The Whopper Plays Catch Up

Burger King moves to stop its slide, but are its efforts enough?

A dozen Burger King restaurants in Orlando are getting a total makeover. Yellow, violet-blue, and red hues have replaced the dark earth tones in the eating area. The oakwood panels have given way to tiles in vibrant colors. The tired bun halves logo has been energized with blue and a more contemporary look. The kids' playroom features computer games.

Sounds great. But will new decor be enough to get Miami-based Burger King back on the growth track? In the past year, Burger King has lost market share as average store sales slipped 2.3%. Franchisees' frustration with the home office and parent company Diageo PLC reached a flash point this winter when franchisee leadership hired a law firm to explore the possibility of a spin-off. "We believe that Diageo could have done a better job with the brand," says Steven Lewis, president of Burger King's franchisee group and owner of 31 Burger King restaurants. "There's substantial room to improve."

Burger King officials agree, and they've undertaken a broad growth strategy. The company is implementing a $500 million program featuring new restaurants and backed by new ads and menu items. Burger King says customers love the new look and that sales at revamped restaurants are up 30%. "It's probably the most significant change Burger King has undergone in recent history," says Burger King CEO Dennis Malamatinas.

MAC ATTACK. But the new plan comes late. Burger King franchisees have complained that Diageo did them wrong for much of last year. While Burger King had little in the way of strong new marketing and menu items, rival McDonald's attacked Burger King where it hurts: It remodeled its kitchens to handle made-to-order food, long Burger King's single greatest advantage in the burger wars. "They're losing that point of differentiation," says Mitchell Speiser, a restaurant analyst at Lehman Brothers Inc. As a result, Burger King is also losing some once-loyal customers. "When McDonald's came out with the Big Xtra!, I stopped going to Burger King," says John Harris, 51, of Atlanta. These days he can get the fresh lettuce and tomato he loves just as easily at the Golden Arches.

Burger King is now hustling to make up for lost time and regain its quality edge. The biggest push comes with its new restaurant design. Over the past year, 25 renovated outlets have opened in Florida. Executives say 1,000 more will get a makeover over the next year. By 2004, all the 8,183 outlets in the U.S. will be made over. There's more to these new restaurants than just a fresh look. Behind the counter, kitchens feature improvements such as a three-speed broiler and cheese-melting steamers. There's also a special prep area for the drive-through line, which cuts waiting time.

SULTRY. The problem is it will take years before all the Burger King outlets can get their upgrades. So, in the interim, the chain is counting on tried-and-true marketing tactics to build store traffic. To lure grown-ups, a new ad campaign features the sultry voice of actress Kathleen Turner. The new ads are supposed to take Burger King "back to our key strength--great taste," says Stefan Bomhard, the company's new-marketing chief for North America. And for kids, the company is holding fast to its movie licensing program. Burger King is also fiddling with its menu: It's rolling out such oversize items as the X-treme Double Cheeseburger. The company, meanwhile, is cutting back on some marketing gimmicks, especially 99 cents promotions, after franchisees complained that the discounting undercut Burger King's brand image.

Even with all the moves, Burger King faces an uphill battle with its franchise owners. The restaurant refits can cost store owners as much as $250,000 a pop. What's more, Burger King is raising the fee franchisees must pay, from 3.5% to 4.5% of sales, making more capital spending a hard program to sell. "It's hard to know what kind of return I'm going to get on my investment," says Diann Banaszek, who owns nine outlets in Silicon Valley.

Still, there are signs that tensions may be easing between the company and some of its larger franchisees. Lewis says he's had monthly meetings with Burger King executives this year and they've been "receptive" to franchisee concerns. As for a spin-off, a Diageo spokesman says it has no plans to sell. Analysts following the conglomerate say that makes sense. "It's franchise income," says Graham Eadie, an analyst with Deutsche Banc Alex. Brown. "The revenues are very stable."

But a big whopper of a question remains: Can Burger King lure back its lost customers? Bomhard is optimistic that, in the long run, Burger King's new commercials and jazzed up restaurants will win the day. In the meantime, though, expect the burger wars to continue in high heat.

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