Recipe For Dissension

Franchisees worry they'll get burned as Burger King pushes through costly redesign
By Alina Matas, Review Staff

Miami Daily Business Review, Chronicling Money and Power in South Florida, Thursday, September 30, 1999

Juan Cruz has been running his family's Burger King restaurant in Northwest Miami-Dade for 22 years, and last year his outlet won the chain's brand-delivery award.

"I am a positive franchisee, and I love changes," he says.

But these days he isn't so ready to go along with his corporate parent, which recently unveiled an ambitious billion-dollar, system-wide revamp to strengthen its brand and increase earnings.

The problem: Franchisees may need to come up with more than $100,000 per restaurant to pay for the overhaul.  Furthermore, some franchisees--Cruz included--don't like all the changes.

Miami-based Burger King, which is owned by London-based Diageo PLC, hasn't specified a date by which it will complete the overhaul.  The company has begun a test run with 43 corporate-owned restaurants in the Orlando area through spring 2000.

Already, the burger chain is stamping a new logo on its restaurant sings and paper goods, and will soon roll out a new drive-through window that includes a clearer intercom system, easier-to-read menu boards and an area where customers can request items they forgot.  In the kitchen, an even bigger change is underway: a new broiler kitchen system will transform the current assembly-line process Burger King uses to put buns and burgers together.

The aggressive overhaul is aimed at reversing a 5 percent decline in same-store sales in North America during the first half of this year.  And it's part of a fight to maintain the gains in market share Burger King made in the mid-1990s.

The company wants to increase average sales per restaurant to $1.6 million from its current $1.1 million.  Doing so would allow Burger King to surpass its biggest rival, McDonald's Corp., which has average restaurant sales of $1.45 million.

But first, Burger King needs to rally about 1,400 Burger King franchisees, who own more than 90 percent of the chain's 10,600 restaurants and pay 3 percent royalties on gross sales to Burger King.

"Since the sales are down nationally, obviously spending a lot of money on remodeling is not something franchisees would like to do without seeing some rewards," says Joe Lal, a large franchisee in Sacramento, Calif., whose chain of 22 Burger King restaurants and 11 Denny's have fallen on hard times.  "There has been no research that tells us if we spend this kind of money, we will have this return."

Most franchisees say they like the idea of a redesign in general, but many also are worrying about the details. 

Cruz, for example, says he isn't convinced the new kitchen design, in which one person makes everything on the menu--as opposed to the current system where one person makes only whoppers, another makes all other burgers and another makes everything else--will help him sell more burgers.

"I have not negatives about the new image," he says.  "I'm just having problems with the kitchen."

What's more, Cruz questions whether changing the kitchen system is what Burger King really needs.  He and some industry analysts point out that Burger King's kitchen has been the envy of McDonald's, not the other way around.  In fact, McDonald's is undergoing a redesign of its kitchen to cook the meat at the time of order--thereby delivering a fresher product--as Burger King has done for years.

"I went to a new McDonald's, and it's exactly what we have today," Cruz says.  "This makes no sense."

Burger King, for its part, says its new kitchen design will produce higher-quality food, shave off seconds each step in the process and make a more efficient use of labor.

"We need to be the restaurant of choice," says Burger King spokeswoman Kim Miller, "And that's not just great food but also a great environment."

But there are other uncertainties, particularly with regard to costs.

"Franchises are apprehensive about how much it will cost them," says Beverly Jeremik, marketing vice president for Southern Industries Corp., which controls 37 restaurants in the Jacksonville area.  The changes will modernize and enhance Burger King, she says, but "we really don't know yet what this is going to mean in concrete dollars and cents."

Burger King's Miller declines to cite any cost estimates, saying those figures aren't finalized. Burger King, she says, is still working to bring down the per-unit cost of building a new kitchen as it tests the concept at 43 corporate-owned stores in Orlando.  Slated for completion by the spring of 2000, that test market also is supposed to yield figures on sales increases as a result of the new change.

Whatever the cost, "we believe the brand is worth it," says Miller, adding that the company will factor in the costs somehow so that franchisees can reap benefits from their investment.

Miller also said the company will roll out some less costly components first, such as the changes in the drive-through window.

What will be contentious is agreeing on whether the required investments will financially benefit every franchisee, say some observers.  With an average mal ticket of about $4, an average restaurant would have to sell an additional 342 meals each day to raise annual sales by $500,000 a year--from $1.1 million to $1.6 million, as is the company's goal.

Robert Zarco, name partner in the Miami law firm Zarco & Pardo, which represents Burger King franchisees throughout the country, says Burger King should demonstrate that the required investment will make commercial sense in every instance or other wise offer some form of financial assistance, such as a subsidy or a reduction in royalties, to make the investment financially worth it for franchisees.

Then again, Burger King may be looking to weed out its financially weaker franchisees.  The company acknowledges that it will seize on a timing opportunity: Many of its 20-yeard franchise agreements soon will come up for renewal.  "Certainly, we will be mandating those changes to renew those agreements," Miller says.

Says Zarco: "There's no question that Burger King will use this to weed out the less wealthy operators.  It's a way of identifying who will continue to follow Burger Kings' leadership.

Meanwhile, Steve Lewis, president of Burger King's National Franchise Association, said he hopes the group's involvement in developing and testing the new concepts will result in a smooth rollout, in which franchisees' interests are protected.  "We want to make sure that everything we do has a legitimate return on our investment," he says.

But not everyone is so optimistic, including Robert Hakimianpour, who with different partners co-owns 40 Burger Kings in California and Texas.  His prediction?   "They will force it down franchisees' throats."