Thin times ahead for Burger King?

Although spun off from the dead-hand ownership of Diageo, Burger King faces falling profits, a declining US market and criticism of its reliance on promotions, rather than brand-building. Jaime Eastham looks at its prospects

Burger King has struggled for decades to compete with the massive marketing machine that is McDonald’s. In February, the fast-food chain reported a decline in operating profit for the last six months of 2001, to &£79m. Worldwide like-for-like restaurant sales rose slightly, by 0.4 per cent. The chain has been particularly hard hit in the US, where it has been losing market share since 1999.

Last week, drinks giant Diageo sold Burger King to a management buy-out team – backed by a US-based private equity consortium, led by Texas Pacific Group – for $2.26bn (&£1.45bn). Burger King will continue to be run by its current chairman and chief executive John Dasburg, who is joined in the buyout team by global chief marketing officer and executive vice-president Chris Clouser – a former colleague of Dasburg’s from his days at Northwest Airlines (MW February 14).

It was no secret that Diageo wanted to get Burger King off its hands so it could focus on its core drinks business, having offloaded Pillsbury to General Mills last year. Earlier plans to float Burger King on the New York Stock Exchange, were shelved in the face of falling stock markets and burger sales, and the fast-food chain had become Diageo’s unloved child, seen as little more than a distraction to management and a drain on company resources.

Burger King, which has more than 11,000 outlets around the world, now finds itself with new owners; a new UK advertising agency, Delaney Lund Knox Warren (DLKW, MW last week); and the opportunity to overhaul its marketing strategy and start afresh. But the slate is far from clean.

Ninety-two per cent of its restaurants are owned by franchisees, meaning consistent quality and service standards are almost impossible to maintain. Mintel figures reveal the burger market is reaching maturity and will grow only 13 per cent over the next four years, and smaller fresh-food chains, such as Pret A Manger, are becoming increasingly popular.

Burger King is eager to increase its US market share, which stands at 18.5 per cent (McDonald’s controls about 43 per cent). In the UK, McDonald’s outspends Burger King on advertising by a ratio of four to one, laying out more than &£40m last year, compared with Burger King’s &£11m and KFC’s &£14m. Burger King devotes most of its marketing budget to promotional giveaways, such as toys and free drinks, and its advertising campaigns always feature product shots.

Burger King faces many obstacles in its quest to stay competitive and steal market share from its rivals. One agency source notes that branding is notably absent from Burger King’s advertising, and warns that unless the company makes radical changes to its marketing strategy, it will always live in the shadow of McDonald’s.

He says: “The business is in pretty bad shape. Unless Burger King does some major work on its marketing strategies, I don’t hold out much hope for it.”

Burger King appears to be aware that action needs to be taken. Last month, it parachuted in a WPP group agency chief, John Valentine, to lead a six-month brand strategy review, ahead of a relaunch in the UK (MW June 20). Valentine, chairman and founder of VML – Burger King’s interactive agency in the US – reports to Clouser and Burger King president Andre Lacroix.

But Burger King is up against McDonald’s, a master of branding, which uses its &£40m advertising budget to create the impression that going to McDonald’s is a family experience.

The agency source says: “Burger King needs to build a brand, not market itself on products alone. Offering someone a free drink is not going to convince them to go to Burger King.”

But the news that Burger King has axed its creative agency, Lowe, and appointed DLKW, was accompanied by an indication from Lowe managing director Jeremy Bowles that the fast-food giant was more interested in price-promotion ads than in brand-building.

DLKW deputy chief executive Tom Knox confirms that Burger King will not be diverted from its promotional strategy. He says: “It’s about creating a balance between driving traffic and brand-building. You can’t ignore either one of those.”

Burger King UK is reportedly considering adopting the “You got it” tagline used by the chain in the US – and formerly the UK – in place of the “OK BK” tagline used in the UK. Knox says these claims are “purely speculative”. He adds: “There will always be an international element to the local strategy, particularly with things like movie tie-ins. Beyond that, no decisions have been made.”

Industry sources say that adopting the US tagline would be a mistake. One insider says Burger King needs to revise its product range before making any such claims in its advertising: “‘You got it’ – what does that say about the brand? It says whatever you want. We’ve got it, but Burger King hasn’t? It needs more variety in the menu if it wants to compete.”

DLKW chief executive Mark Lund says Burger King’s &£11m budget will have to be spent wisely: “Burger King doesn’t have the budget of McDonald’s, and the company has lost some ground, but we will spend the money as effectively as possible to build on the brand’s strengths.” Lund says one of those strengths is higher-quality, less fatty food than some chains – this is something for which Burger King is known.

Burger King’s advertising strategy has yet to be decided, but any emphasis on the health values of its food could be dangerous. Last week, Caesar Barber, a New York maintenance worker, filed a class-action lawsuit against McDonald’s, Burger King, KFC and Wendy’s, on behalf of millions of overweight Americans. The 57-year-old, who weighs 115kg (just over 18 stone), blames the fast-food industry for his medical problems, which have included two heart attacks and diabetes. His lawyers reportedly claimed that fast-food companies entice people to eat food that is bad for them, without posting warnings or understandable nutritional information. They said burgers, chicken and fries could follow tobacco, and have to carry health warnings.

The National Restaurant Association (NRA), representing 858,000 outlets in the US, issued a statement in response to the “frivolous” lawsuit. NRA president Steven Anderson said: “It is senseless, baseless and ridiculous to compare food to anything addictive. This is about personal responsibility and moderation.”

Frivolous it may be, but this kind of lawsuit will put even more pressure on an industry t

hat is already battling to compete with healthier fast-food options.

In a statement to Marketing Week, Burger King says it will be “business as usual” following the sale. It says management will focus on the brand, and continue to build the business by delivering on its promise of quality food and good value.

Burger King has quite a fight on its hands, on more than one front. The industry awaits its next move with interest.

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