How Penn Station Keeps Operational Costs Low

Penn Station has been one of the best-kept secrets in franchising for a long time, and the brand is only beginning to tell its story. Founded by Jeff Osterfeld in 1985, Penn Station was voted the Best Sandwich in America through Nation’s Restaurant News in 2015. Besides having great food, however, the most compelling reason to own a Penn Station restaurant centers on an operational model designed and refined to reduce costs, streamline operations, and drive unit economics. 

Craig Dunaway, Penn Station’s minority owner and president since 1999, said the franchise model is oriented around unit-level economics, and the brand believes that is what makes them stand out from other franchising models. 

When a franchisee buys into any franchising concept, they’re buying into a system that should be proven over time. Dunaway indicated just because the model has been successful, however, it doesn’t guarantee success for the franchisee. “You’re paying for an operational system that should have been refined through many years of trial and error,” said Dunaway, “but it’s up to the franchisee to follow that model and execute it according to the operating manual provided by the franchisor.” 

“We only have one company-owned unit that is used as our test kitchen and training facility.  As a result, we are hypersensitive to a franchisee’s profitability,” Dunaway said. “If franchisees aren’t making money, they’ll not want to grow. If Penn Station franchisees aren’t growing, it limits the brand’s growth, since the company focuses on franchising and not building corporate restaurants.”

To this end, Penn Station’s model and primary focus are centered around the operating income statement. “We have a strong understanding of what each line item on P&L (a store’s profit-and-loss statement) should look like,” Dunaway said, “and we provide the franchise owners tools to help them identify waste. It’s a great system, and if a franchisee follows it, they’ve got a greater likelihood of success.”

Like most restaurants, the majority of Penn Station’s daily operational costs are in food and paper. Compared to other brands, Penn Station has been able to reduce those costs by streamlining their menu, providing cost control tools and negotiating vendor contracts at the corporate level so that store owners get the best possible pricing.

“Our menu is streamlined to reduce overhead,” said Dunaway. “We offer simple, appealing menu items, almost all of which share ingredients with other menu items. We use one type of bread, one cut of chicken, etcetera. There is very little food waste, and inventory is restocked quickly and inexpensively. We also negotiate supplier contracts with national name brand vendors, allowing owners to focus on staff and customers instead of shopping around for better suppliers.”

Because vendors are managed at the corporate level, Penn Station is adamant about using vendor rebates to benefit the franchises, so all vendor rebates are placed in a national advertising fund. 

“Rather than taking vendor rebates into corporate level profits, we contribute 100 percent of our rebates to an ad fund that benefits our entire system,” Dunaway said. “Last year we put about $2.4 million into that fund, which is more than franchisee contributions to the national advertising fund. Because we do not take rebates, our food and paper costs tend to be better than bigger competition.”

Those operational efficiencies have made Penn Station one of the most sought-after investment opportunities in its segment, and Dunaway said the brand’s development team is planning to take full advantage of that position by expanding rapidly, but carefully.

“Our growth projections are aggressively conservative,” Dunaway said. “This means we have the infrastructure to assist franchisees with opening 40 or 50 locations per year, but we aren’t going to go all over the country and grow simply for the sake of growth.  Our first priority is making sure each one is successful. We try to grow out in concentric circles; that helps with logistics, operational oversight, and brand recognition. We want our franchisees to be as successful as possible, so we dedicate our resources and structure our growth strategy accordingly."