How Wendy's Toppled Burger King

when it comes to fast food McDonald's is unrivaled in scale and success McDonald's has held onto its crown for decades selling more fries Burgers nuggets and apple pies every year than any other fast food chain by orders of magnitude there is no serious Challenger to the golden arches whether that's overseas or on home turf in the world of burgers the fight for the top spot is futile for decades Burger King has held second place with its signature flame grilled Whopper onion rings and French toast sticks Burger King was a Cornerstone for Americans in the 70s and 90s who enjoyed it as an alternative to Big Macs and Happy Meals but the burger Wars these days are not so clear-cut McDonald's went through its own identity crisis for years attempting to be fancy and healthy after a period of struggle McDonald's has found success returning to its roots as the fastest cheapest simplest and most consistent burgers around Burger King on the other hand has struggled to hold on to second place and stay relevant Burger King these days is just hanging around beyond the Whopper the food is acceptable but not exceptional the service is inconsistent most items are more expensive than McDonald's and they still insist on charging extra for cheese the last time I had Burger King it was three years ago and it was the only restaurant open at the time to my surprise the Whopper was good the fries were decent and the flame grilled flavors shine through even on a hangover but for eight to ten dollars I'd rather pay a little bit more for Shake Shack Burger King's marketing feels equally lackluster these days with forgettable ads and an outdated habit your way tagline that was never really true in the first place while the fight for first place is non-existent the battle for second place in the burger Wars is vicious Burger King and the little red-haired girl by the name of Wendy's have been in a constant battle for the number two spot behind McDonald's while the king and the girl have traded places over the year years Wendy's these days is a clear number two Burger chain despite having significantly fewer locations and resources Burger King's fall is a Timeless story of what happens when private Equity takes over and oversimplifies business into a short-term soulless optimization of numbers and shareholders over products and customers in this episode we'll cover the toppling of Burger King and the rise of Wendy's as a modern tale of David vs Goliath and how important vision is for all businesses that even Burger flippers live or die based on their strategy first a word from this episode's sponsor there's been many lost decades but 2023 is shaping up to be a year of lost wealth a shocking survey even shows more than half of Americans making six figures are now living paycheck to paycheck unfortunately the rising cost of living isn't the only issue tens of thousands of people have been laid off in just the last few weeks and Jerome Powell is still actively trying to bring the labor market to a screeching halt as a record number of people make emergency 401K withdrawals now Goldman Sachs is being honest about where the market is headed nowhere but Goldman Sachs also offered some guidance as they join the chorus of Institutions moving away from a typical 60 40 portfolio they say adding in real assets can help you protect your purchasing power because even if the stock market flatlines this year as they expect these low correlation assets can hold their value according to a recent report by Citibank the asset with the lowest correlation to the stock market of any major asset class was Contemporary Art that's right Contemporary Art prices have more than doubled the s p 500's Total return over the last 26 years now this Market used to be hard to get into but thanks to Masterworks their platform lets you invest in multi-million dollar paintings from Legends like Picasso and Banksy without spending Millions Masterworks has built an impressive track record of 11 exits all of them profitable with the last three exits handing back 10 13 and 35 percent net returns Masterworks has seen over 650 000 members try to gain access and paintings have sold out in hours so there's a wait list but you can get a VIP access right now just check the description below thank you to Masterworks for supporting modern MBA and making this episode possible in 2008 Burger King was in the John chidsy era his predecessor was Greg breneman a professional CEO with a reputation for turning around troubled companies Greg's claim to fame was saving United Airlines from bankruptcy in the 1990s yet Greg would last just two years at Burger King before putting in his resignation in 2006. Greg left to take over Quiznos where he ran the once promising sandwich chain literally into the ground his sudden departure thrusted Burger King's CFO John chidsy into the CEO spot out of necessity in 2006 Burger King was about to IPO and promoting an in-house candidate was the best way to demonstrate stability John was a numbers guy who had built his career in rental cars and soda neither Greg nor John had any restaurant experience prior to Burger King and it showed in their work John's first edict as CEO was for Burger King to get out of the restaurant business and to focus on International growth this was the same Playbook as KFC reduced costs through franchising expand quickly and Chase overseas markets at the expense of domestic sales but Burger King was so high profile that the company needed an answer for competing with McDonald's at home John came up with the barbell strategy he pitched that Burger King could reignite sales by designing its menu like a literal barbell with low end value menu items on one end and pryan premium products on the other the value menu would pull in budget type customers as lost leaders which would be offset by the higher margins of the premium products as long as there was something for everyone John believed people would have no reason not to eat at Burger King John's comfort zone was in the numbers he Dean Burger King's greatest priority after franchising International growth and a barbell menu was to win the quote-unquote superfan super fans were an internal label to describe 18 to 34 year old men who made 15 trips a month on average to a fast food restaurant this demographic allegedly represented 18 percent of Burger King's customers and accounted for 50 percent of all traffic to fast food restaurants with the high awareness around nutrition and processed foods these days it's hard to picture but not impossible to imagine that back in the 2000s 50 percent of a young American male's diet was fast food under John Burger King would become more masculine in messaging and product between 2008 and 2010 John's strategies were in full effect the company pursued its barbell strategy rolling out high margin premium items like the Steakhouse burger The Angry Whopper the three pepper Angus burger the cheesy bacon Tender Crisp the bacon barbecue Tender Crisp and funnel cake sticks just by the naming of these products alone it's clear how strongly Burger King believed their success to be on winning male customers Burger King had tie-ins with just about every action Blockbuster like Iron Man Transformers the Incredible Hulk and Indiana Jones and the kingdom of the Crystal Skull to attract families Burger King also showed up in The Simpsons the Jonas Brothers Pokemon Twilight SpongeBob and Neopets Burger King wanted to be visible everywhere and anywhere that was trending in a not so subtle nod to its desired male audience Burger King's ad campaigns became more risque but the controversial Whopper virgins and the gimmicky flame body spray which sold quote the scent of Seduction with a hint of flame broiled meat for the low price of 3.99 in a time where the market was demanding healthier fast food Burger King responded with apple fries mac and cheese and grilled chicken tenders but like McDonald's burger king would find out the hard way that healthy fast food is an oxymoron positioning cheap processed burgers and deep fried potatoes as Gourmet natural good for you Foods is the exact definition of putting lipstick on a pig under intense political and Market pressure McDonald's would burn Millions over the next several years in a failed attempt to reinvent itself into something it could never be to John's credit Burger King didn't fall into the same trap like most number crunchers he sucked to data as the basis of his decisions as CEO but in this case he was right the new health-conscious offerings like grilled chicken tenders won headlines but failed to meet sales expectations investment into making Burger King healthy never went beyond these few products under John's tenure between 2008 and 2010. in the same time span Burger King rolled out value items like Burger shots BK rappers the one dollar Whopper Junior and the one dollar double cheeseburger while Burger King talked up its barbell menu of high-end and low end products the reality was John was focused most On The Low End under John when Burger King wasn't marketing to young men it was messaging value to everyone else families mothers seniors and children Burger King ran Nationwide promotions where customers could get two chicken sandwiches or two Whoppers for four dollars John wanted Burger King to be the fast food leader in providing quote exceptional value he pushed the superiority of Burger King's one dollar Whopper Junior and one dollar double cheeseburger over McDonald's in taste and Portion between 2008 and 2010 BK had two messages for customers all around the world come in for a Macho Meal or for a great deal under John all Burger King stores would also extend their operating hours with guidance from corporate to open 24 7 whenever possible to pull in any and all late night customers CEOs operate on abstractions and John was no different the abstractions that John subscribed to were dead simple and bordered on Common Sense it is better to have a sale than no sale at all if the food is cheap enough people will buy if a restaurant is open then a sale can be made if a restaurant is open when its competition is closed it is likely to earn more sales to John cost and availability were core drivers that appealed to all demographics John's abstractions in themselves are not wrong yes a restaurant that is open can sell whereas one that is closed has no chance of selling anything at all yes it is better to make one dollar than no money at all the problem with Jon's abstractions is that they are too simple and too rooted in static black and white binary logic when business is really different Shades of Gray it would be unfair to evaluate John's decisions as CEO between 2008 and 2010 without context it was the time of the Great Recession the poor Global macro economic conditions had hurt fast food just like every other industry high unemployment low wages and a drop in disposable income meant people were eating out less unemployment amongst 18 to 34 year olds BK's so-called super fans was reportedly as high as 20 percent all restaurants especially fast food chains engaged in discounting to pull customers back in customers on even the tightest of budgets couldn't say no to two Whoppers for four dollars the one dollar Whopper junior or the one dollar double cheeseburger no matter what you might think of Burger King in terms of quality the amount of food customers were getting with these promotions were exceptional deals and not even McDonald's came close to offering by offering Foods at negative margins John succeeded in keeping up Burger King's overall sales and revenue during the Great Recession the problem that Burger King ran into with the strategy was that its discounts were too aggressive and its promotions were too generous while we've covered the franchisee and franchisor dynamic extensively this season with the KFC and Steakhouse episodes Burger King provides a new angle that we've not explored before the one dollar Whopper Junior and the one dollar double cheeseburger were products with negative margins from a psychology standpoint the value menu in fast food is like milk in supermarkets value menu items serve as lost leaders to get customers in the door it's in the fries and the drinks where fast food chains have the highest profit margins if a customer walks into a Burger King orders the one dollar double cheeseburger but then adds fry eyes and a drink then those high margin additions offset the negative margins of the one dollar double cheeseburger since most people don't go in for just fries or soda in a cup that one dollar double cheeseburger is necessary to make the sale and is worth the loss this is why whenever you order something off the value menu whether at Burger King McDonald's or any other fast food chain you are explicitly asked if you want to upgrade to a combo meal if you buy only the one dollar burger the store loses money while affordability is Central to fast food the reality is that there are conflicting incentives at play below the surface when sales are up and franchisees are successful the franchisor pockets more money from royalties when sales drop and franchisees struggle the franchisor earns Less on paper royalties hold franchisers accountable they will only be successful when their franchisees are but Burger King's royalties like McDonald's and every other chain are a percentage of gross sales franchises are incentivized to optimize for the Top Line because that's where they take their cut they care about gross sales and less about margins franchisees on the other hand optimize for the bottom line they depend on margins and net income improving gross sales is always a positive but to franchisees it's not welcome if that growth is built on selling products that have no margins so when Burger King kept pushing these deals and value items during the Great Recession franchisees lost money even though the company's overall sales and revenue stayed up franchisees were mandated to follow these promotions and were not allowed to sell the Whopper junior or dollar cheeseburger for more than one dollar in a time where everyone was desperate for a deal customers would go into Burger King ordering only the value menu which left franchisees in the red the Lost leaders had become the primary products and franchisees hated John for it they rallied to sue Burger King alleging that BK had no right to force prices and unprofitable products onto franchisees the lawsuit was an ugly and highly publicized legal Affair that would only be resolved under Burger King's new owners and after John's departure years later yet the most controversial move of John's tenure was replacing the broilers at Burger Kings all around the world BK's differentiation since its founding was cooking its hamburger patties over open Flames to achieve that signature flame grilled flavor but John was a numbers guy he believed that the numbers could always be improved and such Pursuit was worthwhile even if it came at the risk of quality the new broilers were fully enclosed machines that would heat up faster than before but the trade-off was that the patties would no longer be cooked over an open flame the other difference was the change from single serving to batch cooking with the old broilers workers would feed in patties one at a time to cook as needed with the new broilers meat would be cooked in batches which would reduce waste and enable Precision the new broilers also simplified cooking into pre-programmed settings would set temperatures and cooking times so workers only needed to push a button to operate while the old broilers Ran hot from open to close the new machines would automatically shut off after each batch John pitched that franchisees would enjoy significant Savings in gas and electricity with these new broilers and without open Flames making the kitchen hot Burger King stores would no longer need to run as much air conditioning another great opportunity for savings and improved numbers in John's mind John pushed the flexibility of these new batch broilers these machines were critical he said to supporting the barbell menu strategy he teased that these machines could be programmed to cook ribeye steaks pork tenderloins kebabs or even bone-in ribs which could all one day be high margin premium features on Burger King's menu by the end of John's tenure in 2011 all Burger King restaurants around the world had replaced their old traditional Open Flame broilers to these new pre-programmed batch broilers while the company has maintained that these new broilers have had no impact on Flavor some fast food enthusiasts to this day claim that this change ruined the once great classic open flame grilled Taste of Burger King's Burgers by 2011 the relationship between Burger King and its franchisees had deteriorated to even worse levels same store sales continued to decline average annual sales per store had stagnated profit had flatlined and the company's operating margin was stuck in the low 13 to 15 percent range Burger King was not great at being either a restaurant or a franchisor despite John's statements on International growth and franchising Burger King had made very slow progress towards these goals under his tenure the number of franchise Burger King stores only went up one percent every year while Burger King was not in free fall it was by all conventional measures floundering John's strategy did not change and he did little to inspire shareholders his fate was sealed in 2011 when Wendy's toppled Burger King for the first time in history in revenue and sales as the new number two Burger chain in the United States 3G capital a private Equity founded by five Brazilian billionaires acquired Burger King in late 2010 for 4 billion dollars they followed the standard private Equity PlayBook take a struggling company private cut costs simplify operations improve profits and then flip the company for billions more John was one of the first casualties and would remain out of work for the next eight years it would eventually land on his feet in 2019 as the present-day CEO of Subway where he is once again struggling to breathe life into a legacy restaurant and has alienated franchisees by pushing aggressive discounting Burger King's new owners appointed one of their own in Daniel Schwartz a 29 year old econ major from Cornell who had spent the past five years climbing the ladder and proving his loyalty at 3G capital Daniel would serve as CFO in 2011 before becoming the CEO of Burger King in 2013 at the age of 32. Daniel had no prior restaurant operational or managerial experience his age made him one of the youngest ever Executives of a fortune 1000 company but based on where Burger King's new owners wanted the company to go perhaps experience and domain expertise was not needed everyone knew the Playbook even John before he was kicked out pursue International growth fund expansion to overseas markets worry less about domestic competition reduce costs and become an exclusive franchisor with Juicy 20 plus margins while both John and Daniel were numbers guys the key difference between the two was that Daniel had the aggression and ruthlessness from his PE background to make things happen fast Daniel settled the value mini lawsuit and repaired relations with franchisees promising them greater collaboration and a voice into corporate decisions he needed to keep franchisees Happy from 2009 to 2011 the number of franchised Burger King stores under John Grew incrementally From 88 to 90 percent under Daniel these efforts were accelerated by 2014 franchisees were running a hundred percent of all Burger King stores less than one percent of locations today are run by corporate as Burger King got out of restaurants and into the franchisor business overhead decreased and profits improved dramatically operating margins jumped from 15 in 2009 under John to 21 46 and then 69 percent by 2014 under Daniel but just like with the new broilers there are trade-offs the franchisor play is not fairy dust the lower costs better profits stronger margins all come at the cost of lower Revenue Burger King as the franchisor receives significantly less income but to Daniel and its new owners this exchange was acceptable under a classic private Equity lens there's no point in making more money if it cannot be kept as profit Burger King's total revenue under Daniel declined from 2.5 billion dollars to 1 billion dollars as the overall pie shrunk in dollars royalties grew to become the majority of Burger King's business from 2009 to 2010 under John franchise fees and royalties accounted for just 10 percent of Burger King's Revenue by 2014 under Daniel franchise fees and royalties would now represent over 90 percent of Burger King's income and as a revenue stream would grow on average 10 percent year over year in dollars food and drink sales at corporate locations which represented 70 of the business in 2009 would drop to account for less than 10 percent by 2014. Burger King would sell off hundreds of corporate locations to franchisees the company would go from operating a thousand five hundred stores in 2009 to just 52 stores by 2014. this streamlining extended into the menu and other aspects of Burger King Daniel sold off the company jet laid off employees and cut the menu down to Essentials these cost cutting measures and change in business model helped the bottom line but had little impact on customer appeal overall system sales which is food and drinks sold at Burger King stores around the world had grown from 14.3 billion dollars in 2009 to 17 billion dollars by 2014. the growing profits higher margins and three percent growth in sales year over year sounds decent but on closer look doesn't hold up between 2009 and 2014 Burger King expanded from 12 000 stores to over 14 000 locations worldwide in 2009 under John the average Burger King store grossed 1.18 million dollars a year five years later in 2014 under Daniel the average Burger King store was still grossing 1.18 million dollars a year the same as before suggesting no real change in demand but Wall Street is easy to please despite no change in customer sentiment or demand 3G re-listed Burger King on the New York Stock Exchange in 2012 showing off its sexy new margins and growing profits Daniel's pitch to investors was that as long as Burger King continued streamlining operations growing internationally reducing costs and franchising the company would reclaim its second place spot behind McDonald's yet despite the financial improvements Burger King under Daniel would follow the same tired barbell menu strategy prioritize franchisees over customers and regress into a stale unopinionated and forgettable brand like all restaurants Burger King needed to constantly spice up its menu to keep things interesting for customers but with one hundred percent of stores now in the hands of local operators Daniel needed the franchisees more than ever between 2013 and 2017 Burger King launched the mushroom and Swiss bacon Whopper the A1 ultimate bacon cheeseburger chicken fries the A1 hearty mozzarella burger the big king the Chicken Big King the Swiss King the rodeo king and the extra long jalapeno cheeseburger as new premium products while these new products Were Meant to get customers excited in reality these items catered far more to franchisees than customers franchisees are most sensitive to food and labor costs to keep franchisees happy Daniel mandated that new Burger King products should be operationally simple and should introduce as few new steps or ingredients as possible this would help franchisees keep their labor costs low as their staff no longer had to be retrained for every new product food preparation and assembly was simplified to the bare minimum food costs would remain the same as many of the newer items were mostly rearrangements of existing ingredients one example was the extra long jalapeno cheeseburger which was a rearrangement of the standard hamburger patties lettuce and cheese onto the long chicken sandwich buns with the addition of a few jalapenos the new products were uninspiring and failed to catch on with customers but franchisees were more than happy to do less work to maintain their margins and to operate under the illusion of Greater menu diversity franchisee happiness to Daniel was more important than customer satisfaction the number of new products at Burger King dramatically declined under Daniel's tenure he demanded not only simpler but also fewer product launches in another franchisee friendly move Daniel restructured the value menu from the controversial flat pricing to flexible ladder pricing Burger King's value menu would now offer multiple products between one dollar and two dollars and franchisees had autonomy to set their own prices this helped franchisees ensure profitability with low end items and eased tensions over loss leaders when it came to marketing Daniel was careful not to repeat the mistakes of his predecessor rather than chase after a specific demographic and risk being wrong Daniel brought in Burger King's target market to Encompass everyone quote at Burger King we welcome everyone you look at who Our Guest bases it's everyone across all demographics and ages if you go back in time Burger King's marketing message had narrowed a bit despite the fact that if you looked at our guest space it really was everyone we've brought in the message so that it's much more inclusive and it's reflective of who Our Guest base actually is Daniel wasn't wrong but this was as safe and as non-committal as you can get when it comes to marketing as a consumer brand Daniel preached balance in products marketing and operations Burger King's success he believed lived in the barbell menu of value core and premium products if the market shifted to favor high-end Foods then Burger King could monetize if customers swung towards value like they did during the Great Recession then BK could also win quote our strategy has remained the same throughout we are here for the long run and in the long run we are delivering great guest satisfaction great products and strong franchise profitability we believe in a balanced approach sometimes we offer more value other times we offer more premium but the same strategy that we've had in place for the past five years is going to continue regardless of if things slow down or accelerate within a quarter balance in itself is not a bad strategy but when you try to be a jack of all trades you end up as a master of none there were some product wins during Daniel's tenure limited time offerings like grilled dogs Mac and Cheetos Cheeto chicken fries chicken fry Rings Fruit Loop and lucky charm shakes all help sustain short-term sales through virality but these gimmicky Foods ran counter to Burger King's historical reputation around quality and flame grilled flavors these products were all operationally simple for instance the chicken fries and mac and Cheetos came in Frozen all employees had to do was take them out of the bag and drop them in the fryer but the greater point is that these products were out of left field they were only available for a limited time they were designed for virality and they had no relevance to the rest of the many unlike Taco Bell who has embraced creativity to great success Burger King stubbornly remained on the fence never fully leaning into these wacky offerings or its classic flame grilled burgers this strategy might have worked if the market was static but Burgers as a food category were evolving customers were becoming more sophisticated competitors were emphasizing quality and Wendy's was taking market share Daniel's so-called balanced approach made Burger King feel outdated Bland unopinionated and forgettable to customers were you supposed to go to Burger King for the Whoppers or were you meant to LEAP out of your chair for these viral limited time offerings what exactly were Burger King's strengths and why should anyone go to BK over any other Burger chain Burger King's International success covered up its Decay as a brand since 2011 Daniel had pushed for Rapid International expansion through the master franchise joint venture model under the master franchise joint venture model or mfjv for short Burger King would work with a local partner who would oversee day-to-day operations within one specific country in exchange for exclusive development rights these Partners would take on franchisor duties within their countries like recruiting local franchisees opening up more restaurants enforcing standards and adapting the menu to local pallets they were not required to follow or constrained by Daniel's pandering to franchisees cost-cutting measures or mandates for operational Simplicity as a result Burger King's overseas exercise greater culinary creativity and enjoy stronger many diversity relative to the United States with items like the Kuro Diamond burgers in Japan the donut burger in Israel and coconut shrimp in Korea between 2014 and 2018 Burger King's total revenue and profits continue to climb back up thanks to its International success yet on a per location basis average annual sales had once again stagnated even after nine years of private Equity leadership a Burger King store in 2018 was grossing the same amount in food and drink sales as it was 10 years ago under John chidsy and during the Great Recession for Burger King that didn't matter so long as franchisees weren't revolting and royalties kept flowing in while the media portrayed Daniel as the child prodigy who saved Burger King the reality was that Burger King was stuck in third place Wendy's continued to outperform Burger King despite having significantly fewer resources and smaller International presence in 2019 Jose sill a veteran who had worked at Burger King for over 18 years took over as CEO instead of bringing a fresh perspective and changing up the status quo Jose ended up parroting the same exact strategy as his predecessor we've said many times before that we're at our best when we have a balanced offering and a balanced marketing plan our Focus continues to be on driving the top line through a balanced approach with value offerings core offerings like our Whopper and crispy chicken sandwiches and compelling premium offers which we think will drive more guests into the restaurants Drive the top line and help us improve the bottom line performance we know that the best way to grow our business is a balanced core premium and value offering that caters to all guests this would be the eighth year in a row which Burger King would bring up the barbell menu and preach balance as its main strategy Jose did make some tweaks to Burger King's marketing to re-emphasize the Whopper which had become devalued in prominence and visibility under Daniel's time as CEO but when sales continued to slip in the United States Jose's takeaway was not that Burger King needed to step its game up in terms of food quality instead his interpretation was that customers needed more value in response Burger King launched one dollar tacos which were short-lived and widely panned for their appearance and taste it is said that history repeats itself and Jose was now unintentionally following the same discounting Playbook that John came up with back in 2008 in order to save millions in annual printing fees Jose pushed for replacement of the outdoor drive-through many boards from paper to digital at all Burger King locations Jose's biggest win in his first year was the launch of the impossible Burger which was the perfect intersection between gimmicky and classic The Impossible Whopper made Burger King the first big fast food chain to offer plant-based burgers and tapped into the Brand's flame grilling Heritage while the impossible Burger was first positioned as a premium Standalone product the company found that after the hype had died down few people were willing to pay Seven dollars for a plant-based Burger Burger King ended up downgrading the impossible Whopper months later into a two for six dollar promotion to pull in sales in 2020 Burger King launched its 100 real Whopper with no artificial flavors and preservatives but this was two years after McDonald's had done the same with its entire menu Burger King was playing catch-up by now the signals around Burger King's decline in America were too strong for Jose to ignore he moved to restore the Whopper as the centerpiece of Burger King's menu quote all our data shows that the Whopper outperforms the hero products of our competitors yet many of our Burger promotions for the last few years have focused on extensions rather than doubling down on our Flagship hero product the Whopper is a multi-billion dollar brand and we need to treat it as such the Whopper had been regularly discounted kicked around the menu and featured extensively in two for five dollar promotions in the past decade under John and Daniel to pull in low-income customers it would take two more years but Burger King would eventually remove the Whopper off its value menu in 2022 the other problem was discounting Burger King had sustained sales over the years through gimmicky limited time offerings and by over indexing on value an internal review revealed that Burger King's value menu had three times as many items as McDonald's even in 2020 Burger King was mailing out three times the number of paper coupons every year compared to its competitors due to the excessive discounting and the Brand's unopinated passive positioning over the past decade customers had Associated Burger King with value and not quality Jose had no choice but to wean customers off this perception only a fool could continue parroting the ineffective quote balanced barbell menu strategy of the past decade even with three times as many stores greater International presence and worldwide brand recognition Burger King was still lagging behind Wendy's the annual gross sales of the average Burger King store had grown just three percent in 12 years from 2009 to 2021. most damning of all Burger King grossed just 9.9 billion dollars in the United States while Wendy's grossed over 11.1 billion dollars despite having 700 fewer restaurants Burger King's overall profits and margins continued to impress but given the lack of sales growth on a per store basis and the years of aggressive store expansion questions have emerged on how much longer Burger King can last before hitting saturation and cannibalization around the world Burger King these days has a new strategy called reclaim the flame elevating the guest experience accelerating store traffic and growing sales is now the company's top priority not short-term franchisee profitability Burger King has committed 400 million dollars over the next two years in advertising kitchen equipment store remodels and Technology to win customers back and restore the Brand's reputation around quality and flame grilled flavors franchisees are being retrained and the Whopper is now the star of the menu the company has poached Executives from Domino's to re-emphasize food quality whether all these efforts will be enough to turn things around is anyone's guess but admitting you have a problem is the first step in recovery Burger King's fall from second place is a Timeless story of what happens when a company has no product strategy or Vision this is often the case when private Equity takes over as their operating model is to oversimplify business into a short-term optimization of numbers as we've seen with KFC pursuing International expansion and transitioning into an exclusive franchisor to offset domestic decline is not a silver bullet your profits and margins will improve significantly but the chickens will always come home to roost the core issue with Burger King's barbell menu strategy is that it's a pricing strategy not a product strategy both John and Daniel made the Fatal mistake of conflating pricing with product Daniel's constant preaching for balance meant that Burger King never took a real strong stance on anything it did or clearly communicated what the brand was good at his pandering to franchisees and mandate for launching fewer and simpler new products were also strategic missteps these constraints prevented Burger King from meaningfully iterating on its menu at a time where fast food chains were rapidly experimenting and emphasizing food quality to win back customers with a focus on Broad appeal the marketing was unopinionated and passive Burger King avoided directly challenging McDonald's but at the same time it wasn't actively defending its market share either while 3G has commissioned puff pieces presenting Daniel Schwartz as the whiz kid who saved Burger King his appointment itself deserves greater scrutiny it is an open question on how Daniel could have been qualified to be the CFO of a fortune 1000 company at 29 and then CEO at the age of 32 without any restaurant operational or managerial experience while experience is overrated as a measure of Competency an experience is equally dangerous if Daniel was under qualified then he should have surrounded himself with Executives who would challenge him rather than keep around the same unimaginative veterans who are glad to Parrot whatever Daniel came up with for a company to stick to one strategy for 13 straight years and expect better results in the face of decline is absurd Daniel's constant preaching for balance is a textbook example of the peanut butter approach when people spread peanut butter over their toast the goal is to spread it evenly so every bite has an equal amount of the good stuff in business the peanut butter approach is when risk-averse Executives distribute money energy and people equally in every possible area to avoid being wrong the problem is that while all the bases are covered under the peanut butter approach the resources are spread too thin to be effective Executives live or die based on the projects teams and trends that they invest in when they're right they get promoted and when they're wrong they get demoted for a first time operator and executive like Daniel the peanut butter approach was a seductive trap that he could not resist the barbell menu strategy is an exact reflection of the peanut butter approach where the low end value items serve as a hedge against the high-end premium products and vice versa the broad appeal unopinionated marketing and unwillingness to fully commit to either gimmicky offerings or established products are all symptoms of the peanut butter approach in a business as competitive as Burgers you cannot afford to not have an opinion and where Burger King failed Wendy's succeeded Wendy's did everything that Burger King could not this small red-haired girl had a Clear Vision on who she wanted to be she made decisions based on values and not numbers and never forgot that even at scale the purpose of a restaurant is to serve good food between 2009 and 2010 Wendy's was a clear third place Burger chain Wendy's Revenue was lagging global system sales were 40 percent lower it had half as many stores as Burger King brand awareness was low margins were thin and the company was just shaking off an 800 million dollar loss but despite its struggles Wendy's leaders were not deterred from their long-term vision quote we do believe that the food for Wendy's is a clear point of difference between us and our competition we will Spotlight our fresh never Frozen beef center-cut chicken breasts fresh toppings freshly made salad and chili made every day in our restaurants our strategy is highlighting Wendy's Superior Quality in everything we do we are committed to fiercely protecting this great brand and positioning it for future growth and profit our approach is designed not only to Leverage The Wendy icon in a more authentic and honest manner but also designed on delivering higher quality versus our competition we know from research performed that what attracts people is high quality delicious food and that's what we're focused on delivering Wendy's clear understanding of its strengths and the areas in which it wanted to compete in help the company settle on a clear target market of 18 to 34 year olds during the Great Recession Wendy's was under the same macroeconomic pressures to embrace discounting while the company rolled out its own one dollar double cheeseburger to match Burger King and McDonald's its leaders were cautious of over committing quote we want to take value to a place where it goes beyond just a single menu item because you can imagine if you're duking it out at 99 cents on one specific item there's just never going to be enough margin to make that work over the long term our focus is trying to broaden the value picture so it's not just about one sandwich one thing we're not going to budge on our value menu is quality so we've only got to adjust price and portioning you'll see a shift away from a single product focus on our value strategy to a broader based meal approach that will improve our margins while still allowing us to keep significant price pressure because we understand that you can't price combo meals or value meals at high prices because they'll just lose appeal just months after this comment Wendy's took action involving its value menu into a trio of 99 items a junior bacon cheeseburger a double stack and a crispy chicken sandwich Wendy's franchisees like Burger Kings were on edge as these smaller portioned items were still loss leaders and hurt their bottom line in response Wendy's proactively raised the prices on its chili and baked potatoes items that were historically 99 best sellers on the value menu since these were unique foods that you could only get out of Wendy's Executives had confidence in their pricing power raising prices on Wendy's most popular items helped franchisees offset the losses incurred from the new value items despite the market pressures for cheap deals Wendy's continued to roll out new products reflective of the positioning that it wanted to have between 2008 and 2010 products like hand cut panko breaded cod fish sandwiches the bacon and blue hamburger boneless wings and salads with fresh berries would arrive on the menu investment was not just limited to the shiny new things in 2010 Wendy's proactively overhauled its core menu cheeseburgers would now have 40 percent thicker beef patties they would include pickles and red onions and buns would be butter toasted and not plain solids would now have larger chicken fillets with better marination and breading this quality first product strategy chewed up bottom line as each store would require new equipment but Wendy's was at peace with these lower margins and greater costs the race against Burger King for second place was a marathon not a Sprint and Wendy's as the lightweight needed to build up its strength and wait for the right moment to strike while Burger King's failures were fundamentally rooted in its peanut butter approach of doing everything and nothing Wendy's success was developing a go to market strategy where The Branding and messaging was backed by product decisions were based on values and not solely numbers improvements were made holistically and not tactically between 2011 and 2013 Wendy's extended its rigorous self-assessment to areas Beyond food reinterviewing their GMS retraining staff modernizing the brand challenging its competition with Boulder advertising terminating underperforming franchisees closing down locations that scored below corporate standards and removing preservatives and artificial ingredients from its Foods including the salad dressings even the employee uniforms were revamped Wendy's leadership uncovered in their self-assessment that like Burger King and many others the company had over rotated to discounting during the recession and had not adjusted quote if you look at our value menu we have six center-of-the-plate proteins on there McDonald's has two you just can't be that out of balance there we're incurring the food cost for that but I don't think we're getting the sales benefit for that so we do think that there's an opportunity to better calibrate while Wendy's would proactively identify and resolve these issues for good in 2011 it would take Burger King another 10 years and declining sales to take action the vision for Wendy's began to take shape customers were gravitating towards the quality offered at Quick Service fast casual restaurants like Chipotle while Burger King launched premium items for the sake of its barbell menu and gimmicky products for virality Wendy's had a clear goal in mind when it came to launching new products the bacon Portobello melt the spicy guacamole Chicken Club Berry almond chicken salad pretzel bacon cheeseburger flatbread grilled chicken smoked gouda on brioche ghost pepper fries and Baconator extensions were not introduced for the sake of being expensive but to embody the quick serviced fast casual quality at fast food prices not every new product at Wendy's was a success but the intended purpose was right in setting a standard by 2014 Wendy's had surpassed Burger King as the second Place Burger chain in total revenue despite having significantly smaller presents and far slower expansion rates while there were fewer Wendy's stores relative to Burger King stores the average Wendy's locations was far more effective consistently earning hundreds of thousands of dollars more in gross sales every year now that the products are selling the brand is resonating and the quality based product strategy is finally paying off after years of investment Wendy's has now developed the confidence to say that this is the right time to switch business models and scale quote we are carefully migrating the Wendy's company to a model of higher royalty and Rental income expanding margins and more robust free cash flow and the benefits are evident in our excellent results and long-term Outlook Wendy's operating margins and profits would grow from single digits to double digits in the following years as the company would operate fewer locations and lean on franchisees for expansion while total revenue would decline as expected with this change in business model Wendy's would maintain its upwards trajectory on a per location basis with each store earning a record 1.8 million dollars a year in 2021. Burger King still holds the lead in global system sales even today at 23 billion dollars compared to Wendy's 13 billion dollars but Wendy's has every reason to be optimistic Burger King has three times as many stores as Wendy's worldwide despite operating on a significantly greater scale BK is not even selling twice as much in food and drink compared to Wendy's fast food is an industry built on fine lines and when these same store sales have outpaced Burger Kings by several basis points despite operating on a much smaller budget rather than resting on its Laurels Wendy's is instead now closing in for The Knockout blow the company recently launched its brand new breakfast lineup after years of trial and error to take market share away from Burger King's lucrative morning drive-through business the emphasis on quality and food innovation has not stopped with the introduction of hot honey chicken sandwiches Italian Mozzarella sandwiches French toast sticks and garlic fries International expansion is now a regular topic people everywhere just want good food and Wendy's believes it can introduce a standard and quality higher than Burger King and McDonald's abroad if Wendy's can get it right in America then they can get it right everywhere else the company believes its momentum in the United States will easily carry over to overseas customers who have only ever experienced Whoppers and Big Macs but just because franchising is now a larger part of the business Wendy's doesn't want to get out of the restaurant business entirely like Burger King did to this day the company insists on running at least five percent of its restaurants itself quote we have always said that we like having skin in the game so our company portfolio of restaurants can be the brand Steward for our franchisees Wendy's success highlights many lessons the importance of value-driven decision making product strategy vision and patience the company actively chose to put off franchising and overseas growth even when that path would have been far cheaper and easier than self-improvement Wendy's believe that there's no point in international expansion if they can't even get it right at home in business and in life Conformity is always the safest but Nets the smallest returns there's always greater value to be had when you paddle your own boat and follow a vision even if that road is longer and harsher in the past decade Wendy's made sure that customers understood what their brand stood for even if that meant beating people over the head about its fresh never Frozen beef they consistently made decisions based on their founding values and they constantly made sure that their own products and operations lived up to those standards boiling down business into a soulless optimization of short-term numbers was Burger King's greatest mistake organizations and the strategies that they take are a direct reflection of its people and it was the people and the values that They Carried within this small little red-haired girl that enabled her to topple a king

Channel: Modern MBA

Views: 119,865

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Id: 7Q8FkLRT6Eo

Length: 51min 0sec (3060 seconds)

Published: Wed Mar 01 2023

Reddit Comments

[u/theDart]

The sole difference being I don't walk into a Wendy's and immediately notice 3 health code violations.

[u/Seeda_Boo]

Burger King stores just not giving a shit at all anymore about the quality of the product they deliver has a lot to do with their slow fade into oblivion.

[u/Leadantagonist]

Dude, I just thought it’s because I lived in the hood that all my local burger kings were so shit. I live in watts, the burger kings in the mlk plaza is awful. But turns out it’s a nation wide thing.

Does that make it better or worse?

[u/xGenocidest]

Wendy's looking good..

[u/FlameMage]

You know you have a great restaurant when you have to bombard people with complicated sheets of coupons on the regular. Fun for all parties involved too I'm sure. BK is a poorly run shit hole joke of a business.

[u/tyehyll]

Burger King was amazing up until I'd say sometime in the 2010s

[u/ElDonnintello]

Wow when I look at your comments or watch this documentary Burger King seems to be a very terrible place in the US... Here in France it is not considered the same way at all lol

[u/Surprise_Yasuo]

BK is better than most fast food if it’s actually prepared properly by employees who aren’t underpaid and give a shit about their job

But 9 times out of 10 it’s disgusting. Can’t risk it on a 1 out of 10 shot it’ll be worth the ridiculous prices they also charge.

[u/09014]

I’ve only ever had food poisoning from a fast food place twice in my life. Both times it was burger king.