Jack in the Box Gets Jump on Rivals by Going Its Own Way

Once just another “hamburgers, French fries and milkshakes” chain strung out across America, Jack in the Box lost big in the early 1980s in its effort to “out-McDonald’s McDonald’s,” as Chairman Jack Goodall puts it.

Today, the approach of the chain of fast-food restaurants run by San Diego-based Foodmaker Inc. bears little resemblance. It has radically shifted its market focus, conceding the “children and family-oriented” fast-food market to McDonald’s.

The 900 Jack in the Box stores feature an eclectic array of items exemplified by the Fajita Pita, strips of beef served in a pita bread pouch that after its introduction in February grew to 11% of Jack in the Box sales before tapering off in recent months.

Other items ranging from shrimp salads to chicken sandwiches, in addition to hamburgers, are geared to an adult market with above average incomes and education levels. It is all a part of differentiating Jack in the Box from chains slugging it out in what Goodall calls the “hamburger wars.”

War with McDonald’s, which had $12.4 billion in systemwide sales in 1986, was clearly a no-win proposition, Goodall said. McDonald’s controls nearly one-quarter of the $51-billion fast-food industry.

In contrast to other chains, whose menu items sometimes seem etched in stone above the checkout counter, half of Jack in the Box’s 40 menu items have been introduced over the last five years. Currently, the company has 50 items in various stages of consumer research and testing, nine or 10 of which will ultimately find their way to the menu. The company was the first major fast-food chain to introduce a takeout salad six years ago.

In 1979, Goodall also decided to shift Jack in the Box’s market focus, making it a regional chain. He closed down or sold some 245 stores in the eastern United States while boosting Jack in the Box’s penetration of certain key western U.S. markets. The chain now has 90% of its stores in California, Arizona and Texas.

And although Foodmaker is far down the list among fast-food franchisers in terms of total outlets--McDonald’s has more than 7,000 U.S. outlets and Burger King, a unit of Pillsbury Co., has nearly 5,000--the chain founded in 1950 is No. 1 or No. 2 in its Los Angeles, San Diego, Dallas and Phoenix market areas in penetration measured in total outlets.

To get across the chain’s change in philosophy, Foodmaker ran television ads in the early 1980s that showed the Jack in the Box clown being blown up. The ad “signified that Jack in the Box was no longer a limited menu, fast-food restaurant catering to a cross-section of users,” said Goodall, who has been president of Foodmaker since 1972.

The change seems to be paying off. Now the nation’s 15th largest fast-food franchiser, Foodmaker is about to report a 40% increase in earnings and a 10% increase in sales at company-operated stores for the year ended Sept. 27. The revenue growth is tops in the industry, company officials say.

Bucks Industry Trend

At a time when other chains are standing pat or regrouping, Foodmaker plans an aggressive expansion program over the next five years that will add 400 new stores to the 900 Jack in the Boxes already open, Goodall said.

The apparent success of Foodmaker, which went public in February after breaking away from former parent Ralston Purina in 1985 through a leveraged buyout, is, several analysts say, one of the few bright rays of light in an otherwise gloomy fast-food landscape.

Most major markets are over-saturated with fast-food chains which, even so, continue to add outlets at a faster rate than the growth in fast-food spending.

Increased competition has caused some chains, including Church’s Fried Chicken and Wendy’s International, to lose customers in recent months. As a result, fast-food stocks generally have lagged behind the rest of the market over the past two years.

Perhaps even more alarming than market saturation, industry observers say, are changes in consumer eating habits that center more and more around home entertainment, specifically VCRs, and microwave ovens. Moreover, consumer spending has flattened out in recent months and will continue to moderate over the next year or two, an inhibiting factor for fast-food industry growth, several analysts believe.

Rivals’ Problems Cited

Foodmaker stock has suffered along with others in its group. Since the company went public in February at $13.50 per share, Foodmaker stock has since dropped, closing off 25 cents a share Monday to $11.625.

To explain Foodmaker’s poor stock performance, Goodall points to the problems of Church’s and Wendy’s, two other publicly owned fast-food companies that are widely owned by institutional investors. Church’s and Wendy’s, which both have reported significant decreases in year-to-date revenue, have “dragged down” other fast-food stocks, he said.

Other analysts point to Foodmaker’s high debt load and exposure in the depressed Texas economy to explain the stock’s poor performance.

Analysts tend to see the problems of Foodmaker’s stock as part of a larger industrywide conditions, especially over-saturation. According to Morgan Stanley & Co. Vice President Ram Capoor, there were 800 people for each fast-food franchise outlet in 1979. As of the summer of 1987, there were only 685 people for each outlet, he said, an example of the increasingly crowded marketplace.

“All fast-food stocks are languishing in a malaise that afflicts all of them and that is that the outlook is for slower growth in consumer spending over the next two years,” Capoor said. “The straightforward logic is that if consumers don’t have as much money to spend, how will fast-food restaurants be able to grow their sales and profits?”

Increased Competition

Jay Freedman, an analyst with Kidder, Peabody & Co. in New York, described the economics for the fast-food industry as “very negative.” Major chains continue to expand at a 9% annual clip, Freedman said, while demand for fast-food grows at between 2% and 3% per year.

Tom Strenk, managing editor of New York-based Restaurant Business magazine, said fast-food chains are also facing increased competition from home delivery chains such as Domino’s Pizza as well as from the growing number of grocery stores and restaurants that offer take-home food.

“That McDonald’s is opening sites on military bases and in hospitals is, I think, an example of how these chains are stretching to grow,” Strenk said.

Peter Romeo, a staff writer with Nation’s Restaurant Business magazine in New York, said many chains are experimenting by “clustering” their outlets with other fast-food stores. Dairy Queen, for example, is opening up sites in conjunction with Karmel Korn and Orange Julius locations. 7-Eleven convenience stores are teaming up with Church’s and Dunkin’ Donuts, Romeo said. Burger King has begun franchising mobile hamburger stands.

FAST-FOOD GIANTS Systemwide sales for the fast-food chains’ fiscal years ended in 1986, followed by market share based on 1986 franchised restaurant sales of $51.5 billion. (Sales numbers include total store sales, not just franchise royalties and revenues as reported by franchisor.)

1986 sales Market Chain in billions share McDonald’s $12.4 24.1% Burger King 4.5 8.7 Kentucky Fried Chicken 3.5 6 Wendy’s 2.7 5.2 Hardee’s 2.7 5.2 Pizza Hut 2.6 5.0 Dairy Queen 1.7 3.3 Domino’s Pizza 1.5 2.9 Taco Bell 1.4 2.6 Big Boy 0.96 1.8 Arby’s 0.90 1.8 Long John Silver’s 0.70 Dunkin’ Donuts 0.65 1.3 Shoney’s 0.64 1.2 Jack in the Box (Foodmaker) 0.59 Other 14.1 27.6

Source: Restaurant Business magazine