Foodmaker, Inc.

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Foodmaker, Inc.

9330 Balboa Avenue
San Diego, California 92123
U.S.A.
(619) 571-2121
Fax: (619) 571-2101

Public Company
Incorporated: 1966
Employees: 25,000
Sales: $1.05 billion
Stock Exchanges: New York
SICs: 5812 Eating Places; 6794 Patent Owners & Lessors

Foodmaker, Inc., is the operator and franchisor of Jack in the Box restaurants, the fifth-largest fast-food hamburger chain in the United States. In addition to the 1,220-unit Jack in the Box chain, which has restaurants spread throughout the western and southwestern United States, Hong Kong, and Mexico, Food-maker holds a 39 percent equity position in Family Restaurants, Inc., which operates 663 restaurants throughout the United States, including Chi-Chi’s Mexican Restaurants, El Torito, Carrows, Coco’s, and Charley Browns.

Foodmaker, Inc.’s, predecessor was Foodmaker Co., a food-service company that had created numerous successful specialty restaurant chains, including Oscar’s, Hamburger House, Family Tree, and The Jolly Ox. Foodmaker Co.’s greatest success was Jack in the Box, a unique chain of fast-food restaurants that enabled customers to drive up to a menu board, place their order, and drive away with their food in roughly three minutes. Situated on top of the menu board, with a microphone concealed inside, was the company’s symbol, a large jack-in-the-box. Foodmaker Co.’s fast-food concept was notable for its speed of service and its drive-through, rather than drive-in, format.

Jack in the Box had evolved from a car-hop restaurant opened in 1941 as Topsy’s Drive-in. Over the next several years, as the drive-in restaurant concept began to enjoy increasing popularity, Topsy’s Drive-In was expanded to four locations and renamed Oscar’s, then renamed Jack in the Box in 1950, when its first drive-through unit was opened in San Diego. The chain expanded to 24 units by 1961 and to 182 units by 1966, the year that Foodmaker, Inc., was established.

Throughout Jack in the Box’s formative years, Foodmaker Co. had prepared all of the chain’s food products except dairy items and hamburger buns, providing for the daily delivery of food to each individual restaurant. In 1965, however, Foodmaker Co. spun off its restaurant division, including Jack in the Box, and its commissary and specialty restaurant division, which included Hamburger House, Family Tree, and The Jolly Ox. The former was incorporated in July 1965 as Jack in the Box, Inc. In September 1966 Foodmaker, Inc., was incorporated, and four months later it acquired the commissary and specialty restaurant business of Foodmaker Co. The result after the confusing corporate reshuffling was Foodmaker, Inc., operator of 27 specialty restaurants located throughout Southern California, and Jack in the Box, Inc., owner of roughly 200 Jack in the Box restaurants.

Shortly thereafter Foodmaker, Inc., merged with Jack in the Box, Inc., and Foodmaker, Inc., began providing exactly the same preparation, purchasing, and delivery services to Jack in the Box restaurants that Foodmaker Co. had previously provided. By the time the dust had settled from the renewed alliance, the chain of fast-food drive-throughs had established a solid foundation after a decade and a half of growth. Offering a menu that included hamburgers, cheeseburgers, french-fries, onion rings, fried chicken, fried shrimp, tacos, apple turnovers, and soft drinks, Jack in the Box had proved its popularity with the American public, prompting Foodmaker, Inc., to map out an ambitious expansion plan. Between 1966 and 1973, Foodmaker management proposed to open 450 to 500 additional Jack in the Box restaurants, more than tripling the size of the chain.

Such optimism pervaded Foodmaker’s management in 1966 for several reasons. Since the inception of the Jack in the Box concept and the chain’s swift expansion throughout the Southwest, only two units had failed, an enviable record made more remarkable by the potentially risky practice of leasing Jack in the Box restaurants to independent entrepreneurs. Designated leasees rather than franchisees, independent Jack in the Box operators purchased all their food from Foodmaker, paid rent to Foodmaker based on the sales their restaurant generated, and kept the remainder of the money their particular unit produced as income.

Much of Foodmaker’s growth was due to its methodical approach to managing the Jack in the Box chain. Everything, including the preparation of food, the selection of restaurant sites, the screening of prospective leasees, and the staffing of individual Jack in the Box units was done methodically and efficiently. Once successfully past a preliminary screening, leasees were subjected to a battery of tests conducted by a psychologist, then provided with a location for their Jack in the Box that from 1965 forward was selected by a computer. After seven months of training, Jack in the Box operators were required to stay in close contact with Foodmaker management through daily and weekly accounting summaries. Foodmaker’s control over the chain went further, including at least three on-site inspections per week, giving Foodmaker the ability to maintain quality standards, monitor performance, and plot further growth with precision. Well organized and enjoying gratifying success, the Foodmaker organization drew the attention of much larger companies, and within two years of its incorporation Foodmaker became a subsidiary of Ralston Purina Co.

During the 1970s, Foodmaker led the Jack in the Box chain toward its most prolific growth, but as the decade progressed, the chain began to increasingly resemble its larger competitors, particularly the industry giant, McDonald’s. Jack in the Box began to struggle during the latter part of the decade, and its expansion into East Coast markets was at first cut back from original estimates, then halted altogether. By the end of the decade, Jack in the Box restaurants were being offered for sale in increasing numbers, forcing Foodmaker to respond quickly in order to effect a turnaround.

The decade ended on an explosive note in 1979 when Food-maker management signaled a dramatic shift in marketing strategy by blowing up the chain’s symbol, the jack in the box clown, in television commercials. Jack in the Box announced that it would no longer compete for McDonald’s target customer base of families with young children. Instead, Foodmaker would attempt to attract older, more affluent customers with what it touted as a higher-quality, more upscale menu, which attempted to satisfy the changing tastes of aging Baby Boomers.

In accordance with this new marketing strategy, Jack in the Box restaurants were remodeled and redecorated with designs intended to attract older, more affluent patrons. Most important, the chain’s menu was greatly expanded, transforming Jack in the Box from a limited-menu hamburger operation that had been unsuccessfully competing against McDonald’s into a chain of restaurants boasting a diverse menu at a time when few fast-food operations offered more than what had become the standard menu for the industry. Menu diversification became the key to success during the 1980s, driving annual sales upward as the decade progressed.

After Foodmaker’s new strategy had recorded encouraging success for several years, Ralston Purina came out with its own new strategic plan, announcing in 1985 that it would only continue to own companies that were number one in their respective markets. Despite Foodmaker’s progress during the first half of the decade, Ralston Purina’s edict meant that Food-maker was slated for divestiture. Foodmaker’s management arranged a $435 million buy-out of the company, returning Foodmaker to private ownership after 18 years as a subsidiary of Ralston Purina.

Once again on its own, Foodmaker continued to distinguish itself from other fast-food chains with its varying, expanding menu. Under Foodmaker’s direction, Jack in the Box was introducing at least two new menu items per year at a time when the chain’s competitors were simplifying their menus, and was recording big success with such items as Chicken Fajita Pita, Hot Club Supreme Sandwich, Ultimate Cheeseburger, and a line of “finger foods” that included egg rolls, deep-fried shrimp, and fried chicken strips. During the late 1980s the chain’s menu offered more than 40 items. By 1987 sales reached $655 million, the chain boasted 897 restaurants, and Foodmaker went public.

With Jack in the Box once again demonstrating the strength it had shown during the 1950s and 1960s, Foodmaker began looking for another growth vehicle for the company. In 1988 Foodmaker acquired Chi-Chi’s Inc., based in Louisville, Kentucky, for $235 million. The acquisition gave Foodmaker a chain of roughly 200 Mexican dinner restaurants to complement its primary money earner, Jack in the Box.

Believing the stock market had significantly under-valued its stock, Foodmaker management returned the company to private ownership after the acquisition of Chi-Chi’s. Over the course of the next two years sales generated by the Chi-Chi’s chain doubled, jumping from $25 million to $50 million, while the Jack in the Box chain continued to perform admirably. In 1990 the 1,000th Jack in the Box unit was opened in Yorba Linda, California, marking the end of a ten-year period that saw the chain emerge from the formidable shadow cast by McDonald’s and establish a distinct image. Looking ahead, Foodmaker management anticipated opening 60 new Jack in the Box units per year and 20 new Chi-Chi’s restaurants per year during the early 1990s, confident that the previous decade of growth would continue unabated into the 1990s.

The onset of a national economic recession, however, dashed the company’s expectation of an encouraging start in the new decade. In 1991 the company suffered an 81 percent decline in net earnings, while annual sales remained flat, hovering at $1.15 billion. Once again, Foodmaker went public, hoping to raise money to continue expanding its two chains. Despite the lackluster performance recorded during 1991, the company management announced an ambitious plan in October 1992 to spend between $60 and $100 million over the next decade on international expansion, delineating plans to develop roughly 700 Jack in the Box units in the Far East, Southeast Asia, and Latin America. Two months later, the company suffered a disastrous blow when a customer, six-year-old Lauren Rudolph, suffered three heart attacks and died. Her death was caused by a food-borne bacteria known as E. coli, the origin of which was linked to the consumption of a tainted and undercooked Jack in the Box hamburger.

Within a month three more Jack in the Box customers died—all young children—while more than 600 people in five Western states fell ill, arousing nationwide fear of an E. coli bacterial epidemic and a pervasive distrust of the Jack in the Box chain. Foodmaker lost $98.1 million the following year and another $39.6 million in 1994, while sales slipped to $1.24 billion in 1993 and $1.05 billion in 1994. In the wake of the E. coli epidemic, the Chi-Chi’s chain of 237 Mexican restaurants was sold to Restaurant Enterprises Group Inc. for $270 million in cash and equity, as Foodmaker attempted to recover from the massive image problem engendered by four dead customers and hundreds others left with lasting health impairments and the need for organ transplants.

In early 1994 Foodmaker settled four wrongful-death lawsuits stemming from the E. coli outbreak, paying the victims’ families an unspecified amount. The company launched a comprehensive food safety program immediately after the E. coli outbreak, but by May 1995 had yet to record a profitable quarter since the tragic death of the four children. Not surprisingly, sales and performance levels enjoyed by Jack in the Box before 1993 continued to elude the chain during the mid-1990s, causing considerable concern for the future.

An aggressive attempt to achieve a recovery was underway as Foodmaker plotted its future course for the late 1990s and into the next century. In 1995 the company resurrected its clown mascot in national television commercials, bringing the old symbol of Jack in the Box back in a series of advertisements featuring a blue-suited executive wearing a spherical clown head. Foodmaker earmarked $35 million for remodeling Jack in the Box units by the spring of 1995, with the remodeling of franchise units slated to follow in the ensuing 18 months. Whether Foodmaker and Jack in the Box could fully restore their tarnished image remained to be seen.