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New menus, ads crown Burger King rebound
2007-06-16
In a new television ad, Sean "Diddy" Combs, seeking a late-night snack, visits the mansion of Burger King's chief executive. The CEO -- an actor, not current chief executive John Chidsey -- takes the hip-hop mogul and his entourage to a Burger King and opens it, just to satisfy their appetite. In real life, keeping restaurants open after midnight is just one of many changes the world's No. 2 hamburger chain recently made that have helped the brand overcome years of weak management, sluggish sales and disgruntled franchisees. "We've cleaned up a lot of issues and really built ourselves a very solid foundation from which it is much easier to grow," Chidsey told The Associated Press. Burger King went public in May 2006 and has seen its stock double since August. It has reported 13 consecutive quarters of positive comparable sales growth and initiated a worldwide expansion strategy, with a goal of opening about 200 new restaurants this year. Average restaurant sales of $1.17 million for a 12-month period ending March 31 are an all-time high. The stock price has doubled to about $26 after bottoming out at $12.41 last August. Success has come from new "premium" flame-broiled products with high profit margins, quality chicken products and value menus; and a marketing campaign that brought back the King and the "Have it Your Way" mantra and also used Spider-Man and SpongeBob Squarepants. The turnaround dates to when Texas Pacific Group, Bain Capital and Goldman Sachs Capital Partners bought Burger King from Diageo PLC in 2002, and continued when the management team led by former CEO Greg Brenneman took over in 2004. Before then, profit margins had slipped behind fast-food industry leader McDonald's Corp. and No. 3 burger chain Wendy's International Inc. "Burger King, because it had had so many management teams, it had had so many advertising agencies, so many different strategies, I think the consumer was very confused," Chidsey said. "So bringing back the King, bringing "Have it Your Way" back, lots of things like have certainly helped people talk about the brand again." A principal concern after Burger King's initial public offering was reducing debt, which was $1.35 billion in February 2006. As of March 31, the company had reduced its debt to $872 million, according to Securities and Exchange Commission filings. Chidsey, who joined Burger King in March 2004, says management stability is a positive, especially in relationships with franchisees. More than 90 percent of Burger King's roughly 11,200 restaurants are owned by franchisees, who at one point saw sales decrease for six straight years. "I'd say when we got here the relationship (with franchisees) was probably a two or a three in the U.S," Chidsey said. "I'd say today it's probably an eight-and-a-half or a nine." U.S. franchisees such as Heartland Food Corp. welcome a consistent message from management. That's different than before the private equity groups took over, when franchisees looked to the National Franchisee Association rather than corporate headquarters for leadership, said Steve Wiborg, president and chief executive of Heartland Food, based in Downers Grove, Ill. With 258 Burger Kings in Illinois, Indiana, Michigan, Wisconsin and the Carolinas, Heartland Food now plans to open seven more stores by year's end, Wiborg said. "The numbers make sense now, and Burger King is a lot healthier than it was three or four years ago," Wiborg said. Burger King helps franchisees by providing loans to fund capital improvements such as remodeling. During the nine months ending March 31, Burger King had funded $3 million in "Capex" loans to franchisees, and has future commitments to provide $7 million in loans and up to $10 million of improvements to properties leased to franchisees, SEC filings showed. Meanwhile, new stores are smaller, reducing building costs by 20 to 25 percent, Chidsey said. They sit on a half-acre of land rather than a full acre, and have 40 or 60 seats compared to 100 or more -- following studies that show only about 20 percent of customers eat inside. Burger King is aggressively going after markets abroad, where there is room for growth. Burger King opened new stores this month in Japan and Nanjing, China, while announcing development agreements in Egypt and Poland. Julio Ramirez, Burger King's president for Latin America, said there's enough demand in the region to satisfy expansion in that market. Burger King has signed a development deal for 47 more Argentinean restaurants and plans to add 125 Brazilian restaurants in the next few years. In the U.S., the fast-food or "quick service" industry faces several challenges. One has been competition from the "fast-casual dining" industry, which includes places like Chili's and Applebees. Other challenges include managing food, paper and product costs, and the rising cost of land, especially in large metropolitan areas. In an investor's note, J.P. Morgan analyst John Ivankoe wrote trends show positive traffic at fast-food restaurants, while casual dining concepts continue to see fewer customers. Ivankoe said the numbers confirm a "trade-down" phenomenon in which consumers look for lower-cost options While most of the picture seems healthy, Burger King faces criticism that it's lagging in cutting trans fats. The Center for Science in the Public Interest sued the company in May, claiming it had failed to set a definite timetable for the change. Burger King says it may complete a rollout of trans-fat-free oil in the United States and Canada by year's end, based on the success of one blend it is testing the change will be delayed until 2008, if it goes with another blend it's testing. Burger King hopes to strengthen its stance among what it calls the "superfan" -- someone who goes to fast-food burger restaurants about 16 times a month and likes sports, movies, music and video games. The typical "superfan" uses about five of those visits at Burger King, Chidsey said. "Just to pick up one more visit out of that 16, to go from five to six out of that 16, is a big leap in terms of driving incremental business for us," Chidsey said. A possible new product is called the Hold-em, which features a soft-shell tortilla filled with steak or chicken, Chidsey said. And Burger King will continue to heavily promote its late closing hours and whatever new items come along, with advertising that targets young people and uses pop culture. "We've sort of created a niche," Chidsey said. "It's much more difficult for Wendy's or McDonald's, given what their brand image is and what they are, to go and play ball in the area we've carved out."
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