Monday, September 26, 2005
Fat Sells
Less is more. But sometimes -- in the fast-moving fast-food hamburger business, for instance -- more is more. This is the story of how national chain Hardee's went from the verge of extinction to profitability, even sexiness, by understanding when to offer less and when to provide more.
When Andy Puzder took the helm of publicly traded CKE Restaurants in the fall of 2000, the company was on the brink of ruin. Of the three fast-food chains owned by CKE -- Hardee's, Carl's Jr., and La Salsa -- it was Hardee's that was causing the trouble. Seven straight years of declining sales. Not a penny of profit since 1990. Market share cut nearly in half since 1995. As a result, CKE reported a $30 million loss that year -- its first since 1993. In the spring of 2000, before Puzder arrived, CKE shares had shed more than 90 percent of their peak value of $42 and were trading at just $3.50. Barely enough even to buy one Hardee's sandwich.
A rock 'n' roll guitarist by passion and corporate lawyer by training, Puzder, now 55, knew little about the fast-food business when he met CKE founder Carl Karcher in 1990. (At 6 feet and 185 pounds, Puzder doesn't look very familiar with the food either.) He had time to learn, though, as Karcher's personal attorney and then CKE's general counsel, before assuming the CEO post. Among his first acts was shuttering 430 of the 923 Hardee's owned by CKE. (Another 1,737 restaurants were franchised or licensed.) But he still couldn't contain the damage.
Poring over documents in his corner office wasn't helping. So he hit the road, spending the next 24 months dropping in on one Hardee's after another across the Southeast and the Midwest, 300 in all. What he found alarmed him: poor food, lousy service, unclean restaurants. "Every time I went into a restaurant, people were cleaning the windows because it's the easiest thing to clean," he says. Sometimes, when Puzder masqueraded as a customer, he encountered cashiers who stared back at him blankly without offering a greeting or a single order suggestion. "Turning around the service and cleanliness was step one," Puzder recalls.
The Epiphany of Simplicity
To get there, puzder torpedoed a cumbersome company manual and replaced it with an easy-to-digest handbook containing just 12 points. Next he implemented table service (customers still order at the counter, but meals are delivered to their seats) and wrote talking points for Hardee's cashiers, which he taped to the registers. Finally, he remodeled the restaurants, ditching the clownish brown-and-orange interiors for brighter white tiles to create a cleaner, more modern atmosphere. Yet all these changes failed to move the needle.
CEO Puzder's Recipe for Success
-Face the heat: Get into the kitchen!
-Cut away money-losing operations.
-Strain out excess products.
-Make your core product a contrarian one.
-Charge a premium, and serve.
Puzder was still groping for ideas in July 2001, when he had an epiphany while manning a Carl's Jr. to commemorate that chain's birthday. (CKE prides itself on having its top managers spend key company holidays as burger flippers; in fact, Puzder had spent a day the previous month working in a Hardee's.) Suddenly it struck him with the zest of a double-pickle why Carl's was so successful while Hardee's was sucking slaw: Carl's menu was a model of simplicity. Since only burgers and chicken sandwiches are offered, the food is quickly and efficiently prepared. By contrast, Hardee's 50-item menu, offering everything from hot dogs to fried chicken and fish sandwiches, was a mess of complexity. Customers had to wade through too many choices, food preparers continually struggled to catch up with orders, and stocking all that stuff was a supply-chain nightmare. It was clear why Hardee's struggled to produce average same-store sales of $763,000 while Carl's Jr. averaged $1.1 million. "I realized," Puzder says, "that the Hardee's model isn't a good business plan."
Going Big
Hardee's menu had to be streamlined. Puzder called on Los Angeles-based advertising agency Mendelsohn/Zien to help him determine which foods to keep and which to abandon. The firm, which has two decades of experience with the fast-food industry, had been instrumental in revamping Carl's Jr. just two years earlier with the launch of a premium-priced sandwich dubbed the Six Dollar Burger. Mendelsohn/Zien spent the next seven months conducting focus groups, trying to find a hole in the market for Hardee's to fill.
"In all the market research that I've done, people always say, 'I wish I could get a burger like the ones I get at T.G.I. Friday's,'" says Jordin Mendelsohn, the agency's executive creative director, referring to Friday's unusual chargrilled burgers (one has a sauce made with Jack Daniel's whiskey). "But you can't have the same voice as Wendy's (WEN), McDonald's (MCD), and Burger King. You have to have a unique selling position and marketing niche, or you'll fail."
Mendelsohn's first proposal was crazy. He urged Puzder to tear down his existing restaurants, delete breakfast from the menu, begin serving huge third- and half-pound burgers, and, oh, change the name of his chain to Thickburger. "I liked the idea," Puzder recalls, "except the parts where we tear down the buildings, take out breakfast, and change our name. But I thought the Thickburger would be a great focus for us."
So while the competition, especially McDonald's, emphasized its new love and respect for healthy salads and cheap "dollar meals," Hardee's would go 180 degrees into the realm of high fat and high price. The effort culminated in the April 2003 debut of the Thickburger line: nine grease-dripping, 100 percent Angus beef burgers, each packing more meat, more mayo, more butter, more bun -- heck, more of everything -- than any single-patty sandwich offered by Hardee's competitors. Beginning at a third of a pound, the burgers max out at the Monster Thickburger, a two-thirds-pound, 1,420-calorie sandwich with twice the Food and Drug Administration's recommended daily allowance of fat. It costs $5.50. (McDonald's "high-end" burger is $2.45.)
Hardee's immediately drew scorn. The Center for Science in the Public Interest called the burgers "food porn." But Puzder dismisses such criticism."We're not here to decide what customers should eat," he reasons. "We're here to decide what they want to eat." And eat, they do: The month Thickburgers debuted, Hardee's same-store sales spiked 6 percent. They've remained positive in 23 of the past 27 months. Even once-embittered customers like Tom Trimble, a professional contractor and fast-food gourmand, are returning in droves. "Unless you want to go home and cook for yourself, you can't get a better burger," he says, after downing a Bacon Cheese Thickburger and curly fries at a Hardee's in Overland Park, Kan. A Hardee's patron since his teens, Trimble, now 46, quit the chain four years ago. "All of a sudden the food was different. The burgers were inedible." It was the siren song of the Thickburger that drew Trimble back. Now he's a twice-a-week Hardee's devotee again.
The Thickburger is more expensive to produce than other menu items, but Hardee's makes up for it in price. Before the Thickburger arrived, Hardee's average sandwich cost $2. Now it's $4. That helped Hardee's fatten its restaurant-level margin to 14 percent in 2005 -- twice what it was in 2000 -- and turn a $5 million profit, its first in 14 years.
All of this means that CKE is back on track too. The parent reported an $18 million profit for fiscal year 2005, its first in six years. CKE's stock is up as well, trading around $12 a share in mid-August. Now, instead of closing restaurants, Puzder is planning to expand the Hardee's chain with 12 new locations by January.
But don't think that Puzder is forsaking healthier foods altogether. This fall he plans to promote Hardee's first non-Thickburger sandwich in two years: a hefty chicken club sporting plenty of crisp lettuce and big juicy tomatoes. You can be sure it'll have a stack of thick bacon too.
When Andy Puzder took the helm of publicly traded CKE Restaurants in the fall of 2000, the company was on the brink of ruin. Of the three fast-food chains owned by CKE -- Hardee's, Carl's Jr., and La Salsa -- it was Hardee's that was causing the trouble. Seven straight years of declining sales. Not a penny of profit since 1990. Market share cut nearly in half since 1995. As a result, CKE reported a $30 million loss that year -- its first since 1993. In the spring of 2000, before Puzder arrived, CKE shares had shed more than 90 percent of their peak value of $42 and were trading at just $3.50. Barely enough even to buy one Hardee's sandwich.
A rock 'n' roll guitarist by passion and corporate lawyer by training, Puzder, now 55, knew little about the fast-food business when he met CKE founder Carl Karcher in 1990. (At 6 feet and 185 pounds, Puzder doesn't look very familiar with the food either.) He had time to learn, though, as Karcher's personal attorney and then CKE's general counsel, before assuming the CEO post. Among his first acts was shuttering 430 of the 923 Hardee's owned by CKE. (Another 1,737 restaurants were franchised or licensed.) But he still couldn't contain the damage.
Poring over documents in his corner office wasn't helping. So he hit the road, spending the next 24 months dropping in on one Hardee's after another across the Southeast and the Midwest, 300 in all. What he found alarmed him: poor food, lousy service, unclean restaurants. "Every time I went into a restaurant, people were cleaning the windows because it's the easiest thing to clean," he says. Sometimes, when Puzder masqueraded as a customer, he encountered cashiers who stared back at him blankly without offering a greeting or a single order suggestion. "Turning around the service and cleanliness was step one," Puzder recalls.
The Epiphany of Simplicity
To get there, puzder torpedoed a cumbersome company manual and replaced it with an easy-to-digest handbook containing just 12 points. Next he implemented table service (customers still order at the counter, but meals are delivered to their seats) and wrote talking points for Hardee's cashiers, which he taped to the registers. Finally, he remodeled the restaurants, ditching the clownish brown-and-orange interiors for brighter white tiles to create a cleaner, more modern atmosphere. Yet all these changes failed to move the needle.
CEO Puzder's Recipe for Success
-Face the heat: Get into the kitchen!
-Cut away money-losing operations.
-Strain out excess products.
-Make your core product a contrarian one.
-Charge a premium, and serve.
Puzder was still groping for ideas in July 2001, when he had an epiphany while manning a Carl's Jr. to commemorate that chain's birthday. (CKE prides itself on having its top managers spend key company holidays as burger flippers; in fact, Puzder had spent a day the previous month working in a Hardee's.) Suddenly it struck him with the zest of a double-pickle why Carl's was so successful while Hardee's was sucking slaw: Carl's menu was a model of simplicity. Since only burgers and chicken sandwiches are offered, the food is quickly and efficiently prepared. By contrast, Hardee's 50-item menu, offering everything from hot dogs to fried chicken and fish sandwiches, was a mess of complexity. Customers had to wade through too many choices, food preparers continually struggled to catch up with orders, and stocking all that stuff was a supply-chain nightmare. It was clear why Hardee's struggled to produce average same-store sales of $763,000 while Carl's Jr. averaged $1.1 million. "I realized," Puzder says, "that the Hardee's model isn't a good business plan."
Going Big
Hardee's menu had to be streamlined. Puzder called on Los Angeles-based advertising agency Mendelsohn/Zien to help him determine which foods to keep and which to abandon. The firm, which has two decades of experience with the fast-food industry, had been instrumental in revamping Carl's Jr. just two years earlier with the launch of a premium-priced sandwich dubbed the Six Dollar Burger. Mendelsohn/Zien spent the next seven months conducting focus groups, trying to find a hole in the market for Hardee's to fill.
"In all the market research that I've done, people always say, 'I wish I could get a burger like the ones I get at T.G.I. Friday's,'" says Jordin Mendelsohn, the agency's executive creative director, referring to Friday's unusual chargrilled burgers (one has a sauce made with Jack Daniel's whiskey). "But you can't have the same voice as Wendy's (WEN), McDonald's (MCD), and Burger King. You have to have a unique selling position and marketing niche, or you'll fail."
Mendelsohn's first proposal was crazy. He urged Puzder to tear down his existing restaurants, delete breakfast from the menu, begin serving huge third- and half-pound burgers, and, oh, change the name of his chain to Thickburger. "I liked the idea," Puzder recalls, "except the parts where we tear down the buildings, take out breakfast, and change our name. But I thought the Thickburger would be a great focus for us."
So while the competition, especially McDonald's, emphasized its new love and respect for healthy salads and cheap "dollar meals," Hardee's would go 180 degrees into the realm of high fat and high price. The effort culminated in the April 2003 debut of the Thickburger line: nine grease-dripping, 100 percent Angus beef burgers, each packing more meat, more mayo, more butter, more bun -- heck, more of everything -- than any single-patty sandwich offered by Hardee's competitors. Beginning at a third of a pound, the burgers max out at the Monster Thickburger, a two-thirds-pound, 1,420-calorie sandwich with twice the Food and Drug Administration's recommended daily allowance of fat. It costs $5.50. (McDonald's "high-end" burger is $2.45.)
Hardee's immediately drew scorn. The Center for Science in the Public Interest called the burgers "food porn." But Puzder dismisses such criticism."We're not here to decide what customers should eat," he reasons. "We're here to decide what they want to eat." And eat, they do: The month Thickburgers debuted, Hardee's same-store sales spiked 6 percent. They've remained positive in 23 of the past 27 months. Even once-embittered customers like Tom Trimble, a professional contractor and fast-food gourmand, are returning in droves. "Unless you want to go home and cook for yourself, you can't get a better burger," he says, after downing a Bacon Cheese Thickburger and curly fries at a Hardee's in Overland Park, Kan. A Hardee's patron since his teens, Trimble, now 46, quit the chain four years ago. "All of a sudden the food was different. The burgers were inedible." It was the siren song of the Thickburger that drew Trimble back. Now he's a twice-a-week Hardee's devotee again.
The Thickburger is more expensive to produce than other menu items, but Hardee's makes up for it in price. Before the Thickburger arrived, Hardee's average sandwich cost $2. Now it's $4. That helped Hardee's fatten its restaurant-level margin to 14 percent in 2005 -- twice what it was in 2000 -- and turn a $5 million profit, its first in 14 years.
All of this means that CKE is back on track too. The parent reported an $18 million profit for fiscal year 2005, its first in six years. CKE's stock is up as well, trading around $12 a share in mid-August. Now, instead of closing restaurants, Puzder is planning to expand the Hardee's chain with 12 new locations by January.
But don't think that Puzder is forsaking healthier foods altogether. This fall he plans to promote Hardee's first non-Thickburger sandwich in two years: a hefty chicken club sporting plenty of crisp lettuce and big juicy tomatoes. You can be sure it'll have a stack of thick bacon too.
