FDD Talk 2019: Charleys Philly Steaks Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the Charleys Philly Steaks franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Charleys Philly Steaks franchise, based on Item 7 of the company’s 2019 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Charleys Philly Steaks franchise, based on Items 5 and 6 of the company’s 2019 FDD

• Section IV – Number of franchised and company-owned Charleys Philly Steaks outlets at the start of the year and the end of the year for 2016, 2017, and 2018, based on Item 20 of the company’s 2019 FDD

• Section V – Presentation and analysis of Charleys Philly Steaks’ financial performance representations, based on Item 19 of the company’s 2019 FDD, including information on the:

• 2018 average gross sales, median gross sales, and range of gross sales for the 446 franchised Charleys Philly Steaks Restaurants that were open during the entire 2018 calendar year, grouped according to venue type (military bases, airport, mall food court, strip center, and all)

• 2018 average gross sales, median gross sales, and range of gross sales for the 55 company-owned Charleys Philly Steaks Restaurants that were open during the entire 2018 calendar year, grouped according to venue type (mall food court, strip center, and all)

Section I – Background Information

21 Things You Need to Know About the Charleys Philly Steaks Franchise

Celebrates Milestone and Aims for More

1.  At the beginning of December 2018, Charleys Philly Steaks announced that it had hit a major milestone back in September when the company opened its 600th location. The Lancaster, Ohio store was the second Charleys nationwide to feature its new menu concept with chicken wings and tenders alongside Philly cheesesteaks. It was also just the second restaurant system-wide to feature a drive-thru, as well as Charleys’ new warehouse/farm-style interior design, which combines raw industrial elements with organic finishes.

2.  This updated menu and design is the focal point of Charleys’ continued expansion across the United States. The chain plans to open an additional 400 stores and hit the 1,000-restaurant mark by 2022. However, the vast majority of these new Charleys locations are targeted for strip centers. This coming year will mark the first time in Charleys’ history that strip center development exceeds mall growth.

3.  Charley Shin, CEO of Charleys Philly Steaks, said that, of the 600 locations, about 420 or so are currently in malls. About another 100 are military locations and, by summer 2019, 70-80 will be housed in strip centers.

4.  There are several reasons why Charleys is shifting direction. The health of America’s malls isn’t necessarily one of them, though. Shin says he’s seen A malls (top tier) get stronger and B malls ramp up. It’s really the C malls (lower tier) that are floundering. That’s a phenomenon reported by restaurants and retailers nationwide. Shin added, “Actually our business has been very strong in the mall environment. We had same-store sales grow mid-single digits [this past year], which is much stronger than industry average.”

5.  The strip center and standalone locations present an entirely different challenge. Mall dining tends to be an impulse decision. Customers are there for another reason and expect to grab a bite, or not. Where they choose isn’t necessarily determined when they get into the car. While that spontaneity can be true of non-mall restaurants as well, it’s nowhere near as frequent.

6.  Shin says the strip center Charleys have to become destinations. That’s a challenge, but it also has its perks. “Customers can access our cheesesteaks now a lot more readily than going, parking in the mall, and walking all the way through the mall to the food court. We’re actually making it a lot easier for customers to visit us.”

7.  That benefit is balanced by losing guaranteed foot traffic. Shin says the marketing effort is much more focused and intense at strip center locations. They’ll launch a social campaign around a 3-mile radius about a week before opening. Charleys will also typically purchase a billboard in the area a month prior to get the name out and build anticipation.

8.  Charleys’ growth trajectory, which calls for about 70 units in 2019 as opposed to the 40-50 it has tracked in recent years, is circling the brand’s strongest markets, including Florida, Texas, and California.

9.  As for the menu, Charleys has long offered chicken as part of its Chicken Philly menu offerings. A few years back, Shin says, he was looking at protein consumption and realized the brand should expand this offering into other tiers. He cited a forecast that calls for chicken consumption in the U.S. to almost equal pork and beef combined in the future.

10.  Charleys first tested its chicken fingers concept three years ago. Shin says the chicken finger business boosted sales by double-digits. He still thought it could do better. That’s when further study led him to the bone-in chicken wing.

11.  Charleys’ new menu features wings tossed-to-order with 10 chef-inspired flavors ranging from Angry Ghost and Nashville Hot to milder options like Zesty Lemon-Lime Rub and Sweet Teriyaki. Customers can order Classic Wings or Boneless Wings and choose from new sides including celery sticks, coleslaw, baked beans, or Texas toast. Shin added, “It was almost a year of research and now it’s showing great results.”

12.  Moving forward, Shin believes the new model and menu will only make the brand’s expansion more impactful. Shin said, “We’re just very thankful for what we’ve been able to do with 600 units. And we’re looking forward to growing to 1,000 units with this improved format.”

Updates POS System

13.  In late September 2018, Charleys Philly Steaks started upgrading its POS system, rolling out PAR’s cloud-based Brink POS system in each of its 594 domestic locations. At the time of the announcement, the rollout was slated to finish by the end of 2019.

14.  Charleys said that it had stores in 46 states and 17 countries and that its previous POS solution was not designed to support such a large enterprise. According to Matthew Son, vice president of information systems for Charleys Philly Steaks, the technical infrastructure, business processes, and product were insufficient, requiring the chain to modernize the overall technical ecosystem, manage risk, improve infrastructure, and achieve a more comprehensive understanding of their data.

15.  With Brink in place, speed of service has improved, leading to higher sales, and the modern technology platform is allowing Charleys to implement enterprise-wide online ordering, a mobile application, loyalty program, and delivery in a unified and profitable manner, according to the release. Time trials of order entry were 40 percent faster than before, and implementations at stores that were being restricted by POS speed improved by 10-15 percent from faster order entry during busy times.

16.  Son said, “To achieve a modern, stable, robust, and enterprise-grade technology platform, we chose Brink and the market knowledge and expertise of the PAR organization. The PAR team’s knowledge of the software and attention to detail proved the organization was like an expert craftsman. The Brink solution was technically the best and most cost-effective when compared to other offerings. Brink has been a fantastic partner in building a robust and modern POS solution.”

Company History

17.  Charleys Philly Steaks was founded as Charley’s Steakery in 1986 by Charley Shin in Columbus, Ohio across the street from Ohio State University, where Shin had gone to school. Shin had tasted his first Philly cheesesteak sandwich in 1985 and immediately fell in love with it.

18.  While attending school, Shin worked in his mother’s Japanese/Korean restaurant, but convinced his mother to sell the restaurant and help him launch a new business venture. After experimenting with recipes for about a year, Shin opened the first Charley’s Steakery in 1986.

19.  One of Shin’s early decisions regarding the layout of Charleys was to put the grill facing the customer, so they could always see their food being cooked. This is now a staple of all Charleys restaurants. Charleys was an immediate hit with the college crowd and as more customers rolled in, Shin launched a franchising program in 1991.

20.  The brand went through two name changes; the first in 2002 when it became Charley’s Grilled Subs and the latest change took place in 2012 with all domestic locations becoming Charleys Philly Steaks. Over the years, Charleys Philly Steaks has continued to grow around the world with most of its locations found in retail shopping centers, airports, strip centers, and Army and Air Force bases.

Entrepreneur’s Franchise 500

21.  Charleys Philly Steaks ranked No. 102 on Entrepreneur’s 2019 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Charleys Philly Steaks franchise costs, based on Item 7 of the company’s 2019 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on Charleys Philly Steaks’ initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2019 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2016

• Outlets at the Start of the Year:  423
• Outlets at the End of the Year:  435
• Net Change:  +12

2017

• Outlets at the Start of the Year:  435
• Outlets at the End of the Year:  455
• Net Change:  +20

2018

• Outlets at the Start of the Year:  455
• Outlets at the End of the Year:  471
• Net Change:  +16

Company-Owned

2016

• Outlets at the Start of the Year:  48
• Outlets at the End of the Year:  55
• Net Change:  +7

2017

• Outlets at the Start of the Year:  55
• Outlets at the End of the Year:  55
• Net Change:  0

2018

• Outlets at the Start of the Year:  55
• Outlets at the End of the Year:  57
• Net Change:  +2

Section V – Financial Performance Representations (Item 19, 2019 FDD) and Analysis

• The following tables present information about the historic annual sales of 501 Charleys Restaurants that were open during the entire 2018 calendar year.

Part 1 – Statement of Average Gross Sales for Franchised Restaurants 2018

• There were 57 company-owned Restaurants and 471 franchised Restaurants as of December 31, 2018.

• The Statements of Average Gross Sales consist of the average annual Gross Sales of 55 company-owned Restaurants and 446 franchised Restaurants that were open during the entire 2018 calendar year.

• The Statements of Average Gross Sales exclude the results from: (1) one company-owned Charleys Philly Steaks Restaurant that was not open during the entire 2018 calendar year; (2) 25 franchised Charleys Philly Steaks Restaurants that were not open during the entire 2018 calendar year; and (3) one company-owned Charleys Philly Steaks Chicken Wings Restaurant that was not open during the entire 2018 calendar year.

• The Gross Sales of franchised Restaurants were derived from unaudited financial reports submitted by franchisees for the purpose of computing royalty fees.

• The franchisor compiled the Gross Sales of company-owned Restaurants on the basis of generally accepted accounting principles consistent with those included in its annual audited consolidated financial statements, consistently applied. The information presented is unaudited. All company-owned Restaurants use the same accounting methods and system.

• This financial performance representation does not reflect the costs of sales, operating expenses, or other costs or expenses that must be deducted from the Gross Sales figures to obtain your net income or profit.

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