Hardee's restaurants: stuck in the middle or creating competitive advantage?

Droege, Scott ; White, Harold ; Tucci, Jack 等

CASE DESCRIPTION

Business-level strategy is the primary focus of this case. Secondary issues examined include strategic groups and strategic reorientation. The case has a difficulty level of four, appropriate for senior level courses. The case is designed to be taught in one class hour and is expected to require one hour of outside preparation by students.

CASE SYNOPSIS

On January 21, 2003, Andrew Puzder, CEO and president of Hardee's Food Systems, Inc. stated, "We are distinguishing ourselves from the competition as the premium burger specialist among quick-service restaurants." But how much value can you really add to a hamburger? Clearly companies like Outback Steakhouse, Cracker Barrel, and Shoney's offer menu selections similar to Hardees' "Thickburger," but these restaurants set themselves apart by offering a casual dining atmosphere, a wide selection of entrees beyond hamburgers, and table service rather than order counters. On the other end of the spectrum are fast food restaurants such as McDonalds, Burger King, and Wendy's, Hardee's traditional competitors offering low cost convenience meals. Hardee's Thickburger initiative goes beyond efforts at differentiating itself from its competition. Instead, the company is taking actions it hopes will move it into a new strategic group where competition is less intense. This case examines the difficulties in strategic reorientation when such reorientation requires a business-level strategy that moves a firm from one strategic group to another. Students must decide if Hardee's new initiatives will be successful or whether the fast food franchise will be "stuck in the middle" with neither a feasible low cost nor a feasible differentiation strategy.

INTRODUCTION

After struggling with the intense competition in the fast food industry, Hardee's struck upon what seemed to be a cure for its mediocre performance of the last few years. Its Six Dollar Burger campaign in 2002 attracted consumer attention to this struggling franchise. The ability to quickly get a quality hamburger similar to what one might expect at a full service restaurant such as Appleby's or TGIFriday's seemed to appeal to customers with little time but discretionary tastes. The success of this initiative compelled Hardee's to think deeply about where it had been and where it hoped to be in the future. On January 21, 2003, Andrew Puzder, CEO and president of Hardee's Food Systems, Inc. stated, "We are distinguishing ourselves from the competition as the premium burger specialist among quick service restaurants."

BACKGROUND

CKE Restaurants, Inc. is the parent company of 1,000 Carl's Jr, restaurants, 97 La Salsa Fresh Mexican Grills restaurants, and 2,181 Hardee's restaurants. The combined revenue was nearly $3 billion for the fiscal year ending January 2003. While these are substantial revenues for a franchisor, the company has struggle recently and has not earned a profit since 1999. The company had a net loss of $150 million for 2003. After extrapolating a value for a procedural change in accounting which had a significant negative financial impact, the St. Louis based Hardee's Food Systems, Inc. segment, a wholly owned subsidiary of CKE, lost $10.5 million in fiscal year 2003 after losing $76.9 million in fiscal year 2002.

The restaurant chains within the CKE parent are franchisers, with only limited company ownership of retail stores. As with all franchises, one of the corporate parent's primary objectives is the proliferation of the franchise brand that provides desired escalation of revenue through franchise fees. Because Hardee's accounts for the "lion's share" of both retail stores and revenues for CKE Restaurants, the strategy that Hardee's employs will have a substantial financial impact on CKE.

Historically, Hardee's has been a quick service (fast food) franchise, competing mainly on price against rivals McDonald's, Burger King, Wendy's, and other fast food chains. Although each chain attempts to differentiate its products, imitation by competitors is swift, prohibiting any single chain from gaining a competitive advantage based on product attributes. Intense competition within the fast food market has forced these restaurants to focus on operating efficiencies to drive down costs in an effort to maintain acceptable net margins. Brad Haley, Hardee's executive V.P. has felt the pricing pressure in the fast food segment: "We can't compete when everybody is selling sandwiches for 99 cents. Nobody can. Even the big guys are losing at that game."

Combined with recent diminishing profit margins for the entire quick service restaurant industry, Hardee's recent losses in the past two years have forced the chain to reconsider its strategy. Rather than competing on price against its traditional rivals, Hardee's has embarked on a strategy intended to vastly differentiate it products from the traditional fast food items. In October 2001, Hardee's contracted with Mendelsohn|Zien, a Los Angeles based advertising firm to help reposition its brand. Richard Zien, managing partner with Mendelsohn|Zien noted, "No one has been able to unlock the door of advertising success at Hardee's in many years. Inconsistent advertising strategies have resulted in a variety of messages which may have served to confuse Hardee's customer base."

Soon after contracting with Hardee's, Mendelsohn|Zien recommended that the restaurant chain introduce the "Six Dollar Burger". In November 2001, Hardee's introduced this 1/2 pound, 911 calorie, $3.95 hamburger, which quickly became the fastest growing burger among all fast food chains. In 2002, the "Six Dollar Burger" won the Restaurant Business Award for Best New Burger. CKE Restaurant Corporate Affairs Director Larry Brayman noted that not only was the "Six Dollar Burger" recognized among industry critics, but also by customers. "We are very pleased to have introduced a product that has received not only critical acclaim with the Best Burger Award for 2002, but also the approval of our guests."

THE RESTAURANT INDUSTRY

According to the Bureau of Economic Analysis, restaurants have a significant impact on the overall health of the U.S. economy. Considering both direct and indirect employment, this industry supports a greater number of jobs than any other industry in the nation's economy. Other than the government, the restaurant industry is the nation's largest employer with over 11.7 million employees. However, restaurants are extremely labor intensive. In 2001, sales per full time equivalent employee were $55,351, which is notably lower than most other industries. Again for 2003, the National Restaurant Association reported that employee recruitment and retention remains the number one challenge facing fast food (quick service) restaurant operators. Due to its low-skill, labor-intensive environment, the industry employs a workforce with a high turnover rate and demographically composed of a majority of young, single, female, part-time employees averaging 25.6 hours per week. Consequentially, approximately one-third of all adults in the United States have worked in the restaurant industry at some time in their lives.

However, with the majority of workers viewing their "tour of service" as only temporary, opportunities for advancement are superior to most other industries as evidenced by a rate of eight out of ten salaried employees starting their careers as hourly workers.

With over 300,000 restaurant companies, the industry is mature and extremely competitive. Although there are differences among specific companies, the industry can be divided into two basic groups-full service (casual dining) and quick service (fast-food). The full service sector tends to have more points of differentiation including family atmospheres such as Denny's and Shoneys, buffets such as Quincy's and Golden Corral, combination full service restaurants with bars such as Appleby's, ethnic cuisine such as China Palace and many more.

The fast food sector is geared towards quick, inexpensive meals and includes made-to order sandwiches such as Subway, Mexican food such as Taco Bell, chicken entrees such as Kentucky Fried Chicken and Popeye', pizza such as Domino's and Pizza Hut, the hamburger chains such as Hardee's, McDonalds, and Wendy's, and a variety of others. Both the full service and fast-food segments include locally owned restaurants typically managed by a single individual. Currently, seven out of ten establishments are single-unit (independent) operations with less than twenty employees. Historically, these local restaurants always compete with the national chains by creating menus catering to local tastes and/or building strong personal relationships with local repeat customers.

Because the restaurant market is mature and annual industry sales growth is relatively small at about 4.5%, it is increasingly difficult to earn above average returns. Economic downturns tend to impact fast food as well as full service restaurants as indicated by the posted 2002 growth rate of 4.1% compared to 4.8% for full service. In 2000, the average check per customer at fast food was $3.71. Whereas, the average per person price for a meal at a full service restaurant is from $9.96 for casual dining to $24.59 for upscale. The total market for dining away from home in 2000 was over $241.7 billion. As projected for 2003 by the National Restaurant Association, the full-service sales should reach $153.2 billion and the quickservice revenue should exceed $120.9 billion.

Although in 2002, the average U.S. household spent $2,137 at restaurants annually, consumers become more price sensitive during economic downturns. The way households divide their purchases between the full service and fast food segments may change, making fast food restaurants viable, less expensive substitutes. Or, the reduced discretionary income may cut into the customer counts--especially for fast food restaurants. Currently, both dynamics of consumer behavior are impacting the industry, but full service restaurants have a slight advantage in terms of gross sales and profitability. In 2002, full service restaurants average $650,000 per restaurant while fast food restaurants average a little less at $585,000. Also, full service restaurants posted an average pretax income of 6% versus 5% for the fast food segment.

Other market factors bearing on the fast food segment are: a) consumer tastes are slowly evolving toward a desire for more healthy meals. There is increasing pressure on fast food chains to offer low fat, nutritious alternatives. b) technology is changing the way Americans shop and the restaurant industry is beginning to feel the impact of this shift in consumer behavior. Over fifty six percent of all restaurants currently have web sites. c) the American population is aging which will impact the available low wage labor market and the customer behavior trends.

When it comes to restaurant spending, household income is one of the most influential characteristics. Households with an average income of more than $70,000 make up only 17% of the American households yet account for more than twenty six percent of total spending on food away from home. In general, expenditures on food away from home rise dramatically for households that bring home more than $30,000 in pre-tax income.

Age of the head of household also is another of the most influential characteristics. Households with the head at an average age greater than 45 years but less than 65 years spend approximately twenty five percent more per-capita than age groups on either side.

STRATEGIC REORIENTATION

This success with its initial attempt to distinguish Hardee's from its competitors gave the company confidence to continue with a strategic reorientation of the entire business. The "Six Dollar Burger" was the precursor to a new direction intended to reposition the company within the industry. If it could successfully draw a line between its products and those of traditional fast food competitors, perhaps the company could stem the losses of recent years by adding value to what was, for the most part, a previously undifferentiated product-the common Hardee's hamburger. By setting itself apart, Hardee's hoped to reduce the price competition that had helped drive down its profitability. By competing on product attributes-fast food hamburgers that tasted more like an Applebee's or a TGIFriday's hamburger-Hardee's hoped to exploit a market niche that had been previously ignored by the industry.

To complement its new product line, Hardee's has begun remodeling the interiors and exteriors of many of its restaurants. This "Star Hardee's Program" includes new red signs with a star logo to replace the orange signs with which customers had previously associated with Hardee's. The company projects that all company-owned stores will be converted to Star Hardee's Program and franchisees will be converted by the end of 2004. The next step of this remodelling effort is a yet unannounced prototype design for the restaurant. The phenomenal success of the "Six Dollar Burger" encouraged Hardee's to forge ahead with its plan to reorient the company's strategy. By adding value to its products, the goal was to move away from the competitive rivalry inherent in the price sensitive traditional fast food market segment. To build on the success of the "Six Dollar Burger" and further set itself apart from its competitors, the new Thickburger line was introduced at the same time that 40 items were eliminated from the menu. This included 1/3 pound hamburgers, cheeseburgers, bacon burgers, and chili cheeseburger in addition to a 1/2 pound grilled sourdough burger. Hardee's top of the line Thickburger was a 2/3 pound, 1,088 calorie hamburger. A key feature of this line was that each hamburger was made from Angus beef, a premium source of ground beef. The added cost of Angus beef makes Thickburgers, ranging in price from $2.39 to $4.95, somewhat higher than competitors' hamburgers.

The new tag line in Hardee's advertising, "Hardee's: Making the last place you'd go for a burger, the first," made it clear that the company considered its new product line more than just a menu change, but instead an about face from its previous position in the industry. Hardee's CEO Puzder announced that "a premium product strategy is...being implemented at Hardee's. Over time, we hope this change-together with our continued focus on quality, service and cleanliness-will help reverse the public's perception of Hardee's as the discount variety brand to the place to go for best-in-class premium burgers. If we're successful, our strategy should build on the brand's already strong breakfast business by bringing in new customers for lunch and dinner." Executive V.P. Haley puts Hardee's new strategy succinctly: "It's not fast food and it's not sit-down restaurant food," Haley said. "It's something in between. That's what we're trying to target."

THE CURRENT CRISIS

Although it is too early to know how well Hardee's strategy will work long range, so far revenues are slumping. As of the 16 weeks leading up to May 19, 2003, gross revenues had decline 1% compared to the same period in 2002. Market share had not increased despite an aggressive advertising campaign and minor store remodeling. The company must consider its options. Is this a situation where patience will pay off once its aggressive advertising brings in more customers? If so, how long should the company wait? Has Hardee's been misguided in believing it set itself apart from its rivals with its new menu? Should Hardee's increase its differentiation beyond its menu and remodeling efforts by doing away with the order counter? If the new menu does not eventually increase revenue and net income, should Hardee's return to its original menu and keep competing on price with the other fast food chains? President and CEO Andrew Puzder is certainly struggling with these issues. What should be his next?

Scott Droege, Mississippi State University-Meridian

Harold White, Mississippi State University-Meridian

Jack Tucci, Mississippi State University-Meridian TYPE of SERVICE 2000 2003 Sales ($Billion) Sales ($Billion) Fullservice 134.3 153.2 Quickservice 107.4 120.9 Total 241.7 274.1 Per-capita avg. Percent of spending on American Approximate Annual pre-tax food away from Households Population Household Income home in 2000 in 2000 In 2000 $70,000+ $1,460.00 26.3 74,110,627 $50,000-$69,999 $980.00 15.6 43,959,155 $40,000-$49,999 $920.00 12.0 33,814,735 $30,000-$39,999 $820.00 11.0 30,996,840 $20,000-$29,999 $650.00 12.8 36,069,050 $15,000-$19,999 $580.00 6.5 18,316,315 $0-$14,999 Not Available 15.8 44,522,734 Totals $855 Average 100.0 281,789,456 Per-capita avg. spending on Percent of Year 2000 Age of foodaway from American Approximate Head of Household home Households Population Under 25 $925.00 6.8 19,161,683 25-34 $775.00 23.4 65,938,733 35-44 $795.00 25.2 71,010,943 45-54 $1,030.00 22.6 63,684,417 55-64 $1,010.00 5.9 16,625,578 65+ $750.00 16.1 45,368,102 Totals $855 Average 100.0 281,789,456