In this edition of the Franchise & Hospitality newsletter, we open with an interview of Scott and Celia Catlett. Scott is the Vice President and Deputy General Counsel at YUM! Brands, Inc. (the owner of the KFC, Pizza Hut and Taco Bell brands). Celia is General Counsel and Corporate Secretary at Texas Roadhouse. Their interview provides an interesting view of differing franchise philosophies, important legal issues facing restaurants, the impact of technology on business and their overall work-life balance.
1) What challenges do you face when growing your brand in the U.S. and abroad?
Scott: Our three brands have operations in over 130 countries, so our markets run the gamut from straightforward to extremely complicated. Finding great franchisees is always a challenge as we enter and expand in less developed markets. And even assuming you can find great franchisees, supply chain issues can be a big obstacle—especially when we’re opening over 6 new restaurants on average every day. Then there are always risks arising from different cultural norms and expectations around the world. For example, bribery and corruption are more common in certain areas, and we all saw what happened to Wal-Mart and its international expansion after they encountered very public bribery allegations. So we keep a very close eye on those issues, and mitigating those risks keep many of our attorneys up at night.
Celia: The biggest challenge for Texas Roadhouse in both the U.S. and abroad is responsible growth. In the U.S., this includes vigilance over location selections so that we don’t cannibalize our own sales, safeguarding our value proposition by evaluating menu pricing independent of commodity inflation, and setting realistic expectations for the trajectory of new concepts. Outside of the U.S., it entails finding the right markets for our particular type of Americana, adapting our menu and service model to align with local culture, and finding the right partners to help us grow in a responsible way. Overseas, the process of identifying and vetting our partners, and tailoring our concept to the guests, can take a long time and requires a lot of patience.
2) Texas Roadhouse and Yum! Brands currently have different philosophies on franchising. What do you like and/or dislike about franchising and do you take a different approach depending on whether you operate in the U.S. or abroad?
Scott: At Yum, we love the franchise business model. In fact, we love it so much that we are moving from less than 80% franchised in 2016 to at least 98% franchised by the end of 2018. The franchise business model has a number of advantages for us. First, we can accelerate the growth of our brands by putting our restaurants in the hands of local franchisees who know their markets, are great operators, are well-capitalized and are growth-minded. This approach has served us well in the vast majority of our markets. Second, the franchise business model creates a number of tailwinds from a financial perspective. Franchised businesses tend to be more predictable, less volatile and less capital intensive, and businesses with those traits generally trade at higher multiples, which makes our stockholders happy. In addition, the predictability of the cash flow allows us to borrow at favorable rates and aggressively return capital to our shareholders. To put some numbers on it, we collect over $2 billion per year in franchise fees, have over $9 billion in debt and plan to return close to $7 billion in capital to our shareholders between 2017 and 2019. Again, this is something that our shareholders have appreciated. Third, being more franchised enables us to focus. We’ve evolved from being part-franchisor and part-restaurant operator to now being focused almost entirely on being a world class franchisor and brand builder. Our mission is to build the world’s most loved, trusted and fastest growing restaurant brands, and the franchise model is a critical part of that.
Celia: I wouldn’t say Texas Roadhouse dislikes franchising. As a growth company, we just feel that it is more consistent with our business strategy to keep direct control over operations, while also having a greater ability to pivot when we need to (since we don’t have to get the buy-in of a large franchisee population). A company ownership model certainly brings wider legal risks, but growth companies can tolerate a different risk/reward structure than an older, more stable business like Yum. In the few US markets where we do franchise, it is with solid operators who helped us establish Texas Roadhouse as a brand, and who are in total alignment with our operating philosophy. In non-U.S. markets, which are unproven for Texas Roadhouse, the risk/reward balance tips in favor of a franchise approach, and the importance of “localizing” our business model outweighs the value of retaining complete corporate control over operations.
3) How have technology and cyber-security issues impacted your business?
Scott: Today’s customers want an “easy” experience, and technology is and will be a big part of that—whether that means being part of the brand conversation through social media or experiencing our brands through online ordering. Each of those arenas involves risk, and that’s even before you take into account the privacy and other considerations that arise from having access to so much customer data. Cyber-security is a corollary of that and has also been a huge area of focus over the past few years. Our Audit Committee’s focus on cyber-security, and there’s nothing like attention from directors to drive action. Today, we spend a lot of time thinking about what the bad guys want access to and how we can protect it. We also spend time on table-top exercises and crisis response plans so we can do our best to avoid the unforced errors that are so common after crises today. We know that it isn’t just about building higher walls and wider moats—it requires a holistic approach that involves detection, communication, rapid response and so much more. As our security experts say, this one is a never-ending journey that will require constant attention and resources.
Celia: Technology is the currency of the future, but knowing what is good for our company versus what will detract from our brand identity is an ongoing challenge. Texas Roadhouse is a people company first, in both the guest-facing experience and in operations. We want to stay relevant and continue to evolve, but we actively try to avoid technology that minimizes the role of our greatest asset, which is our people. It’s an area where we are very comfortable being followers, not leaders, so that we can learn from others’ experiences. In a roundabout way, we have the same philosophy when it comes to cyber-security. It definitely dominates our risk discussions these days and we are lucky to have the full support of the Board and the executive team in directing both financial and people resources to it. By doing everything we can to shore up our defenses, we also strive to be followers, not leaders, in the world of data breaches, so that we can learn from others’ experiences.
4) You are both attorneys at well-respected global companies. What has been the key to your success and how do you maintain a work-life balance?
Scott: I chalk up a good portion of my success to being in the right place at the right time, having a great team and working with great people at a great company. I realize that’s not something that one can really count on in all companies. As far as what I can control, my approach is to balance my role as a gate keeper, a problem solver and a business partner. I want all of my internal clients to see me, not as an obstacle that they have to go over or around, but as a facilitator who can help them achieve their goals and the company’s goals in a better or faster way. As anyone in-house will tell you, that involves getting to know the business so well that you could give an investor relations presentation. Once you’re that familiar with the business model and strategy, your legal advice is much more credible and valuable. As far as work-life balance, it doesn’t really exist for us yet. Celia has an incredible career that is very demanding and we have 3 great kids that mean everything to us. I’m convinced she has at least one clone because I don’t see how she juggles all of the expectations as a General Counsel, a mom and a role model. But somehow she does it and I just watch in awe.
Celia: The key to my success and the success of Texas Roadhouse, is great people who are passionate about our brand. With the right people and the right attitude, you can accomplish just about anything. Our strong company culture also generates long-term employees, which means that I am surrounded by people with institutional knowledge, trial-and-error wisdom, strong internal partnerships, and long term focus. To maintain balance, the key is also great people. I couldn’t do it without a supportive spouse who is also an involved parent, loving and forgiving children, a trusted child care provider, generous grandparents, and co-workers who respect family obligations. I actually prefer the term “fluidity” over “balance” because in a household with two working parents and three young kids, it all just sort of blends together. If we tried to shove the demands of our jobs or our family into prescribed periods of time, it wouldn’t work and something (or somebody) would lose out.
