At the end of 2002, Burger King, the second largest fast food hamburger chain in the world, was in financial trouble. Sales were dropping and its franchisees were confronted with heavy debts. One after another, its franchisees including its largest independent franchisee, AmeriKing, filed for bankruptcy protection. Burger King US’ sales in 2003 dropped to US$7. 9 billion from US$8. 3 billion the previous year. Burger King’s introduction of salad and chicken baguette sandwiches in its menu as a response to fight obesity made no significant impact on sales.
The CEO of Burger King, Brad Blum was then assigned to find ways to restore Burger King’s market position and image. The key concerns were the financial situation, the marketing strategies associated with the menu, and the promotion of best practices in management.
In 1954, James McLamore and David Edgerton founded Burger King Corporation (BKC) in Miami. It started with a simple meal concept where families were served reasonably-priced broiled burgers. A drive-in facility made the eating-out experience highly convenient. Burger King also introduced dining rooms.
Back then, it was the first, fast food outlet that offered such luxury. Three years later, Burger King introduced the “Whopper” burger in This case was written entirely from published sources and was prepared as a basis for class discussion. It is not in any way intended to illustrate either effective or ineffective handling of a managerial situation.
The author would like to thank New Fong Yen, a UKM MBA student, for her assistance in preparing this case and Encik Ahmad Ikram Abdullah (a Fellow at Institute of Strategic and International Studies Malaysia) for editing this case. 95 Proceedings of …Seminar 2009: Case Studies in Malaysia ts menu. As the name implies, Whopper is a big-sized burger with sauce, cheese, lettuce, pickles and tomatoes specially prepared for those with a huge appetite. The introduction of Whopper was very successful and it soon became Burger King’s flagship product.
BURGER KING’S FRANCHISE CONCEPT
To speed up expansion, Burger King actively pursued the franchise business model. However, there was a difference. Its franchisees both owned and managed their outlets independently. The two founders of Burger King took their initial payments and left their franchisees pretty much on their own.
In addition, Burger King sold exclusive territorial rights to investors and large business operators. These large business operators bought the territorial rights, build as many stores as they could possibly wish and even sold part of the territorial rights to other investors. These other investors in turn, diversified the business offerings in their restaurants. It was apparent that with this approach, McLamore and Edgerton had either very little or totally no control over the franchisees’ business operations. Nevertheless, the system was showing good results and business expanded rapidly.
With this unique franchise method, Burger King was heavily dependent on its franchisees. In fact, franchisees represented more than 10,000 of Burger King’s almost 11,000 restaurants worldwide and contributed a substantial portion towards the chain’s performance. Burger King’s franchisees owned the stores instead of Burger King. Also, with this highly independent structure, it is almost impossible to maintain consistent quality and service standards.
BURGER KING MANAGEMENT
Burger King began with five restaurants in Florida. It was not long before he number increased with more restaurants being opened nationwide. In 1967 however, James McLamore and David Edgerton decided to sell the Burger King Company to Pillsbury, a home baking food giant. At that time Burger King was fast growing into becoming the third largest fast-food chain in the US. McDonald’s lead as the industry leader was getting thin. Burger King: A Whopping Strategy En Route to Recovery 96 The deal included sale of 274 stores and was worth US$18 million. It marked the beginning of more changes in Burger King’s history as the company saw itself bought and sold to many different owners.
In 1989, Grand Metropolitan PLC bought Pillsbury for US$66 a share or approximately US$5. 7 billion. As a result, Pillsbury became part of Grand Metropolitan’s worldwide system of food and retailing business. In 1997, Grand Met merged with Guinness to create Diageo PLC . Diageo allowed some Burger King operators to manage more than 200 restaurants.
In November 2002, Burger King fast food chain under Diageo was purchased by a management buy-out team composed of Texas Pacific Group (TPG), Bain Capital Partners and Goldman Sachs Capital Partners for US$ 2. 6 billion (GBP1. 45 billion), resulting in another major management change within the corporate structure. However, Burger King continued to be managed by its existing Chairman and Chief Executive John Dasburg with some major changes made in its marketing division.
Nevertheless, this frequent and long history of management change resulted in a tense and fragile relationship between management and the chain’s operators. It also caused extreme difficulty in making strategic adjustments in response to changes in the highly competitive fast-food industry. There was a great tendency for Burger King to lose track of its strategic direction.
Burger King’s operating profit dropped US$27 million in a financial year ending June 2002. The situation deteriorated when AmeriKing, one of Burger King’s largest franchisee filed for bankruptcy in the same year. Later in December 2002, AmeriKing, which operated 329 restaurants, was declared bankrupt. AmeriKing had about US$223 million in assets against US$291 million in debt. One plausible explanation, according to Forbes, as to why these franchisees failed can be traced back to the late 1990s.
Many of these franchisees took too much debt to capitalize on the low interest rates. However, when sales target failed to be met and as a result of declining national and local sales, 28 Burger King outlets in Kansas and Nebraska filed for bankruptcy. The declaration of bankruptcy was taken in order to reorganize the US$30 million worth of debts and to secure assets worth up to US$15 million. As a result of bankruptcy filing, the Kansas and Nebraska Burger King outlets stopped making payments in February 2003. This caused further decline in sales.
Later, eight Burger King’s restaurants in Seattle faced possible closure for the same reasons. Between 2001 and 2002, Burger King’s financial condition and the failure of its franchisees in several states contributed a negative impact towards all other Burger King’s franchise owners. The number of Burger King’s restaurants fell from 8,306 in 2001 to 8,146 in 2002. Burger King had to craft new strategies to check the declining trend.
MENU, STORE IMAGE AND PROMOTION
In terms of menu initiative, Burger King launched a low-fat line of chicken baguette sandwiches in 2002 which cost the company millions of dollars. Unfortunately, this new product line failed to stimulate sales. Whopper was then introduced and studies later showed that Whopper, which competed head to head with McDonald’s Big Mac, was better preferred by customers. However, the quality of Whopper was inconsistent across different markets and franchisees. This was illustrated in a statement by Alan Vituli, Chairman and Chief Executive of New York-based Canon: “2003 was a year of great opportunity in the quick-service hamburger restaurant industry.
Many of our competitors were successful in esponding to these opportunities; unfortunately, the performance of our Burger King restaurants suffered during 2003 from the ineffectiveness of a number of unsuccessful systems-wide marketing and product initiatives”. Company issues continued to pose a threat to business performance. They included dirty stores, poor service and menu missteps. Top company executives admitted that it was in fact a tougher job than expected to fix a dull menu, dirty stores, and debt-laden franchisees at Burger King’s 11,300 restaurants. Richard W.
Boyce who was a Texas Pacific Partner and Chairman of Miami-based Burger King said, “When you acquire something in a downward trajectory, it doesn’t bounce immediately. ” Alvaro M. Cabrera, the Chairman of Burger King: A Whopping Strategy En Route to Recovery 98 Miami-based Heartland Corp. , who had been operating Burger King’s franchise for 18 years, echoed the sentiment by identifying debt and poor store location as restricting factors. During the past decade, Burger King engaged many advertising agencies but never got the right match between its products and advertising message.
For example, in targeting obesity-concerned and health-conscious consumers, Burger King offered salad and chicken baguette sandwiches. The impact on sales was minimal. On the other hand, competitors such as McDonald’s and Wendy’s offered hamburgers and fried chicken, and their sales increased. Another advertising issue was the lack of branding initiatives. Although Burger King spend more on promotional giveaways such as toys and free drinks, the branding component seemed to be absent from Burger King’s advertising campaign.
Despite favourable across the board industry performance, Burger King US sales in 2003 dropped to US$7. 9 billion from US$8. 3 billion in 2002. Industry leader, McDonald’s, recorded increased sales to US$22. 1 billion in 2003 from US$20. 3 billion in 2002 while sales by Wendy’s rose to US$7. 4 billion from US$6. 8 billion during the same period. McDonald’s and Wendy’s have continued to grow. Industry analysts believed that Wendy’s remarkable growth could even outpace Burger King’s and might even edge Burger King from the number two position in the US. Wendy’s had 6,128 outlets in the US at the end of 2003 and each store average annual sales was US$1. 294 million, 30% more than Burger King’s.
THE ROAD TO RECOVERY
Something needed to be done to check against the decline. Burger King’s latest owners, Texas Pacific Group (TPG), Bain Capital Partners and Goldman Sachs Capital Partners invested more than US$100 million in an effort to turn around the company. This included redesigning store image, restructuring the finances, segmentation and management of the menu offerings as well as a more effective marketing and communications campaign.
STORE IMAGE REDESIGN
Blum, the CEO of Burger King had dirty or poorly managed stores temporarily closed. New customer-service standards were introduced. A Dallas store was the first to cease operations in February 2004 followed by a Michigan store in March 2004. Burger King needed to close 1,000 of the chain’s 7,727 outlets in the U. S. over the next 18 months.
A makeover of its 11,000 stores was put in place. A total of 600 stores got new signage and 200 stores were built with a completely new store design. Using new-age rchitecture, the stores were punctuated with bright colours. In addition, customized video games and indoor play areas were also placed in these stores. As for drive-through design, the stores were equipped with digital sound and outdoor screen to show customers their order. Clear bags were used in packaging to make it more attractive and to allow customers to see the items they purchased. However, the re-branding exercise through enhanced store image caused significant financial implication. According to estimates, a complete store redesign costs USD 250,000 to USD 750,000 per store.
With the store redesign effort, company strategists expected However, the recorded figures showed an average sales increase in sales of up to 30%. increase of between 12% and 17% only. Some stores recorded a 35% sales increase but they were few in number. From Burger King’s view, the new look would stand out amongst its competitors. Consumers would be inclined to ignore Burger King’s competitors and would be attracted to patronize its stores. Another business strategy to further boost sales was the decision on May 2008 to extend business hours beyond 2 a. m. , Thursdays through Saturdays.
This strategy is a direct attack on McDonald’s stores which had already extended their business hours to late nights, resulting in improved sales of 9% to USD22. 79 billion in 2007 for McDonald’s.
In response to the debt problem faced by its franchisees, Burger King set up the Franchise Financial Restructuring Program. In August 2003, this program was widely accepted and about 2,540 restaurants participated. The company wrote off about US$106 million in debts of its US operations from December 2002 to June 2005. This amount consists of uncollectible Burger King: A Whopping Strategy En Route to Recovery 00 royalties, advertising and rent. Blum hired Trinity Capital, a Los Angeles-based franchiseturnaround specialist to assist its ailing franchise operators and negotiated with their lenders and restructured its debt.
SEGMENTATION AND MENU MANAGEMENT
More new and strategic initiatives were introduced taking into consideration findings based on market research. From past experiences, Burger King realized that consumers would not look at fastfood chains for health food. The company discovered that fast-food eaters made up of only 18% of the population, which accounted for almost half of the company’s profits.
Through its market research findings, it was found that the best customer group to target were men aged 18 to 34. Based on the findings also, the company further segmentized the market by creating another customer sub-group profile called “superfan”. These were people who patronized Burger King five times a month and ate fast food 16 times a month. The company then planned the introduction of more menu offerings such as extra spicy chicken burgers and coffee with 40% more caffeine that targeted these segments.
An ad featuring a creepy, cool and hype character known as “The King”, was developed. The King” was portrayed together with large sandwiches like Burger King’s Enormous Omelette. This campaign managed to boost sales by 9% in the second half of 2004 and the first quarter of 2005.
In terms of product pricing, Burger King’s strategy was more back to basics. focused on its flagship product – the Whopper. It In 2004, Blum introduced several new premium products – tender-crisp chicken sandwich, fire-grilled chicken salad and hefty Angus steak burger. These new products were aimed at families and Burger King fans, especially blacks and Hispanics.
In 2005, while McDonald’s offered salad for diet and health buffs, Burger King did the opposite – it introduced the “Enormous Omelette Sandwich” which was what people love in a breakfast sandwich. It had twice the size and twice the satisfaction. This was consistent and ran well with its promotional slogan “Have it your way”. Consequently, breakfast sales increased by 20% as Burger King cater to the hardcore fast-food addicts. Furthermore, in response to McDonald’s Dollar Menu and Wendy’s International Super Value Menu, 101 Proceedings of …Seminar 2009: Case Studies in Malaysia Burger King introduced its own Value Menu in 2006. These steps of improved menu offerings provided hope for recovery.
Advertising expenditure was part of a companies’ effort in marketing. Realizing the weakness of its promotional campaign, Blum designed a new strategic marketing plan in 2003 that emphasized quality in place of discounts or other sales promotion. This strategy included a long-term branding campaign that included a 30 and 60-second radio and TV commercial as well as an increase in the usage of network TV as a media of communications.
In 2004, a new campaign re-introducing Burger King’s “Have it Your Way” slogan that was initiated in the 1970s, was said to have contributed to store sales growth of 4. 4%. It also introduced the “made-to-order challenge”, where half of all sandwiches ordered were customized. In addition to extending the operation hours, Burger King increased its breakfast offerings and kids’ meal promotion. “The King” too was not spared. It had a page on MySpace. com, the popular social networking web site. This marked the company’s shift to online advertising aiming at a younger audience.
Burger King’s value menu and the Microsoft Xbox 360 video game promotion spurred sales in the United States. The strategy to co-brand Burger King with Microsoft was very successful. Blum said that more than 3. 2 million Burger King-branded Xbox 360 games were sold at USD3. 99 each.
In 2004, Burger King started to show a modest turnaround. Burger King recorded a notable upturn in sales. Store sales from February to March 2004 increased more than 4%, compared to the same period a year ago . In the last half of 2005, Burger King’s total revenue increased 5% to USD1. 2 billion, income from operations increased 29% to USD142 million and net income increased 9% to USD49 million.
The company managed to achieve total sales of US$1. 94 billion and a profit of US$47 million in fiscal year ended June 30, 2005. Average sales per restaurant were up 11% for eight consecutive quarters. According to the recorded nine months ending March 2006, Burger King reported a net income of Burger King: A Whopping Strategy En Route to Recovery 102 USD37 million on sales of USD1. 5 billion. Even though sales in 2006 increased compared to 2005 sales of USD1. billion, the net income was slightly lower compared to the same period in 2005 which was USD45 million. In terms of cost management, the company was also building smaller restaurants to reduce construction costs by about 25%.
Burger King Corporation was listed on the New York Stock Exchange under the symbol “BKC” on May 18, 2006. According to Wall Street analysts, on average, it was expected that this newly public company will earn 26 cents a share. In November 2006, Burger King’s stock traded around USD17 per share. A year later, the stock traded close to USD28 per share.
J. P. Morgan analyst contended that Burger King’s favourable earnings record was also derived from a lower tax rate and a drop in food and paper costs.
Burger King, the world’s No. 2 hamburger chain planned to introduce several new menu offerings that include two specialty Whoppers, a Wrap, Smoothies and even macaroni and cheese for children. The company also planned to open more new restaurants (300 more restaurant in 2008 and redesign existing ones). Cooking facilities will be improved, employing a new broiler that cooks better burgers.
It would continue running the advertisements with pop culture, promotional campaigns with movies, video games and sports. This followed the huge success the company had with advertising blitzes that featured The Simpsons, Transformers, Spider-Man 3 and the Xbox game system. These co-branding strategies were aimed at boosting Burger King as a fresh and happening brand in the minds of fast food consumers. The company showed strong commitment as it confidently marches along to meet its financial and development objectives for the year.
It planned to adopt proactive portfolio management, including the closure of under-performing enfranchising and acquisitions. In the fourth quarter of 2008, the company launched the Steakhouse Burger platform which offered customers a premium steak dinner.