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.

INSTRUCTORS' NOTES

This case presents Hardee's initiative to stem declining sales and profits through a reorientation of its strategy. After four years of decline against well known market leaders such as McDonald's, Burger King, and Wendy's, Hardee's introduced a new menu item in late 2001, the "Six Dollar Burger", that was an instant hit with consumers. This success gave the company the confidence to initiate a new strategy-remove 40 items from its menu, replaced with the Thickburger line, and remodel the restaurants. The case focuses around whether these changes are enough to differentiate Hardee's from other fast food competitors.

This case was developed using publicly available information from press releases, industry publications and financial reports. It was course tested in a senior level business policy class and modified based on student comments.

The case fits well just after teaching business level strategy in business policy and strategic management cases. There are three primary teaching points. First, the case illustrates strategic reorientation of business level strategy. Second, the case is an excellent example of being "stuck in the middle" with neither a cost leadership nor an adequate differentiation strategy. Third, the case clearly shows how competition within strategic groups is more intense than competition among strategic groups within an industry.

To teach the case, a good starting point is to ask students to identify Hardee's competitors. They will quickly note fast food chains such as Burger King, Crystal's, and others, but are unlikely to mention other full service restaurants in the industry such as Cracker Barrel and Outback Steakhouse. This allows the instructor the opportunity to point out that although all of these are in the same restaurants industry, individual companies do not always compete directly with all companies in that industry. The teaching point to be made here is that competition within strategic groups is more intense than competition between strategic groups within an industry.

Next, ask students to identify steps Hardee's has taken to differentiate itself from its strategic group-the fast food (qiuckservice) segment of the restaurant industry. They will likely bring up actions such as elimination of 40 products from the original menu, addition of the Thickburger line of hamburgers, and remodeling the restaurants to present a new image. The teaching point to be made here is the main point of the case-if a company does not have a clear-cut strategy, whether its low costs, differentiation, an integrated low cost differentiation strategy, or focus strategy, then it becomes, in the words of Harvard's Michael Porter, "stuck in the middle."

To help students come to the realization that this is what Hardee's has done, ask whether Hardee's has done enough to differentiate itself from other fast food competitors. After some discussion, students should come to the conclusion that Hardee's is still just another fast food restaurant competing in the same strategic group as it always has. The attempt to carve out a niche of customers with A follow up question to help wrap up the case and plainly make the point is to ask students, what does it take to differentiate a hamburger? This will further solidify that what Hardee's has embarked upon is neither a workable low cost nor differentiation strategy.

CASE OVERVIEW

At its most basic level, this case centers on a simple question that has no easy answers: How do you differentiate a hamburger? 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." The restaurant industry can be broken into two major sectors-fast food and full service. Clearly, Hardee's is in the fast food sector. With its new Thickburger initiative, a new menu intended to set Hardee's apart from its competition, the company is attempting to move itself away from the strategic group (the fast food sector) to reduce competitive pressures. This case considers 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 successfully introducing the Six Dollar Burger in November 2001, Hardee's decided think deeply about where it had been and where it hoped to be in the future. On the heels of four years of consecutive losses, Andrew Puzder, CEO and president of Hardee's Food Systems, Inc. initiated a strategic change in 2003 with the intent of differentiating the company as "the premium burger specialist among quick-service restaurants."

BACKGROUND

CKE Restaurants, Inc. is the parent company of the franchisor, Hardee's Food Systems, Inc. Both CKE and Hardee's have struggled financially in the past four years. Intense price competition, rapid imitation by competitors of novel products and services, and slow industry growth (4-5% annually) has made it difficult to sustain profitability for Hardee's. Its reaction is to reorient its strategy to set itself apart from this intense interfirm rivalry. As Brad Haley, Hardee's executive V.P. succinctly put it, "We can't compete when everybody is selling sandwiches for 99 cents. Nobody can. Even the big guys are losing at that game."

In October 2001, Hardee's contracted with Mendelsohn|Zien, a Los Angeles based advertising firm to help reposition Hardee's brand. 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 best selling burger among all fast food chains. In 2002, the Six Dollar Burger won the Restaurant Business Award for Best New Burger.

THE RESTAURANT INDUSTRY

With approximately 300,000 restaurant companies, the industry is highly competitive. As mentioned, the industry can be divided into two basic groups-full service and fast food. The full service sector tends to have more points of differentiation including family atmospheres, buffets, combination full service restaurants with bars and others. At the other end of the spectrum, the fast-food sector is geared toward quick, inexpensive meals Both the full service and fast food segments include locally owned restaurants typically managed by a single individual. These restaurants sometimes compete with the national chains by creating menus catering to local tastes.

Because the restaurant market is mature and annual industry sales growth is relatively small, it has become increasingly difficult to earn above average returns. Economic downturns tend to impact full service restaurants more than fast food. Full service restaurants have a slight advantage in terms of per restaurant gross sales over fast food restaurants with full service restaurants averaging $650,000 and fast food restaurants average a little less at $585,000. Combined with full service restaurants average pretax income of 6% versus 5% for the fast food segment, the full service segment has a slight advantage in terms of their industry position. Another factor bearing on the fast food segment is that 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.

STRATEGIC REORIENTATION

If Hardee's 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 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, referring to this phase of its strategic rorientation as the "Star Hardee's Program." The new product line included Thickburgers while eliminating 40 items from the menu. The Thickburger line 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 Thickburgers is that each is 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, a little more expensive 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. 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 over the long term, so far things are not looking too good. 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 store remodeling. At this point, the company must consider its options the length of time they should wait for the strategic reorientation to increase sales and profits, whether the strategic reorientation is misguided and doomed from the beginning, whether they should differentiate farther from the fast food segment by offering true sit down service rather than an order counter, or whether they should return to their old strategy (and previous menu) despite intense competitive pressures in the fast food strategic group. The bottom line is, what should president and CEO Andrew Puzder do next?

DISCUSSION QUESTIONS

As mentioned in the case note introduction, this case is probably best present as a series of questions that guide students' thinking toward the conclusion that Hardee's is "stuck in the middle" and has neither a low cost nor a workable differentiation strategy (nor any permutations of these such as focused or broad differentiation, focused or broad low cost, or integrated low cost-differentiation strategy). For ease of use, the specific questions are repeated here in a question and answer format. Professors using this format will be able to guide students thinking while allowing them to develop the correct conclusion. At the same time, allowing students to ponder the questions and the ensuing discussions should illustrate a business level strategy that is intended to use differentiation in moving from one strategic group to another. However, students will conclude that the strategic reorientation in this case represents a "stuck in the middle" situation that is unlikely to turn Hardee's around and may actually worsen its financial condition.

Question 1: Which companies compete directly with Hardee's?

Answer: Students will name a variety of fast food restaurants, but are unlikely to conclude the full service restaurants are direct competitors. Make the point that competition within strategic groups is more intense than competition between strategic groups.

Question 2: What steps has Hardee's has taken to differentiate itself from its strategic group-the fast food segment of the restaurant industry?

Answer: Students will likely bring up actions such as elimination of 40 products from the original menu, addition of the Thickburger line of hamburgers, and remodeling the restaurants to present a new image. Make the point that if a company does not have a clear-cut strategy, whether its low costs, differentiation, an integrated low cost differentiation strategy, or some other clearly defined way of doing business, it becomes, in the words of Harvard's Michael Porter, "stuck in the middle."

Question 3: Who is Hardee's new target market? How does Hardee's reach and retain this market?

Answer: After some discussion, students should come to the conclusion that Hardee's has chosen members of the 35-54 age group (not the children in these households) with an annual household incomes of greater than $50,000 who have discriminating quickservice tastes, not interested in the "dining experience," and will pick-up at convenient locations. Key in on the idea that promotion brings customers in once, but product, price, and place bring them back.

Question 4: Has Hardee's done enough to differentiate itself from other fast food competitors?

Answer: After some discussion, students should come to the conclusion that Hardee's is still just another fast food restaurant competing in the same strategic group as it always has. Key in on the idea that actions such as those Hardee's has taken (those that students identify) are not a cohesive business strategy, but instead are a patchwork attempt to reduce competitive pressures from the main players (McDonald;s, Wendy's and Burger King) in Hardee's strategic group. A key element not addressed by Hardee's may be upgrading the quality of service (convenient, correct, & customer focused) at the stores.

Question 5: What does it take to differentiate a hamburger?

Students answers will vary and will probably trigger some creative ideas. The more creative the better-this will further solidify in students' minds that what Hardee's has embarked upon is neither a workable low cost nor differentiation strategy.

Scott Droege, Mississippi State University-Meridian

Harold White, Mississippi State University-Meridian

Jack Tucci, Mississippi State University-Meridian 2000 2003 TYPE of SERVICE Sales ($Billion) Sales($Billion) Fullservice 134.30 153.2 Quickservice 107.40 120.9 Total 241.70 274.1 Annual pre-tax Per-capita avg. spending on Percent of American Household Income food away from home in 2000 Households in 2000 $70,000+ $ 1,460.00 26.3 $50,000-$69,999 $ 980.00 15.6 $40,000-$49,999 $ 920.00 12.0 $30,000-$39,999 $ 820.00 11.0 $20,000-$29,999 $ 650.00 12.8 $15,000-$19,999 $ 580.00 6.5 $0-$14,999 Not Available 15.8 Totals $855 Average 100.0 Annual pre-tax Approximate Household Income Population In 2000 $70,000+ 74,110,627 $50,000-$69,999 43,959,155 $40,000-$49,999 33,814,735 $30,000-$39,999 30,996,840 $20,000-$29,999 36,069,050 $15,000-$19,999 18,316,315 $0-$14,999 44,522,734 Totals 281,789,456 Per-capita avg. Percent of Year 2000 Age of spending on American Approximate Head of Household foodaway from 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 Per-capita avg. Percent of Approximate spending on food American Population Annual pre-tax away from home Households in In 2000 Household Income in 2000 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 Percent of Total Mkt Potential Target Annual pre-tax Market Market Household Income (Billion $) (Billion $) $70,000+ 108.20 108.61 $50,000-$69,999 43.08 43.08 $40,000-$49,999 31.11 $30,000-$39,999 25.42 $20,000-$29,999 23.44 $15,000-$19,999 10.62 $0-$14,999 Not Available Totals 241.88 151.69 Percent of 62.71 Total Mkt Year 2000 Per-capita avg. Percent of Age of Head spending on food American Approximate of Household away from 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 Percent of Total Mkt Year 2000 Potential Age of Head Market Target Market of Household (Billion $) (Billion $) Under 25 17.72 25-34 51.10 35-44 56.45 56.45 45-54 65.59 65.59 55-64 16.79 65+ 34.03 Totals 241.69 122.04 Percent of 50.49 Total Mkt