Fed up, BK franchise group moves to dethrone Diageo

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Burger King Corp.'s franchisees want to have it their way.

The fast-feeder's 7,600 U.S. franchisees have made public their intentions of seeking a buyout from parent Diageo, capping years of frustration with changing stewardship and ownership, and their lack of control over shifting marketing directions. They are also fed up with being treated as a cash cow for a conglomerate that plans to sell off the chain within three years.

"The thing that's really kept Burger King from maximizing its efficiencies is being buried within a huge conglomerate," said Steve Lewis, president of the BK's National Franchisee Association. "We want management who can make decisions, where they don't have to go through another entity. The [Diageo] guys make all the decisions over in London."

Mr. Lewis' group seeks to facilitate a buyout from Diageo, ideally by a privately held company that is not part of a larger corporate entity, and has retained an unnamed investment company to develop an offer to present to Diageo by December.


At the root of franchisees' disenchantment is the decades of turnover, not only in ownership but also in upper management at the burger giant. "Turnover at Burger King has been an issue for way too many years," said Mr. Lewis. Said one franchisee: "When everybody is new all the time it's like stepping back to square one again."

The appointment of Colin Storm, 62, CEO of Diageo's Guinness unit, to the CEO slot at BK last week makes him the burger chain's 17th chief executive in its 46-year history. Mr. Storm succeeds Dennis Malamatinas, 45, who resigned.

The franchisees have also seen the company through at least three ownership structures since James McLamore and Dave Edgerton founded it in 1954. Pillsbury Co. bought BK for $18 million in 1967, before itself becoming acquired by Grand Metropolitan for $5.7 billion in 1988. Franchisees fought that hostile takeover, but ultimately lost their campaign to separate from the company. Grand Met merged with Guinness in 1997 to create Diageo, which this month announced plans to sell the burger chain and its other food companies by 2003 to concentrate on the spirits business.


Under the three owners, BK has had a string of advertising agencies, from BBDO Worldwide, New York, in 1968, which created the highly successful "Have it your way" campaign, to J. Walter Thompson USA in 1976 and N W Ayer in 1987. Ayer gave way to a split between D'Arcy Masius Benton & Bowles and Saatchi & Saatchi. A review in late 1993 landed the account at Ammirati Puris Lintas, now Lowe Lintas & Partners Worldwide. Lowe currently holds the $400 million account, with creative centering on the tagline "Got the urge?" voiced by actress Kathleen Turner.

The chain has had its share of advertising disasters, too. "Who could forget the `Where's Herb?' " campaign by JWT, asked franchise consultant Don Boroian, chairman of Francorp, Olympia Fields, Ill., who said the brand is one of the most badly managed in the industry. "How can you have 19% share compared to [McDonald's Corp.'s] 42% when Burger King has a better product?" he asked. "Instead of reminding people that you have a better quality product on the market, they did spots like `Herb.' "

Recently, however, Burger King has apparently gotten some things right. In April, the company announced it had received overwhelming support from franchisees for the chain's continuing $500 million transformation plan, including its new logo, signage, store design and drive-through system.

But the company faces significant challenges in the future to get back on track. According to the franchisee, one of the most detrimental changes was the elimination of the burger chain's research and development department under CEO Jim Adamson during the Grand Met days. "That was something very harmful that reduced product development significantly."


When the product development program was reinstituted, the chain was far behind its competitors. Mr. Lewis agrees there are opportunities to continue to work on product development and value positioning. "We got behind the curve on those," he said.

The franchisee representatives said it is premature to discuss what they would like to see in terms of marketing strategies or staffing after a buyout. But they said retaining good staff is a priority.

Current marketing management "is making an enormous effort to go in the right direction," said the franchisee. "My biggest fear is that the good people won't stay. They get very frustrated working in the Burger King environment."

Marketing chiefs, in fact, have also revolved in and out of the company, with Gary Langstaff, Sidney Feltenstein, Paul Clayton, and James Watkins among those holding the top marketing spot since the early 1990s. Stefan Bomhard is now senior VP-marketing.

BK has indicated the franchisee movement won't derail its plans. "Diageo remains committed to the intentions announced in June to explore a partial flotation of Burger King Corp. on the New York Stock Exchange as the option in the best interest of our shareholders," said a statement the company released last week.

Diageo "can say whatever they want," responded Mr. Lewis. "If you take a look at restaurant stocks, no matter how well the individual concepts are they are not performing up to the indices of the market. That in itself indicates there is no way to maximize what they assume they would garner out of a 20% flotation."

Rather, Mr. Lewis said the partial offering is a way for Diageo to draw more money out of Burger King to divert into its parent's spirits expansion. "They can't spin this thing off and get what they think they can get out of it. There is no way."


The franchisees, however, believe they could turn around the chain's performance as an independent company. "I think this brand within a very short period of time could improve on its performance by 20% to 25%, no question," said Mr. Lewis. In 1999, Burger King's U.S. system sales were $8.6 billion, only 1.2% higher than the prior year. By comparison, McDonald's system sales were $19 billion, up 4.9%.

Most analysts agree Burger King's performance can improve, but not likely to the level franchisees project.

The franchisee group's plans aren't realistic, according to franchise consultant Michael Seid, managing director, Michael H. Seid & Associates. "It sounds good and feels good but it's not practical," he said. "Franchisees need to worry about the micro part of the business, which is serving customers. The franchisor needs to manage and grow the business. The idea that a group focused on the micro aspects in a co-op format can make decisions for the whole, what you get is a consensus business. A consensus business doesn't move any quicker than Diageo."

Another caution for franchisees is they must choose their financial partner very carefully, said Patrick Schumann, analyst with Edward Jones. "Who's to say whether they'll have ultimate control and decisionmaking power if things don't go as planned and the investment group gets antsy?" he said.

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