Burger's King's Reign of Error

Its latest owners have invested more than $100 million, but dirty stores, poor service, and menu missteps continue to dog the chain

When a group of investors led by turnaround artist David Bonderman snatched up Burger King for $1.5 billion in late 2002, it appeared that they had made out like McDonald's famous Hamburglar. After all, the previous owners, Diageo (DEO ), had demanded $2.6 billion six months earlier. But the principal of buyout firm Texas Pacific Group was able to knock $1 billion off the asking price by walking away when Burger King's sales tanked that summer. The deal, say analysts, looked like a steal.

A year-and-a-half later, Texas Pacific has some Whopper-size problems on its hands at the nation's second-largest burger chain. Known for scoring big returns on difficult turnarounds at Continental Airlines (CAL ) and J. Crew, its top executives admit that fixing a dull menu, dirty stores, and debt-laden franchisees at Burger King's 11,300 restaurants is proving a tougher job than expected. And they note that results, while ticking up slightly in recent weeks, could get worse before they improve. "When you acquire something in a downward trajectory, it doesn't bounce immediately," says Richard W. Boyce, a Texas Pacific partner and chairman of Miami-based Burger King.


  Though Texas Pacific handed the task of reviving Burger King to Bradley S. Blum, a hard-charging restaurant executive lured from The Olive Garden chain, Blum's overhaul has so far foundered. A chicken baguette intended to revive sagging sales failed to stimulate the appetite of Burger King's mostly male and macho clientele.

That misstep and slow progress burnishing the Burger King brand led company President Robert Nilsen to resign abruptly in February. He had been recruited a year earlier from Yum! Brands (YUM ), where he led a ballyhooed turnaround of Taco Bell. Then, in mid-March, Syracuse (N.Y.)-based Carrols, Burger King's largest franchisee, said earnings from its 351 Burger King restaurants dropped 66% in 2003.

The bottom line? Even as archrivals McDonald's (MCD ) and Wendy's International (WEN ) have turned in sizzling numbers recently, privately held Burger King's U.S. sales dropped 6.6%, to $7.75 billion, in 2003, according to industry researchers Technomic. "This may be Burger King's last stand," says restaurant analyst David S. Palmer at UBS Securities in New York. "The next six months will determine the future of Burger King."


  Combatting rumors that Blum, the chain's ninth chief in 13 years, may depart, a scramble to reignite the Burger King flame is under way. "Our focus must be only on immediate results. The situation is that critical," Blum told employees in a February voice mail. After pulling the chain's $350 million advertising account from Young & Rubicam in January, a new campaign reviving Burger King's "Have It Your Way" slogan from the 1970s is credited with helping same-store sales grow 4.4% recently.

To fend off the growing threat of low-carb diets and entice more families into Burger King, Blum is expected to roll out a fire-grilled chicken salad. And he's betting a TenderCrisp chicken sandwich launched Mar. 19, as well as a hefty Angus burger due out in April, will coax more BK fans, especially blacks and Hispanics, back.

Blum's biggest task is to fix an unwieldy and debt-ridden franchise system, created largely by Diageo, which allows some Burger King operators to manage more than 200 restaurants. Such a top-down corporate approach drove franchisees controlling more than 600 restaurants into financial distress or bankruptcy in the last two years, analysts say. When Burger King's then-largest franchisee, Westchester (Ill.)-based Ameriking, filed for bankruptcy in December, 2002, it operated 329 restaurants and had about $223 million in assets, vs. $291 million in debt.


  To fix similar problems at other franchise operators, Blum hired Trinity Capital, a Los Angeles-based franchise-turnaround specialist, to help ailing operators conduct debt workouts with their lenders. "Burger King is a fabulous brand that has survived 15 years of mismanagement," says Alan Vituli, chief executive of franchisee Carrols.

Blum is also threatening to temporarily close dirty or poorly managed Burger Kings that don't meet new customer-service standards. It's a threat he has already carried out at least twice, shutting a Dallas store in late February and a Michigan store in March. In a bid to cull unprofitable restaurants, Blum is expected to close 1,000 of the chain's 7,727 outlets in the U.S. over the next 18 months. "Debt and poor locations are what holds us back," says Alvaro M. Cabrera, chairman of Miami-based Heartland Corp. and an 18-year veteran of Burger King franchising.

While new menu items like the chicken sandwich may help sales, analysts say closing restaurants will actually aid McDonald's and Wendy's. That's because half the Burger King outlets to be closed are located within a mile of rival restaurants, potentially adding 1% per month to their sales. And in the notoriously competitive burger business, Burger King's foes offer scant sympathy for its travails: "Ray Kroc said it: If he saw a competitor drowning, he'd stick a hose down the throat," said McDonald's President Charles Bell last month.


  With $500 million in untapped real estate value and $100 million in earnings expected from 3,500 Burger Kings outside the U.S. this year, Texas Pacific insists that it has the resources to rebuild Burger King over the next two years, having aleady sunk at least $100 million into the chain.

Boyce argues that the deal still makes financial sense. "The investor group expects to make money, given the price we paid," he says. For now, however, Texas Pacific is finding it difficult to have things its way at Burger King.

By Brian Grow in Atlanta, with Michael Arndt in Chicago and Wendy Zellner in Dallas

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