Burger King's Appetite for CEOs

Would-be investors in Burger King had plenty of reasons to be wary of wagering on the company's upcoming initial public offering. Among them: slowing sales growth, patty-thin margins, and a franchise network that has been so reduced that the fast-food chain has slipped to No. 3 in the burger business, behind Wendy's (WEN) and, of course, McDonald's (MCD).

Now, Wall Street has something else to consider: the surprise resignation on Apr. 7 of its CEO(see BW Online, 04/10/06, "Burger King: Where's the Beef?").

Gregory D. Brenneman, a turnaround expert and protégé of the investor who led the buyout of Burger King in late 2002, said he was leaving immediately to return to his private equity outfit, TurnWorks. He was succeeded by John Chidsey, Burger King's president and chief financial officer. Chidsey, 43, a former executive at Cendant's (CD) car-rental subsidiaries, joined Burger King in early 2004.


  In a quickly arranged conference call, the new chief executive cautioned investors against reading anything into the abrupt change at the top. "It portends no bad news," Chidsey said. "Everything is fine with the company." Brenneman, 44, seconded him.

But as recently as a month ago, Brenneman had said he intended to stick around through 2007, a pledge he had first made when he was brought in by David Bonderman, a co-founder of Texas Pacific Group, in mid-2004. The pair had teamed up before when Bonderman hired Brenneman to turn around Continental Airlines (CAL) in the 1990s.

Regardless of why Brenneman quit, his departure extends the turmoil that has plagued Burger King's executive suite since its days as a subsidiary of Pillsbury and then food and beverage giant Diageo (DEO). The Miami-based chain is now on its ninth CEO since 1995 and its fourth in the past four years. Indeed, the company warned in its stock registration that Brenneman's loss was a risk factor that might affect performance.


  Brenneman had achieved a modest turnaround. He targeted the chain's so-called heavy users -- men from 18 to 34 years old who patronize the outlets several times a month -- with quirky ads featuring a character known as The King, and with hefty sandwiches like its Enormous Omelet. After declining for years, same-store sales started growing again, topping 9% in 2004's second half and last year's first quarter.

But by the middle of 2005, that growth rate was slipping, and the company once more began logging occasional declines in monthly sales. Its profits came to only $47 million in fiscal 2005, which ended on June 30, on sales of $1.94 billion.

Moreover, with its franchise network decimated by bankruptcies and closings, Burger King was down to 11, 400 locations by yearend 2005. That allowed Wendy's, with higher per-store sales, to edge past its longtime rival last year in revenue. Each chain now has 14% of the U.S. burger market, vs. McDonald's, with a 45% market share, according to Technomic, a restaurant consultancy in Chicago.


  "The segment tends to be a market-share-stealing business," notes Dean Zuccarello, a former Burger King vice-president who now heads Cypress Group, a Denver investment banking firm. "If Burger King is doing well, it's at the expense of McDonald's and Wendy's -- and vice versa. It's not a huge growth market. And you've got the big dog spending a lot of money on marketing."

Alvaro Cabrero, a longtime Burger King franchisee who owns 259 sites, says he was stunned by the flip in CEOs. He has nothing but high praise for Brenneman, calling him "a very sharp guy."

Still, if much of the management team stays intact, Cabrero says he won't be too worried. That's because sales at his restaurants in Illinois, Florida, and a half-dozen other states are increasing, and the remaining executives should be able to help him maintain momentum. But in the past at Burger King, a new CEO has meant a complete turnover at the top, and that would be bad for the entire chain.

Fast-food IPOs have been hot this year(see BW Online, 02/2706, "How the IPO Market Got Its Buzz Back"). Chipotle Mexican Grill (CMG), which McDonald's spun off in late January, doubled its share price on the first day of trading and, at $55.50 on Apr. 6, has soared an additional 26% since then.

Doughnut-and-coffee chain Tim Hortons (THI) also has done well since Wendy's took it public two weeks ago. It opened at $22.16 and closed at $28.07 on Apr. 6, up 27% (see BW Online, 3/21/06, "A Taste for Tim Hortons?"). Burger King's owners had hurried up its IPO to cash in. But with the unexpected loss of its turnaround specialist CEO, Burger King may lack its competitors' sizzle.

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