Firehouse subs case study | Accounting homework help

Firehouse Subs is a 16-year-old restaurant chain based in Jacksonville, Fla. It emphasizes a firefighter theme and has more than 390 restaurants that serve specialty submarine sandwiches. 
THE CHALLENGE Facing declining sales throughout its system, the chain sought a new marketing strategy in the depths of the recession. 
THE BACKGROUND Robin and Chris Sorensen, brothers and former firefighters, opened their first Firehouse Subs restaurant in 1994. They emphasized their firefighter heritage by featuring red furnishings, colorful murals of firefighters in action and sandwiches like the hook-and-ladder sub. 
By 2001, the chain had grown to 30 company-owned restaurants in Florida and switched to a franchise model to expand into new markets. By early 2008, the company had expanded to 300 locations in 17 states, mostly in the South and Southeast. But then growth fizzled. 
That March, comparative sales for the entire system declined from the previous March. “In our entire history, we had never had a period like that when our entire system was running negative sales,” said Don Fox, thechief executive. “It was something completely foreign to us.” 
At the time, in addition to a 6 percent royalty, Firehouse Subs was collecting a 3 percent advertising fee from franchisees, including 2 percent for local advertising. As sales fell, the company’s executives grew dissatisfied with their advertising agency and started groping for a new strategy. But with no answers on hand, Robin Sorensen, the chairman, floated an unconventional suggestion: Why not give the local marketing dollars back to the stores? 
“Some people thought it was insane to give the money back,” Mr. Sorensen said. “We didn’t have an ego about who has this money. We want results. We could feel the onus on our shoulders. We’re the leadership team, and we’ve got to do something.” 
In a meeting with franchisees that June, the corporate leadership unveiled the new strategy: franchisees could keep the 2 percent of royalties that normally went to the local marketing fund. In return, franchisees were expected to do their own marketing. 
The company used the honor system, with no mechanism to verify that the local stores actually did any advertising. “It was something pretty radical,” Mr. Fox said. “I’m not aware of any franchiser ever taking that step, and I’ve been in the business 35 years.” 
But things only got worse. When the company stopped collecting marketing royalties in July 2008, comparative sales were off 3.4 percent from the previous July. By the end of 2008, system-wide sales were running 6 percent behind the previous year — far below the industry average, which was off 2 percent. “We didn’t feel our brand deserved this kind of disproportionate loss,” Mr. Fox said. 
In downturns, consumers often trade down to less expensive restaurants, and Firehouse Subs should have been positioned to capture some of these customers. For some reason, the chain was being bypassed. Its executives became convinced the problem stemmed from a lack of brand awareness. 
THE OPTIONS One option was to continue the local marketing efforts. But Firehouse had tried that for six months. Mr. Fox and Mr. Sorensen estimate that only about a third of their franchisees made meaningful efforts to market themselves. 
Another option was discounting, a common tactic to increase sales. But the leadership team quickly dismissed that. The chain’s gross margins were already modest compared with those of its competitors — the consequence, the leaders contended, of large portions, more expensive ingredients and low prices. Mr. Fox and Mr. Sorensen also rejected the idea of reducing portion sizes or using cheaper ingredients. 
So they turned to a new marketing campaign. “I knew our brand was stronger and deserved better than negative 6 percent,” Mr. Fox said. 
As the experiment with local advertising had failed, Firehouse Subs began looking for a new agency to handle the corporate account. It chose Zimmerman Advertising is based in Fort Lauderdale, Fla., and whose accounts include Papa John’s Pizza and Nissan. In its presentation, the agency promised an 8 percent increase in sales, a bold move in the grim economic climate of early 2009. 
But it would not come cheaply. To do a proper campaign, Zimmerman insisted that the company not only reclaim the 2 percent local marketing fee but double it, — asking franchisees to pay 4 percent. That would increase the combined royalty and advertising fees to 11 percent from the original 9 percent when most franchisees were struggling. 
At first, Mr. Sorensen balked. But when the ad agency laid out data showing that some competing chains were spending more on advertising per store, he began to change his mind. Subway franchisees, for example, pay an 8 percent royalty and a 4.5 percent advertising fee; Quiznos franchisees pay a 7 percent royalty and a 4 percent advertising fee, according to those companies. Firehouse hired Zimmerman to do a test campaign in three cities. 
Zimmerman developed a creative campaign and radio ads that emphasized the food and the portion sizes, but offered no discounts. The agency used the Sorensen brothers as spokesmen. The slogan: “Our way beats their way. If you don’t agree, it’s free.” 
In June 2009, the corporate executives made the case for “investment spending” at the annual meeting with franchisees. Firehouse and Zimmerman showed results from the three test markets. Augusta, Ga., Jacksonville, and Knoxville, Tenn., had all had double-digit sales increases after the test campaign. 
Franchisees were allowed to vote on whether to take part in the new marketing program in their markets. About two-thirds of franchisees agreed to pay the 4 percent marketing fee. The ad program ran only in markets where all franchisees agreed. Those who did not agree paid the 2 percent fee. 
With a new marketing war chest, Firehouse Subs and Zimmerman started an $8 million advertising campaign in September 2009. 

1. Why do you think the original strategy to give back advertising fees to its franchisee was not successful? Explain.
2. What do you perceive as the benefits of franchises working with advertising firms?
3. Was the increased advertising fee worth it to both Firehouse Subs and the franchisee?
4. With the increased funds for marketing, what marketing tools / media outlets would you utilize in your marketing campaign?

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