King Reignites Flame
For Ralph Cimmarusti, Burger King’s expected separation from its British-based parent won’t be soon enough.
As president of Glendale-based Cimm’s Inc., Cimmarusti is one of Burger King’s largest franchisees, with 110 restaurants in several states. But sales have fallen badly, from $175 million in 1999 to $150 million last year, and his company is in bankruptcy reorganization.
Like other Burger King operators, Cimmarusti blames his misfortunes largely on corporate problems under the stewardship of liquor giant Diageo: no new products, inconsistent advertising, discounting that cut into sales, problems with kids’ meal toys and a revolving door of faraway chief executives, who for the most part in recent years were neither accessible nor in tune with Burger King’s 2,180 franchisees in the U.S.
“Diageo buried us in the dungeon of a huge corporation and threw away the ... key,” said Julian Josephson, a San Diego-based franchisee and chairman of the Burger King National Franchisee Assn.
But now, Josephson and others see rays of hope as Diageo, the producer of Smirnoff vodka and other spirits, prepares to unload Burger King so it can focus on its drinks business. A buyer is expected to be announced this spring, and to prime the company for sale, Diageo has been busily sprucing up Burger King’s operations in recent months.
The nation’s No. 2 fast-food chain has added a slew of menu items--including a flame-broiled veggie burger--revamped its advertising campaign and hired dozens of consultants and trainers to help improve service, food quality and cleanliness.
McDonald’s Corp. too has been implementing a back-to-basics strategy, as big hamburger chains have been hurt by an expanding array of fresh fast-food offerings. The burger giant said last week that earnings would fall for the sixth consecutive quarter, partly because of fears of “mad-cow” disease in Japan. On Tuesday, Jack in the Box Inc. in San Diego announced that sales at restaurants open at least one year, a key industry measure, would fall slightly in the current quarter.
But Burger King’s slide has been particularly bad. The number of customers visiting the typical Burger King restaurant every day has fallen, on average, by 20% in the last five years. Its share of U.S. burger sales was down to 18.8% in 2000 from more than 20% just two years earlier. By comparison, McDonald’s share rose slightly to 43.1% in that two-year period, and Wendy’s International Inc., the No. 3 burger chain, rose to 12.7% from 11.5%, according to industry research firm Technomic Inc.
Burger King is “not seen as having good service or good food,” said Claes Fornell, a professor of marketing and management at the University of Michigan. “They’re kind of like McDonald’s, but their fries aren’t as good.”
Burger King executives concede that times have been hard, saying that one in five franchise operators are struggling financially. At least 11 franchisees, including Cimmarusti, are in bankruptcy proceedings.
But the worst appears over, and Burger King’s new chief executive, John Dasburg, who joined the company in April, has moved quickly to stop the bloodletting. Under a new management team assembled by the former head of Northwest Airlines Corp., Burger King reported that U.S. same-store sales increased 1% for the six months ended Dec. 31, contrasted with a 6% drop for the same period a year earlier. It was the first jump in three years.
Dasburg has set the ambitious goal of fattening the chain’s market share to 23% by the end of 2004. To win back customers and generate buzz, the company has begun introducing new products for the first time in three years, including a Chicken Whopper that debuts April 1.
In recent months, Burger King has made its shakes creamier and thicker by adding ice cream. It dressed up the Whopper with larger pieces of lettuce, thicker slices of tomatoes and pickles with a stronger dill flavor.
Mike Aldredge, 36, a Burger King regular for the last 15 years, has noticed the difference. The Costa Mesa resident, who eats at Burger King twice a week, said he liked the new and improved food so much he might easily double his visits.
“This is the best fast food I’ve ever had,” he said, clutching a double Whopper with cheese. “And it’s getting better.”
However, new products and variety might not be the sales drivers Burger King executives expect. McDonald’s much-hyped New Tastes Menu, which rotates new products year-round, has failed to attract hordes of new customers. In a recent national survey, Villa Park restaurant consultant Robert L. Sandelman found fast-food customers ranked cleanliness, taste and food flavor ahead of choice, which placed 11th out of 12 categories.
And to steal market share measurably, Burger King needs several “home-run” products, said restaurant consultant Randall Hiatt, president of Fessel International in Costa Mesa.
Burger King is by no means banking on new products alone to boost sales. For years, the chain aired fuzzy, forgettable TV spots, including one that featured sultry actress Kathleen Turner asking viewers if they “got the urge.”
Now, it has launched a back-to-basics campaign that highlights flame-broiling and made-to-order sandwiches, among Burger King’s strongest selling points, said Chris Clouser, the company’s new executive vice president of marketing.
In early March, Burger King unveiled a trio of TV ads, including one featuring Lakers basketball star Shaquille O’Neal that spotlights the 45th anniversary of the Whopper. Because the company has “one of the best brand equities in the fast-food business,” showcasing the sandwich makes good sense, said Allan Hickok, a U.S. Bancorp Piper Jaffray analyst in Minneapolis. Upcoming ads will feature new products.
But Burger King’s new products and ad campaign may not be enough to reverse the chain’s fortunes in the over-saturated burger market, said Bob Goldin, a Technomic executive vice president.
The company is “swimming against the tide,” he said. “McDonald’s, Wendy’s and Jack in the Box aren’t going to sit still. It’s tough out there.”
Demographic trends also are working against Burger King. The population of young people, fast-food’s core market, is growing at a much slower rate than the 45-to-65 age group, said Mark Sheridan, an analyst at Johnson Rice & Co. in New Orleans.
Judging from his past successes, though, CEO Dasburg seems up to the task of taking on the competition and turning the chain around, industry experts said.
In late 1990, he took over troubled Northwest, which little more than one year later teetered on the verge of bankruptcy. Dasburg averted insolvency by extracting wage concessions from unions and hammering out agreements with lenders, no small feat, said Michael Boyd of Boyd Group, an aviation consulting firm in Colorado. Under Dasburg’s leadership, Northwest dramatically improved its on-time performance and bumped fewer customers from flights. By the late 1990s, Northwest also had paid off its once-staggering debt.
As at Northwest, Dasburg’s efforts at Burger King have won kudos.
“Burger King is starting to roar,” said Credit Suisse First Boston analyst Janice L. Meyer. “Investors are apt to hear more from Burger King in the next few months than they have in the past several years.”
Burger King’s roots stretch back more than five decades.
James McLamore and David Edgerton founded it in 1954 in Miami, selling hamburgers for 18 cents and Whoppers for 37 cents. By the time Pillsbury Co. acquired the chain in 1967, it had grown to 274 restaurants. In 1988, Grand Metropolitan acquired Pillsbury, and nine years later Grand Met merged with Guinness to form Diageo.
Now, Diageo is about to shed the burger giant. The British beer-and-liquor concern could announce within three weeks a timetable and process for the split. Analysts believe a leveraged buyout, backed by Dasburg, is most likely because Burger King’s sluggish performance makes it unattractive for an initial public stock offering.
Texas Pacific Group, a buyout outfit, is the slight favorite to gobble up the burger maker, Morningstar analyst David Kathman said.
Dasburg has acknowledged holding talks with Texas Pacific, which holds a majority stake in such companies as J. Crew Group Inc. and America West Airlines.
Bain Capital, the Boston-based owner of Domino’s Pizza, and Blackstone Group also are reportedly in the running.
Executives from Texas Pacific, Bain and Blackstone declined to comment.
Whatever the method of separation, Dasburg said he planned to stick around.
“It is my intent that this will be my last job,” said Dasburg, 59. “I will stay here until either my health knocks me out or I get old.”
*
(BEGIN TEXT OF INFOBOX)
Hamburger Market
(text of infobox not included)
