Why Penn Stations President’s Focus Starts with Franchisee’s Bottom Line

1851: How’d you get your start in franchising?

Dunaway: I was playing basketball at a small school in Southern Indiana. A buddy of mine played baseball, and we’d study accounting together in the athletics study hall and talk about how we were going to make our fortunes. We went our separate ways after college, then he joined the accounting firm where I worked.  A mutual friend who was thinking of becoming a franchisee for what is now a leading pizza franchise asked him to put financial projections together. He told me we needed to quit dreaming of real estate and start dreaming of franchising. We decided to invest in that pizza franchise for ourselves. We were brand new to the game but somehow made money in spite of ourselves! Completely inexperienced, I had a knack for managing people and numbers, and my buddy ran operations. We were able to make money while learning about the industry and eventually worked up to 11 locations in the Cincinnati market.

1851: What brought you to Penn Station?

Dunaway: I was a partner at the accounting firm in Louisville, but my buddy and I were spending every weekend in Cincinnati visiting our pizza locations. That’s where we discovered Penn Station. We’d met the founder, Jeff Osterfeld, who was interested in opening locations in Louisville, so it seemed like a perfect opportunity for all of us. Because the commute between Louisville and Cincinnati was hard on my partner, who was more focused on operations, we decided to sell the pizza restaurants and use the proceeds to invest in Penn Station instead. Over the course of two years, we opened five Penn Station restaurants in the Louisville area.  Eventually, I bought out my partner and was asked to join Penn Station’s Franchisee Advisory Council. Where most franchisees talked operations, I talked numbers. Jeff Osterfeld, our founder, apparently liked what he heard and asked me to join the system as President. When I found Penn Station, I realized I had an opportunity to try something different, and if I didn’t seize it, I’d be ignoring the advice I’d always given to clients and employees, which is to avoid getting stuck in my comfort zone. So I stepped down as partner at the accounting firm. That was in August of 1999, and I’ve never looked back!

1851: What makes Penn Station special?

Dunaway: We are hypersensitive to a franchisee’s profitability. We’re able to give franchisees the tools necessary for them to monitor and track their costs and ultimate profits. We know what every line item on P&L should look like, and we can help them identify waste. The restaurants do not run themselves, and the industry is difficult.  However, it’s a great system, and if a franchisee follows it, they’ve got a strong shot at success.

Our operations are streamlined and entirely scalable. Everything is clean and simple. Our menu features a few simple products used in a number of different menu items. We have one type of bread, one type and cut of chicken, etc. So the simplicity behind our operations makes it less difficult for a new franchisee get up and running.

In terms of operating costs, we have exceptionally low food and paper costs compared with our competition.  We negotiate all our supplier contracts, do not take rebates from vendors into our profits and we put any rebate money we do receive into a national advertising fund that benefits all franchisees. Last year we put about $2.4 million into an ad fund, compared to franchisee contributions of just under $1.9 million. We believe that is unheard of with most franchisors, who often pocket millions of dollars off the purchases of franchisees.  That’s a significant part of our national marketing budget, and it does a lot for top-of-mind recognition in every market. Lastly, we only have one company-owned unit, so really our only job is to help franchisees maximize their ROI.

Our royalty structure is also based on a sliding scale instead of a flat percentage. For franchisees making $30,000 or less a month, our royalty is reduced from 4% to 0%, and that savings is invested by franchisees directly into local marketing to support their restaurants.

1851: What’s Penn Station’s consumer point of differentiation?

Dunaway: Penn Station can match any top brand in terms of the quality and satisfaction of its cold sandwiches, but no other brand can match the quality and satisfaction of our hot sandwiches. Hot sandwiches make up the bulk of our 14-sandwich menu. Hot sandwiches served with a hot side, our delicious hand cut fries, make the meal hearty enough for dinner, and in many locations over half of franchisees’ sales come from the dinner crowd.   In essence, we’re not simply viewed as a sandwich shop, which primarily serves lunch, but a full meal that can accommodate both the lunch and dinner crowds. 

1851: How does Penn Station support its franchisees operationally? 

Dunaway: Most franchisors have area representatives who evaluate the operations of their franchisees.  Often, an area rep. can evaluate over 100 individual restaurants spread across many states.  In our case, we have 15 representatives that evaluate and consult with slightly more than 300 locations.  We also have two regional franchise consultants (RFC’s) to further support and consult with those same franchisees. Thus, Penn Station representatives have on average only about 19 restaurants, and this allows them to be in each store every 4 to 6 weeks, often as much as 10 times per year.  Because they consult, they can offer advice on best practices, but also share with the owners deficiencies between their overall operations and the standards as laid out in our Operation’s Manual.    

1851: What kind of growth does Penn Station project for the near future?

Dunaway: Our growth projections are aggressive. We have the infrastructure to open about 40–50 locations a year, but our first priority is making sure each one is successful. We try to grow out in concentric circles; that helps with logistics, operations, and brand recognition. We want our franchisees to be as successful as possible, so we dedicate our resources and structure our growth strategy accordingly.