Exec No Advocate of Burger Price Wars
While McDonald’s and Burger King battle to see who can sell burgers the cheapest, Santa Barbara-based CKE Restaurants Inc. -- the parent company of Carl’s Jr. -- is trying to distinguish itself as a premium alternative.
CKE, California’s largest publicly traded fast-food company, has chosen to stay out of the discount war that industry analysts say has sliced profits at the two market leaders.
Profit also has been hard to come by at CKE since its 1997 acquisition of the Hardee’s chain. The deal catapulted CKE from a regional player to a national one, tripling its number of restaurants to more than 3,000.
A long and painful overhaul of Hardee’s is nearing its end, and CKE has posted profit for five straight quarters. But its stock is hovering near a 52-week low (it closed Friday at $4.47), and is down 65% over the last nine months.
President and Chief Executive Andrew F. Puzder, 52, thinks a focus on quality and standout menu items, such as a $3.95 hamburger that’s advertised as the Six Dollar Burger, will turn things around. A securities lawyer by training, Puzder helped Carl’s Jr. founder Carl Karcher navigate through a personal financial crisis in the mid 1990s.
Puzder became president and CEO in 2000, and last year oversaw the acquisition of Green Burrito, whose holdings include the slightly more upscale La Salsa chain. Combined, the two have about 130 restaurants.
Question: Given the troubles at McDonald’s, Burger King and elsewhere in the fast-food segment, is this just a bad time to be in the burger business?
Answer: I think the pricing war that Burger King and McDonald’s are engaged in has dramatically hurt their profits. We know that when a segment is viewed as less profitable, that can be damaging to the segment as a whole, and I think this pricing war is an indication of that. I see this as a short-lived phenomenon. Our sales are up [at Carl’s Jr.] and we’re not discounting.
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Q: To what extent is the price cutting a symptom of a larger problem in the fast-food segment? Are you losing your customer base to the growing number of healthier alternatives?
A: I don’t see a decline in the desire for burgers. I think what happened was, McDonald’s, over the years, has gotten itself into a position where it has two kinds of customers: bottom feeders -- people looking for the best bargain -- and children. McDonald’s has chosen to cater to those individuals. The problem is, if you start selling something for 99 cents, then people assume it’s worth 99 cents. And those are the least-profitable customers. Burger King was for sale. During the sales process, management decided that the biggest way to generate sales was to cut prices. If McDonald’s and Burger King are giving away food, that’s where those people are going to go. That’s a trap that Burger King and McDonald’s have gotten into and at some point, one of them will have to try to get out.
At Carl’s Jr. and Hardee’s, we’re trying to lure in people who want a quality fast-food experience or a good-quality burger.
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Q: Is part of the issue that people want to eat something other than a burger and fries?
A: I don’t know if America’s losing its taste for burgers. America is maturing. You do have the baby boomers getting older. So you’re going to have an increase in people going to more casual dining restaurants. Fast food fits into the lifestyle of the young much more than it fits into the lifestyle of middle-agers. But if you look at the generation born since the 1980s, that’s one of the largest generations in history. So we’re not nervous about it.
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Q: Where has the effect of the price cutting been greatest, at Hardee’s or Carl’s?
A: It’s been greater on Hardee’s. Some, or maybe all of the drop [in same-store sales] is attributable to the burger wars. Hardee’s switched to premium products about a year ago. So you still have some of the old discount-sensitive customers coming into Hardee’s. So when the other brands are discounting, that does more damage to Hardee’s. We made the change because we wanted Hardee’s to be more profitable and to be able to distinguish itself from McDonald’s, Burger King, Jack in the Box ... and the best way to distinguish itself is through quality.
About a year ago, we had sales increases at Hardee’s. As sales increased, margins went down. So I made a decision in August of ’01 that both brands would remain focused on premium products. That was a conscious decision. The profit numbers at Hardee’s indicate that it was the right decision. While we have lost business to this burger war, it has been more than offset by the increase in margins. For the first quarter [of fiscal 2003], our margins were up 43%. For the second quarter they were up 33%. For the third quarter they were up 41%.
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Q: So much of the company’s attention has been focused on Hardee’s. It represents nearly 70% of the company’s outlets but only 7% of the operating income. Was it a good buy?
A: Hardee’s average unit volumes are lower than Carl’s. Carl’s averages about $1.15 million in gross sales [per restaurant], Hardee’s is about $785,000. One of our big drives is to increase sales at Hardee’s while maintaining margins. We knew when we bought Hardee’s five years ago that it was a troubled brand. And we have a plan to revive it. We have two test markets, in Peoria, Ill., and Knoxville, Tenn., where we’ve converted the entire market to a new format. We put in a new menu, still burger-focused, but we reduced the lunch and dinner menu significantly. The Hardee’s menu had become unwieldy. It was very difficult to run the restaurant. So we’ve introduced a menu that will increase sales, we believe, while maintaining our margins.
Another part of our new and improved Hardee’s is the switch to charbroilers. The great majority of restaurants will be converted by the end of this month. That’s something that’s been ongoing for years. It costs between $15,000 and $25,000 per restaurant. We’re installing new menu boards and order-confirmation boards at the drive-through.
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Q: You seem to know a lot about burgers for a lawyer. Did your lack of industry experience create any challenges for you as CEO?
A: My lack of restaurant experience drove me to spend more time in the restaurants than most CEOs. If you’re not in the restaurant, you don’t have any idea what’s going on. And the markets that I’ll go to, those are the ones where you start to see improvement. I think there’s a direct connection, because of the attention from the top.
When I’m making big decisions, I’m making them with a pretty good understanding of what’s going on in the restaurants. I’ve worked the fry station. I can make a Six Dollar Burger. The only thing I can’t work is the register. It’s too complicated.
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Q: You’ve said Carl’s Jr. and Hardee’s will remain “burger-focused.” But the company acquired two Mexican food brands, Green Burrito and La Salsa. Were you hedging your bet on burgers?
A: We just got those last year, in March of ’02. The company that owned Green Burrito also owned La Salsa, and I needed to get control of Green Burrito [which had outlets in some Carl’s Jr. restaurants before the acquisition]. That’s been a good combination. I could easily see putting one [a Green Burrito] in half of the Carl’s over [the next] four to five years.
We’re very bullish on La Salsa and we intend to grow it through franchise and company store development. Our plans are to build out in our core area -- Los Angeles, Orange County, San Diego, Sacramento and San Francisco -- and then put on a very intense franchising effort for the rest of the country. We weren’t buying [the two] with that in mind, a hedge, but you could say that. You don’t want all of your eggs in one basket.
