What's wrong with Burger King?

Commentary about business and finance.
June 24 2004 2:50 PM

Unhappy Meal

What's wrong with Burger King?

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The Wall Street Journal reported on Wednesday that Burger King is looking for a new CEO—again. Brad Blum, the company's ninth CEO in 15 years, has apparently presided over too many unhappy meals in his year and a half at the helm. More than one-fifth of franchisees are losing money, and "at least three of its 10 largest franchisees have filed for bankruptcy in recent years." Worse, Burger King could soon be displaced as the No. 2 burger chain by Wendy's.

The past several years should have been whoppers for the flame-broiled burger joint. McDonald's, coping with market saturation, was listing for a bit, opening a window for Burger King to steal market share. Even without displacing McDonald's as No. 1—an impossible task—Burger King could have been throwing off tons of cash. No. 2 players in gigantic consumer markets can be highly profitable, even excellent: Newsweek,Lowe's, Pepsi, Hertz, and CBS.There's even some benefit to being No. 2. Just as Wal-Mart takes all the political heat for low pay in the retail industry, McDonald's is the designated flak-catcher for issues relating to obesity and health. Supersize Me filmmaker Morgan Spurlock ate at McDonald's every day, not Burger King. Besides, the food at BK is arguably better. (In the spirit of journalistic inquiry, I sampled both McDonald's and Burger King yesterday. The Whopper at least has the virtue of tasting like a hamburger. I can't say the same for the Big Mac. Fries are another story, however. McDonald's wins hands down.)

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Burger King's problems have been ownership and management—not food. For most of its history, Burger King has been a division of a conglomerate, not a free-standing publicly held company. And in the past 15 years, it has seen almost as many regime changes as Italy. (See here for a list of CEOs.) The longest CEO tenure was four years—hardly enough time to develop a coherent growth strategy, let alone implement one.

Burger King Corp. was founded in Miami in 1954 by James McLamore and David Edgerton, a year before Ray Kroc opened his first McDonald's in suburban Chicago. The Whopper was introduced in 1957. (For other Burger King milestones, click here.) In 1967, Burger King was acquired by the food conglomerate Pillsbury. In 1988, Pillsbury was bought by Grand Metropolitan PLC, a British conglomerate. In 1997, Grand Metropolitan merged with Guinness to create Diageo.

With each merger, even as Burger King grew, it became a smaller piece of the overall company. Ultimately, it became an afterthought. Soon after the merger, Diageo decided that Burger King no longer belonged. In 2000, Diageo officially placed Burger King on the auction block. The company was finally sold in 2002 to a consortium of private equity investors—Texas Pacific Group, Bain Capital, and Goldman Sachs Capital Partners—for $1.5 billion.

Once a division is designated for sale at a large conglomerate, it freezes. Resources are diverted from it and redeployed toward businesses that will provide future growth. Managers spend time burnishing their résumés, not pushing ahead with bold new strategies. And it was in this 2000-2002 purgatory that Burger King started to tank, as recent numbers show. Burger King has been shrinking in its most important market. The number of U.S. stores fell from 8,306 in 2001 to 7,904 in 2003. Systemwide U.S. sales were $7.9 billion in 2003, down from $8.6 billion in 2002 and barely above the 1997 figures.

As Burger King meandered, McDonald's and Wendy's have continued to grow—both internationally and in the United States. McDonald's overall sales have risen for each of the past five years, from $13.3 billion in 1999 to $17.1 billion in 2003, while it grew from 26,309 restaurants worldwide in 1999 to 31,129 in 2003. Wendy's, once a distant third, has nearly caught Burger King in U.S. sales. It had 6,128 U.S. stores at the end of 2003. Wendy's stores average annual sales of $1.294 million—30 percent more than Burger King's.

For 35 years, Burger King was not only an also-ran to McDonald's, it was an also-ran to beer, vodka, cake mix, and all the other businesses at Pillsbury and Grand Metropolitan. At McDonald's and Wendy's, managers and executives have always known that their stock options and restricted shares are almost entirely dependent on the performance of the burger chain. Not so at Burger King. The CEO of McDonald's is the CEO of a Fortune 500 company. For 35 years, the CEO of Burger King was a division head. Division heads operate under greater constraints than CEOs. They have less discretion in developing and implementing strategy or in making acquisitions. At any moment, the unit could be sold from under them. If they're ambitious, they'll look to move to a better assignment pretty quickly. It's abundantly clear that Burger King has lacked the sort of managerial, and especially marketing, talent that McDonald's and Wendy's have. I can't recall a Burger King campaign since the 1974 classic "Have It Your Way."

In theory, Burger King gained a new lease on life when it was bought in 2002 and became a stand-alone corporation. But like a convict sprung from jail after 20 years, the company isn't quite sure what to do with its newfound freedom.

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster. Follow him on Twitter.

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