Karcher Enterprises Fights Decline in Profits : New Carl’s Jr. Shops to Be Leaner

After trimming the prices of its hamburgers, Carl Karcher Enterprises now plans to trim the size and cost of future Carl’s Jr. restaurants as it struggles to reverse its declining profitability, company executives said Wednesday at the fast-food chain’s annual meeting.

The Anaheim company, which reported an 82% drop in first-quarter earnings last week, has retained a Midwest consulting firm to oversee a redesign that could save the company up to 20% on each of its new stores, said Carl Karcher, chairman and founder of the 44-year old firm.

“When you have adversity,” Karcher said, “it helps to develop character.” Karcher Enterprises reported net earnings of $811,000 for the first quarter of its 1986 fiscal year, down from $4.5 million a year earlier. Savings at the new stores could average $50,000 each, Karcher said in an interview following the company’s annual meeting at the Anaheim Marriott. “If you spread those savings around to 50 new stores next year, that’s a lot of money.” Typical Carl’s Jr. restaurants now cost $275,000 to $325,000.

Beside shrinking the size of the stores, the redesign would also “lighten and brighten” the insides of the Carl’s Jr. restaurants, said Bill Babcock, partner at Babcock & Schmid Associates Inc., the Bath, Ohio, consulting firm that is overseeing the redesign.

Babcock said Carl’s Jr. wants a new, distinctive design for its 442 restaurant exteriors, one that will be as recognizable to passing motorists as McDonald’s and Burger King. Karcher’s current stores are “too generic” in appearance, Babcock said in a telephone interview.

Beyond the redesign of its stores, Carl’s Jr. may also add a more modern look to its “Happy Star” logo, and it may eventually place its workers in snazzier uniforms, said Babcock, whose firm has consulted for Straw Hat, Pizza Hut and Ponderosa.

But above all, Carl Karcher will continue to “get back to basics,” company President Don Karcher, Carl Karcher’s younger brother, told an estimated 250 shareholders. “We are no longer talking about reaching a special niche. Our primary focus will be on our mainline products, our hamburgers,” he said.

In a bid to restore lost business, the company recently lowered prices on its entire hamburger line. Carl’s Jr. has saturated Southern California airwaves with commercials announcing the change. Early next month, a second wave of commercials will stress the quality of its lower-priced products, Don Karcher said.

Some competitors, however, still are underselling Carl’s Jr., which introduced a 49-cent hamburger as part of its price-cutting campaign.

Burger King, for example, sells 39-cent hamburgers at some outlets. But Carl’s Jr. was not interested in a “penny for penny war” with Burger King, said Robert W. Wisely, Karcher’s vice president of marketing. “Our feeling was that a hamburger for under a half-dollar was a motivating feature.”

Since the new campaign began May 9, not only are hamburger sales at Carl’s Jr. up 17%, sales of side orders like french fries and soft drinks are up 8%, said Wisely. But, he told stockholders, “We don’t expect to reverse every one of our problems by serving 49-cent hamburgers.”

The company’s price-dropping campaign is a complete reversal from the strategy it adopted two years ago, when it decided it could capture the untapped niche of upscale fast-food eaters. It introduced higher-priced items like dinner plates and gourmet hamburgers, but these failed to capture an audience.

“It proved to be too much, too fast,” said Don Karcher. “It blurred our image of what Carl Karcher was all about.” Karcher said company officials now believe they are seeing straight and that the company will continue to grow, “but with a sharper focus.”

Part of that growth will be through continued franchising, said John E. Shepanek, group vice president of development.

Until 1984, all Carl’s Jr. outlets were owned by Karcher Enterprises. But now, Shepanek said, “franchising is alive and well at Carl Karcher.” He said that 30 franchised restaurants have been opened in the last year while an additional 25--primarily in the Dallas-Fort Worth area--are expected to open this fiscal year.

By 1990, Don Karcher said, the company expects that 40% of its stores will be franchises. Until then, he added, there are still problems to overcome.