Burger King Corporation

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Burger King Corporation

7360 N. Kendall Drive
Miami, Florida 33156
U.S.A.
(305) 596-7011

Wholly-owned subsidiary of Grand Metropolitan, PLC
Incorporated: 1954
Employees: 250,000
Sales: $2.8 billion

Miami entrepreneurs James McLamore and David Edgerton founded Burger King Corporation in 1954. Five years later, they were ready to expand their five Florida Burger Kings into a nationwide chain. By the time they sold their company to Pillsbury in 1967, Burger King had become the third largest fast-food chain in the country and was on its way to second place, after industry leader McDonald’s.

The story of Burger King’s growth is the story of how franchising and advertising developed the fast-food industry. McLamore and Edgerton began in 1954 with a simple concept: to attract the burgeoning numbers of postwar baby boom families with reasonably-priced, broiled burgers served quickly. The idea was not unique; drive-ins offering cheap fast food were springing up all across America in the early 1950s. 1954, in fact, was the same year Ray Kroc made his deal with the McDonald brothers, whose original southern California drive-in started the McDonald’s empire.

McLamore and Edgerton tried to give their Burger King restaurants a special edge. Burger King became the first chain to offer dining rooms (albeit uncomfortable plastic ones). In 1957 they expanded their menu with the Whopper, a burger with sauce, cheese, lettuce, pickles, and tomato, for big appetites. But prices were kept low: a hamburger cost 18 cents and the Whopper 37 cents. (McDonald’s burgers at the same time, however, cost only 15 cents.) In 1958 they took advantage of an increasingly popular medium, television: the first Burger King television ad appeared on Miami’s VHF station that year.

By 1959 McLamore and Edgerton were ready to expand beyond Florida, and franchising seemed to be the best way to take their concept to a broader market. Franchising was booming in the late 1950s because it allowed companies to expand with minimal investment. Like many other franchisers, McLamore and Edgerton attracted their investors by selling exclusive rights to large territories throughout the country. The buyers of these territorial rights, many of them large businesses themselves, could do what they wanted to in their territory: buy land, build as many stores as they liked, sell part of the territory to other investors, or diversify. McLamore and Edgerton took their initial payments (which varied with the territory) and their cut (as little as one percent of sales) and left their franchisees pretty much on their own.

The system worked well, allowing Burger King to expand rapidly. By 1967, when the partners decided to sell the company they had founded, the chain included 274 stores and was worth $18 million to its buyer, prepared-foods giant Pillsbury.

The system also worked well for the franchisees. Under the early Burger King system, some of the company’s large investors expanded at a rate that rivaled that of the parent company.

Where this loosely knit franchising system failed, however, was in providing a consistent company image. Because McLamore and Edgerton didn’t check on their franchises and used only a small field staff for franchise support, the chain was noted for inconsistency in both food and service from franchise to franchise, a major flaw in a chain that aimed to attract customers by assuring them of what to expect in every Burger King they visited.

It was up to the new owner, Pillsbury, to crack down on franchise owners. But some large franchisees thought they could run Burger King themselves better then a packaged-goods company could. Wealthy Louisianans Billy and Jimmy Trotter bought their first Burger King outlet in 1963. By 1969, they controlled almost two dozen Burger King restaurants and went public under the name Self Service Restaurants Inc. In 1970, when the franchisees in control of the lucrative Chicago market decided to sell out, Billy Trotter flew to Chicago in a snowstorm to buy the territory for $8 million. By the time Pillsbury executives got to town the next day, they found they had been bested by their own franchisee.

The Trotters didn’t stop there. By 1971 they owned 351 stores with sales of $32 million. They bought out two steak house chains (taking the name of one of them, Chart House), established their own training and inspection programs, and decided on their own food suppliers. By 1972 they were ready to take over altogether; the Trotters made Pillsbury a $100 million offer for Burger King. When that initiative failed, they suggested that both Pillsbury and Chart House spin off their Burger King holdings into a separate company. When that also failed, they continued to acquire Burger King piecemeal, buying nine stores in Boston and 13 in Houston.

But Pillsbury wasn’t about to allow Chart House to gain other valuable territories. They sued the Boston franchisees who had sold to Chart House, citing Pillsbury’s contractual right of first refusal to any sale. Eventually Chart House compromised, agreeing to give up its Boston holdings in exchange for the right to keep its Houston properties.

Pillsbury’s suit was proof of a new management attitude that involved more central control over powerful franchisees. But it wasn’t until Pillsbury brought in a hard-hitting executive from McDonald’s that Burger King began to exert real control over its franchisees. Donald Smith was third in line for the top spot at McDonald’s when Pillsbury lured him away in 1977 with a promises of full autonomy in the top position at Burger King. Smith used it to “McDonaldize” the company, a process that was especially felt among the franchise holders.

While Burger King had grown by selling wide territorial rights, McDonald’s had taken a different approach from the very beginning, leasing stores to franchisees and demanding a high degree of uniformity in return. When Smith came on board at Burger King in 1977, the company owned only 34% of the land and buildings in which its products were sold. Land ownership is advantageous because land is an appreciating asset and a source of tax deductions, but more important because it gives the parent company a landlord’s power over recalcitrant franchisees.

Smith began by introducing a more demanding franchise contract. Awarded only to individuals, not partnerships or companies, it stipulated that franchisees may not own other restaurants and must live within an hour’s drive of their franchise, effectively stopping franchisees from getting too big. He also created ten regional offices to manage franchises.

Smith’s new franchise regulations were soon put to the test. Barry W. Florescue, chairman of Horn & Hardart, the creator of New York City’s famous Automat restaurants, had recognized that nostalgia alone couldn’t keep the original fast-food outlets alive and had decided to turn them into Burger Kings. Smith limited Florescue to building four new stores a year in New York and insisted that he could not expand elsewhere. When Florescue bought eight units in California anyway, Smith sued successfully. Florescue then signed with Arby’s, and Smith again effectively asserted Burger King’s control in court, based on the franchise contract. His strong response to the upstart franchisee kept Horn & Hardart from becoming too strong a force within Burger King.

Increasing control over franchisees was not the only change Pillsbury instituted at Burger King during the 1970s. Like many other chains, Burger King began to expand abroad early in the decade. Fast food and franchising were unfamiliar outside the United States, making international expansion a challenge. Burger King’s international operations never became as profitable as anticipated, but within a decade the company was represented in 30 foreign countries.

At home the company focused on attracting new customers. In 1974 management required franchisees to use the “hospitality system,” or multiple lines, to speed up service. In 1975 Burger King reintroduced drive-through windows. While original stands had offered this convenience, it had gradually been eliminated as Burger King restaurants added dining rooms. Drive-throughs proved to be a profitable element, accounting for 60% of fast food sales throughout the industry by 1987.

Smith also revamped the corporate structure, replacing eight of ten managers with McDonald’s people. To attack Burger King’s inconsistency problem, Smith mandated a yearly two-day check of each franchise and frequent unscheduled visits. He also decided that the company should own its outlets whenever possible, and by 1979 had brought the company’s share of outlet ownership from 34% to 42%.

Smith also turned his hand to the food served in his restaurants. He introduced the french fry technique that produced the more popular McDonald’s-type fry. In 1978, primarily in response to the appeal that newcomer Wendy’s had for adults, he introduced specialty sandwiches—fish, chicken, ham and cheese, and steak—to increase Burger King’s dinner trade. Offering the broadest menu in fast food did the trick, boosting traffic 15%. A more radical expansion for the Burger King menu came next. After McDonald’s proved that breakfast could be a profitable fast-food addition (offering a morning meal spread fixed costs over longer hours of operation) Smith began planning a breakfast menu in 1979. But Burger King had a problem with breakfast: its flame broilers could not be adapted as easily to breakfast entrees as McDonald’s grills could. Smith urged development of entrees that could be prepared on existing equipment instead of requiring special grills. He began testing breakfast foods in 1978, but it wasn’t until the Croissan’wich in 1983 and French Toast sticks in 1985 that Burger King had winning entries in the increasingly competitive breakfast market.

Smith left Burger King in June 1980 to try to introduce the same kind of fast-food management techniques at Pizza Hut. (Ironically, when he left Pizza Hut in 1983 he moved into the chief executive position at the franchisee that had given Burger King so much trouble, Chart House.) By following in Smith’s general direction, Burger King reached its number-two position within two years of his departure, but frequent changes at the top since then have meant inconsistent management for the company. Louis P. Neeb succeeded Smith, to be followed less than two years later by Jerry Ruenheck. Ruenheck resigned to become a Burger King franchise owner in Florida less than two years after that, and his successor, Jay Darling, resigned a little over a year later to take on a Burger King franchise himself. Charles Olcott, a conservative former chief financial officer, took over in 1987.

Burger King didn’t stand still under its succession of heads, though. The company continued to expand abroad, opening a training center in London to serve its European franchisees and employees in 1985. Besides developing successful breakfast entries, Burger King added salad bars and a “light” menu to meet the demand for foods with a healthier, less fatty image. In 1985 the firm began a $100 million program to remodel most of its restaurants to include more natural materials, such as wood and plants, and less plastic. Burger King also completely computerized its cooking and cash register operations so even the most unskilled teenager could do the job. Average sales per restaurant reached the $1 million mark in 1985.

Even some of Burger King’s post-Smith successes caused problems, though. The company introduced another successful new entree, Chicken Tenders, in 1986, only to find it that it couldn’t obtain enough chicken to meet demand. Burger King was forced to pull its $30 million introductory ad campaign.

Burger King was still bedeviled by the old complaint that its service and food were inconsistent. The company played out its identity crisis in public, changing ad styles with almost the same frequency that it changed managers. After Smith’s departure in 1980, Burger King’s old “Have it your way” campaign (“Hold the pickles, hold the lettuce. Special orders don’t upset us”) was no longer appropriate. That ad campaign emphasized as a selling point what many saw as a drawback at Burger King: longer waiting times. But under Smith’s emphasis on speed and efficiency, special orders did upset store owners. So the company turned to the harder sell “Aren’t you hungry for Burger King now?” campaign. The hard sell approach moved the chain into second place, and Burger King took an even more aggressive advertising line. In 1982 Burger King directly attacked its competitors, alleging that Burger King’s grilled burgers were better than McDonald’s and Wendy’s fried burgers. Both competitors sued over the ads, and Wendy’s challenged Burger King to a taste test (a challenge that was pointedly ignored). In return for dropping the suits, Burger King agreed to phase out the offending ads gradually, but Burger King came out the winner in its $25 million “Battle of the Burgers”: the average volume of its 3,500 stores rose from $750,000 to $840,000 in 1982, sales were up 19%, and pretax profits rose 9%.

Burger King’s subsequent ad campaigns were not as successful. In 1985 the company added just over half an ounce of meat to its Whopper, making the 4.2 ounce sandwich slightly larger than the quarter-pound burgers of its competitors. The meatier Whopper and the $30 million ad campaign using celebrities to promote it failed to bring in new business. All three of the major campaigns that followed (“Herb the Nerd,” “This is a Burger King town,” and “Fast food for fast times”) were costly flops. “We do it like you’d do it” followed in 1988, and then in 1989 came “Sometimes you’ve gotta break the rules,” a controversial and ambiguous campaign that was poorly received by franchises and customers alike.

Burger King’s lack of an identifiable image has contrasted dramatically with McDonald’s strong ad showing. The number-one fast food restaurant spends three times as much on advertising as Burger King does. In a mature market in which there are few new converts to fast food and there is a continual battle for the food dollars of those who already buy it, advertising failures are costly.

In 1988, the company faced another kind of threat. Parent Pillsbury, the target of a hostile takeover attempt by the British Grand Metropolitan PLC, devised a counterplan that included spinning off the troubled Burger King chain to shareholders, but at the cost of new debt that would lower the price of both Pillsbury and the new Burger King shares. Such a plan would have made it highly unlikely that Burger King could ever have overcome its ongoing problems of quality and consistent marketing.

Pillsbury’s plan didn’t work, and Grand Met bought Pillsbury in January 1989 for $66 a share, or approximately $5.7 billion. Pillsbury became part of Grand Met’s worldwide system of food and retailing businesses with well-known brand names. In Burger King, Grand Met got a company with some problems but whose 5,500 restaurants in all 50 states and 30 foreign countries give it a strong presence.

With a new owner committed to developing Burger King, the company may have its best chance yet of conquering the problems that have plagued it from the start. In the tough, slow-growth fast food market, Burger King has to succeed if it hopes to keep its place.