of the business, not taking the money out and putting into stocks or putting it into just like a random fund or whatever it is, but actually saying within my business where I have active control,

where I get the highest returns based on my skill and my competitive advantages, I get higher returns. and that's how these guys build crazy wealth that beats the market. Number seven, ruthless prioritization on the essential few items that they need to sell. The fact that they haven't changed their menu in decades should be a testament to the fact that we as entrepreneurs want to change it all the time. And there's a Henry Ford story that I think drives his home. So he was looking at a marketing campaign and he had been working on it with his executives, et cetera, for months and months and months. And three or four months in, he walked past his marketing CMO's office. and was like, hey, he's like, when are we going to stop running that out? He's like, I'm so tired of it.

And the marketing's I've looked up to him. He was like, we haven't even ran it yet. And so the thing is, is that we have all these things that happen in our mind because we're always iterating. Like, we assume everyone knows everything about our products. We assume everyone's already bored of it because they're talking about chicken sandwiches 24 hours a day. But reality is that most people might get chick-fil-a-month, right, as a treat. And so the customer's perception, when we change something slowly in our mind every six months as a small business, to a customer, it just feels like it's constantly changing. There's no consistency.

And so one of the things that McDonald's proved, which I think Chick-Fleys learned from the lesson, was that people value consistency. People want to know that when they exchange money, they're going to get the thing that they liked last time. Right. And if you make the same thing the same way over and over again, it also gives you the opportunity to improve it. If you have to improve 100 things, it's a hell of a lot harder than improving two

or improving one. And so you've heard me say one product, one avatar, one channel for anybody who's trying to make their first million. And like each one of these stores, if you think about them as a single business, like that's how they're thinking, right? Now, do they have drinks? Yes, et cetera. But like the principle behind it compared to everyone else in the marketplace, they have a quarter the amount of things on their menu compared to McDonald's and they make twice the money. One fourth the options, two times the money and probably four times the profit, five times the profit. There's wisdom there. And so I try to think about that as like, okay, even though I could do those things, should I?

And most times the answer is no. I should just get better at the thing that's in front of me and confront the problem that I have, which is how can I sell more chicken sandwiches, whatever your chicken sandwich is? And to drive even further on the focus they had, even at a micro level within their core product, the chicken sandwich,

if you compare that to McDonald's Big Mac or Burger King's Whopper, McDonald's Big Nap has six ingredients. The Whopper has seven, not including the bun. Chick-fil-A's chicken sandwich, It's chicken, bread, butter, two pickles. That's it. Now compare that to Chick-fil-A's sandwich, which just has butter, pickles, and chicken. That's it. So they even have half the ingredients on their one-quarter-sized menu because even then they get more efficiencies at the ingredient level. They make it faster and easier to prepare so it's more consistent. And they're able to do that

with greater economies of scale. And they can make the process itself leaner and faster and leaner and faster and then you do that for 76 years and become unbeatable. So one of the things that when they were asked, why are you so limited in your selection? Besides all the reasons I already gave, their response was that every time they added another item, they just saw their sales of their main thing to client. So they're just splitting some sales off the thing, their core products. And so how many of us have opened a new thing, got people to switch from the old thing to the new thing? And now you're doing two different things for the same amount of money. Sound familiar? Happens all the time. And so it takes the discipline to say no.

and say we're just going to get better.