Burger King Corporation Business Information, Profile, and History

Company Perspectives:

Burger King is flamed-broiled burgers, fries and soft drinks at a good value, served quickly and consistently by friendly people in clean surroundings.

History of Burger King Corporation

Burger King Corporation is the second largest fast-food chain in the United States, trailing only McDonald's. The company franchises more than 10,400 restaurants and owns about 1,000 for a chainwide total exceeding 11,455, with locations in all 50 states and 56 countries. The company serves 15.7 million customers each day and over 2.4 billion Burger King hamburgers are sold each year across the globe. In the late 1990s and into the new millennium, Burger King was plagued by falling sales and deteriorating franchisee relationships. Burger King's parent, Diageo plc, sold the company to a group of investors led by Texas Pacific Group in late 2002.

Rapid Growth under Company Founders: 1954-67

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. In fact, 1954 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 commercial 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 1 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.

Difficulties with Franchisees Under Pillsbury: 1967-77

The Burger King franchising system also worked well for the franchisees. Under the early Burger King system, some of the company's large investors expanded at a rate rivaling 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 their Burger King outlets better than a packaged-goods company. 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.

However, 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.

New Leadership: 1977-80

Pillsbury's suit was proof of a new management attitude that involved more central control over powerful franchisees. However, 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 promise 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 percent 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 importantly 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 percent 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 percent to 42 percent.

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 percent. 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.

Troubled Times in the 1980s

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 for the next several years 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 did not 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 least skilled 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 could not 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. However, 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 percent, and pretax profits rose 9 percent.

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, with little more success.

In 1988, the company faced another kind of threat. Parent Pillsbury, the target of a hostile takeover attempt by the British company 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 gave it a strong presence.

Turnaround under Grand Met in the 1990s

Grand Met's first move was to place Barry Gibbons, a successful manager of pubs and restaurants in the United Kingdom, into the CEO slot. Soon thereafter, in September 1989, Grand Met acquired several restaurant properties from United Biscuits (Holdings) plc, including the Wimpey hamburger chain, which included 381 U.K. outlets and 148 in other countries. By the summer of 1990, 200 Wimpeys had been converted to Burger Kings, bolstering the company's foreign operations, a traditional area of weakness. Over the next several years, Burger King was much more aggressive with its international expansion, with restaurants opening for the first time in Hungary and Mexico (1991); Poland (1992); Saudi Arabia (1993); Israel, Oman, the Dominican Republic, El Salvador, Peru, and New Zealand (1994); and Paraguay (1995). By 1996, Burger King had outlets in 56 countries, a dramatic increase from the 30 of just seven years earlier.

While Gibbons was successful in accelerating the company's international growth, overall his tenure as CEO (which lasted until 1993) brought a mixture of successes and failures. In the new product area, the hamburger chain hit it big with the 1990 introduction of the BK Broiler, a broiled chicken sandwich aimed at fast-food eaters seeking a somewhat more healthful meal; soon after introduction, more than one million were being sold each day. Also successful were promotions aimed at children. In 1990 the Burger King Kids Club program was launched nationwide, and more than one million kids signed up in the first two months. The program continued to grow thereafter; by 1996 membership stood at five million and the number of Kids Club meals sold each month had increased from 6.1 million in 1990 to nearly 12 million.

Also hugely successful was the long-term deal with Disney for motion picture tie-ins signed in 1992. Through 1996 (when Disney broke with Burger King to sign a deal with arch-rival McDonald's), the partnership had involved such Disney smashes as Beauty and the Beast, The Lion King, and Toy Story. In 1996 Burger King signed a new Hollywood deal with DreamWorks SKG.

Gibbons also worked to improve Burger King's profitability, under a mandate from Grand Met. Soon after taking over as CEO, Gibbons cut more than 500 jobs, mainly field staff positions. He also began to divest company-owned stores in areas where the company did not have critical mass, particularly west of the Mississippi. Doing so helped increase profitability, although some observers charged that Gibbons was selling off valuable assets just to improve the company numbers. In any case, during Gibbons's last two years as CEO, profits were about $250 million each year, compared to at most $175 million a year under Pillsbury.

Where Gibbons certainly failed, however, was in addressing Burger King's longstanding problem with image. The advertising program was still in disarray as the firm hired in 1989, D'Arcy Masius Benton & Bowles, created still more short-lived campaigns: "Sometimes you've gotta break the rules" (1989-91), "Your way right away" (1991), and "BK Tee Vee" (1992-93). Neither franchisees nor customers were endeared to any of these. In the face of the improving profitability of the corporation, such marketing blunders led to abysmal chainwide sales increases, such as a 3.6 percent increase for fiscal years 1991 and 1992 combined.

In mid-1993, James Adamson succeeded Gibbons as CEO, a position for which he had been groomed since joining Burger King as COO in 1991. Adamson, who actively sought out the advice of company co-founder James W. McLamore, moved to build on Gibbons's successes as well as rectify the failures. Adamson's most important initiatives addressed key areas: quality, value, and image. He improved the quality of products, such as in 1994 when the size of the BK Broiler, the BK Big Fish, and the hamburger were increased by more than 50 percent. He belatedly added a "value menu" after most other fast feeders had already done so, as well as offering special promotions, such as the 99¢ Whopper. Related to both value and image was the long-awaited successful ad campaign, "Get your burger's worth," created by Ammirati Puris Lintas, and emphasizing a back-to-basics approach and good value. The focus on the basics also led to a simplification of what had become an unwieldy menu--40 items were eliminated. The new focus was on burgers--with an emphasis on flame broiling--fries, and drinks. By early 1995, Adamson's program was paying off as same-store sales increased 6.6 percent for the fiscal year ending March 31, 1995. Morale among the franchisees had improved dramatically as well.

Adamson resigned suddenly in early 1995 to head Flagstar Cos. of Spartanburg, South Carolina. In July, Robert C. Lowes, who had been chief officer for Grand Met Foods Europe, was named CEO. Later that same year he became chairman of Burger King and gained a position on the Grand Met executive committee, a move that signaled Grand Met's commitment to Burger King and the strength of the company's resurgence. Lowes soon set some lofty goals for Burger King, including $10 billion in systemwide sales by 1997 (from $8.4 billion in 1995) and 10,000 outlets by the year 2000 (there were 8,455 in mid-1996). Management changes continued however, and in 1997 Dennis Malamatinas, an executive from Grand Met's Asian beverage division, was named CEO. Later that year, Grand Met merged with Guinness, creating Diageo plc. The new company's main focus was on its beverage and spirits business, leaving many analysts speculating that Diageo would eventually sell or spin off Burger King.

Despite the changes in ownership and management, Burger King remained dedicated to beating out its main competition, McDonald's. It introduced the new Big King burger to compete with McDonald's Big Mac and also launched a $70 million french fry advertising campaign that included a free fryday give-away at its restaurants. By 1998 both domestic and international sales were increasing, along with market share.

Bolstered by its recent success, Burger King launched an aggressive restructuring campaign that included adopting a new logo; store remodeling with cobalt blue, red, and yellow décor; new packaging; drive-thru lane upgrades; and a new cooking system. The firm also began to turnaround its European operations, exiting the highly competitive French region and focusing on growth in the UK, Germany, and Spain. The company's Latin America, Mexico, and Caribbean operations also experienced modest growth.

Problems Lead to a Sale: 1999 and Beyond

Burger King's success however, proved to be short-lived. In 1999, the company was forced to recall a promotional toy, the Pokemon ball, after it was discovered to be potentially dangerous for children. A class-action suit followed, claiming the company acted in a negligent fashion when it distributed the toy in its kids' meals. The firm's relationship with its franchisees was also deteriorating, marked by a highly publicized lawsuit with franchisee La Van Hawkins. The Detroit-based entrepreneur claimed Burger King failed to help him develop and purchase restaurants as promised. The firm counter-sued claiming that Hawkins owed the company $16 million. Civil rights activist Al Sharpton threatened to boycott Burger King as a result. To top it off, sales were falling, and the company experienced yet another change in management. Malamatinas left the firm in 2000, and Colin Storm was named interim CEO.

By this time, Burger King's parent company had announced plans to exit the fast food industry. Many franchisees were experiencing financial difficulties--including bankruptcy--and had long since complained that Diageo had neglected Burger King in favor of its premium liquor business. These franchisees adopted an internal program entitled "Project Champion" aimed at forcing a sale of Burger King. They approached J.P. Morgan Chase & Co. to orchestrate the deal, and, eventually, Diageo agreed to sell Burger King. Texas Pacific Group along with Bain Capital and Goldman Sachs Capital Partners purchased the fast food chain for $1.5 billion in late 2002.

According to a 2003 Feedstuffs article, Burger King's franchisee association claimed that the new ownership marked "the first day of a new era" for Burger King. CEO John Dasburg--elected in 2001--also felt the acquisition had significant benefits. In the aforementioned article Dasburg remarked that it would "better position Burger King as a healthy, independent company for the first time in more than 30 years."

While company management appeared optimistic about its future, Burger King remained embroiled in intense competition. The firm continued to launch new advertising campaigns and in 2002 introduced the BK Veggie, the first fast food veggie burger to be offered in the United States. Also in 2002, Burger King revamped the BK Broiler, making a new product they called the Chicken Whopper. The firm also moved into its new world headquarters in Miami, dedicating the building to founders Edgerton and McLamore. Management focused on capturing a larger portion of the fast food market. However, only time would tell if Burger King's new independence would help realize its goals.

Principal Competitors: McDonalds Corporation; Wendy's International Inc.; Yum! Brands Inc.

Chronology

• Key Dates:
• 1954: James McLamore and David Edgerton establish Burger King Corporation.
• 1957: The Whopper is launched.
• 1959: The company begins to expand through franchising.
• 1967: Burger King is sold to Pillsbury.
• 1977: Donald Smith is hired to restructure the firm's franchise system.
• 1982: Burger King claims its grilled burgers are better than competitors McDonald's and Wendy's fried burgers.
• 1989: Grand Metropolitan plc acquires Pillsbury.
• 1997: The firm launches a $70 million french fry advertising campaign; Grand Metropolitan merges with Guinness to form Diageo plc.
• 2002: A group of investors led by Texas Pacific Group acquire Burger King.