Carl's jr menu prices 2019

INDIVIDUAL CASE STUDY

CARL’S JR.: DEVELOPING A SUSTAINABLE COMPETITIVE ADVANTAGE1 Fabrizio Di Muro wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Our goal is to publish materials of the highest quality; submit any errata to publishcases@ivey.ca. i1v2e5y5pubs Copyright © 2020, Ivey Business School Foundation Version: 2020-01-15

In April 2019, Carl’s Jr. Restaurants LLC (Carl’s Jr.), an American fast-food restaurant chain, faced an important decision regarding its future. The company was up against strong competition from both traditional players in the fast-food market—such as McDonald’s Corporation (McDonald’s), Burger King, The Wendy’s Company (Wendy’s), and Taco Bell—and newer competitors in the fast-casual dining market, such as Subway, Five Guys Enterprises LLC (Five Guys), and Shake Shack.2 In 2017, Carl’s Jr. stopped using provocative ads, and in 2018, the company ended a long co-branding relationship with Hardee’s Restaurants LLC (Hardee’s). Due in part to these changes, the company struggled to form its own identity.3 The Harris Poll’s 2019 EquiTrend Study revealed that, in the fast-food category, Carl’s Jr. scored below average in key indices such as purchase consideration, familiarity, and quality. The company finished behind not only the big players in the industry (i.e., McDonald’s, Wendy’s, Burger King, and Five Guys) but also the much smaller competitors (i.e., Shake Shack, Culver’s, and In-N-Out Burger).4 Further, another survey revealed that Carl’s Jr.’s purchase consideration percentage (the percentage of fast- food customers who considered purchasing their next fast-food meal from Carl’s Jr.) had recently dropped from 14 per cent to 11 per cent. Carl’s Jr. needed to develop a sustainable competitive advantage in order to make itself relevant again in the minds of consumers.5 HISTORY OF CARL’S JR. Basic Information and Store Locations Carl’s Jr. was founded by Carl Karcher and his wife, Margaret, on July 17, 1941, in Los Angeles, California. Carl and Margaret borrowed US$316 and put in $15 of their own money to establish the business. The original Carl’s Jr. consisted of a hot dog cart, located on the corner of Florence Avenue and Central Avenue in Los Angeles. Over the next few years, the Karchers purchased three additional hot dog stands in Los Angeles. In 1945, Carl and Margaret opened a full-service restaurant called Carl’s Drive-in Barbecue. In 1950, they added burgers to the menu.7

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In 1956, the Karchers opened two restaurants called Carl’s Jr., in Anaheim and Brea. These restaurants were smaller versions of the company’s barbecue restaurants. As time passed, Carl’s Jr. opened in more locations.8 By 1960, there were four Carl’s Jr. locations in operation in Orange County, California. Over the next 15 years, Carl’s Jr. focused its efforts on expanding the business throughout Southern California, and by 1975, there were 100 locations. Once Carl’s Jr. completed its expansion across Southern California, the company expanded across Northern California and opened its first out-of-state restaurant in Las Vegas, Nevada, in 1979. Carl’s Jr. had approximately 200 locations by this time.9 The 1980s marked a time of accelerated expansion for Carl’s Jr. The company franchised in 1984, which allowed it to expand much more rapidly. By the end of the 1980s, Carl’s Jr. had 534 restaurants and had opened its first international location, in Asia. The 1990s also brought about significant expansion, as the company expanded into numerous US states, such as Texas, Oregon, and Washington. Further, in 1997 the company purchased the fast-food restaurant chain Hardee’s, which, at the time, had approximately 2,500 locations in the Southeast and the Midwest United States.10 In 2018, Carl’s Jr. ended its co-branding relationship with Hardee’s, and the two restaurant chains began to operate as separate companies. Carl’s Jr. also engaged in co-branding with Green Burrito, a California-based Mexican taco fast-food restaurant, in 1994 and began serving tacos. Carl’s Jr. bought out Green Burrito in 2002.11 In the early 2000s, the company engaged in significant international expansion, as it opened its doors in American Samoa, China, Indonesia, Malaysia, Russia, Singapore, and Vietnam. In 2011, Carl’s Jr. expanded into Canada, Costa Rica, Ecuador, New Zealand, Panama, and Turkey, and in 2012, the company expanded into Brazil, the Dominican Republic, and Thailand.12 Between 2013 and 2018, the expansion continued into various countries including Australia, the Bahamas, Belarus, Cambodia, Chile, Colombia, Denmark, Ecuador, France, Guatemala, Honduras, India, Indonesia, Iraq, Japan, Kazakhstan, Kenya, Nicaragua, Palestine, Panama, Spain, and Thailand. In 2019, the company had plans to enter Bolivia, Germany, Hong Kong, Morocco, Taiwan, and the United Kingdom.13 By April 2019, Carl’s Jr. operated over 2,000 restaurants: about 1,500 located in the United States and over 500 located in international markets. Restaurants in the United States were mostly in the West and Southwest; the company had restaurants in the US states of Alaska, Arizona, California, Colorado, Hawaii, Idaho, Illinois, New Mexico, Nevada, New York, Ohio, Oklahoma, Oregon, Texas, Utah, Washington, and Wyoming, and its international locations were scattered across the globe.14 TARGET AUDIENCE FOR FAST FOOD Potential Target Markets Many variables were used to segment the fast-food market, but age was one of the most common. One key demographic for fast food was millennials—those in the 18–34 age range. According to the United States Census 2019, 22 per cent of the US population (approximately 68 million people) self-identified as millennials. By 2030, millennials would make up the majority of the US population. Many millennials enjoyed fast food, as 54 per cent of “super heavy” fast-food users (those who ate fast food at least once a day) and 37 per cent of “heavy” fast-food users (those who ate fast food between two and six times a week) were millennials.15 Another key group was consumers in the 35–54 age range. They made up approximately 15 per cent of the US population in 2019 and generally enjoyed the classics with a twist. People in this age range typically spent approximately 40 per cent of food expenditures on food consumed away from home.

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Baby boomers, those born between 1946 and 1964 (falling into the 55–73 age bracket in 2019), generally enjoyed the classics when it came to fast-food consumption. Baby boomers were the largest age demographic in the US in 2019, as they made up approximately 25 per cent of the country’s population.16 Carl’s Jr. Target Market According to Carl’s Jr., the company targeted “young, hungry guys” (YHGs)—males in the 18–34 age range. These YHGs ate a lot of fast food and wanted big, juicy burgers loaded with toppings to satisfy their big appetites.17 Many of the company’s burgers tended to fit the bill, as Carl’s Jr.’s burgers were high- calorie offerings that typically featured half-pound beef patties loaded with toppings like cheese, bacon, and various sauces.18 In 2019, the young men that formed the YHG demographic were millennials. These millennial YHGs were more interested in the quality of the food than previous generations of this demographic had been. The company was aware of this fact: Brad Haley, chief marketing officer of CKE Restaurants Holdings Inc. (CKE Restaurants), Carl’s Jr.’s parent company, commented that “over time, the demographics and the psychographics in that group [men in the 18–34 age range] have evolved and that group is, among many other things, more concerned about what’s in their food, where it came from, how clean it is, etc.”19 Furthermore, Andy Puzder, former chief executive officer (CEO) of CKE Restaurants, noted that “the millennial young guys are concerned with, ‘where do you source your beef, what kind of cooking system do you have and we’re the only national brand with all-natural beef, all-natural chicken, charbroiling, hand scooping.”20 Like many millennials, the Carl’s Jr. YHG was more comfortable interacting with technology than with people and was thus more open to various forms of robotization, such as self-ordering kiosks. Puzder commented that “millennials like not seeing people. I’ve been inside restaurants where we’ve installed ordering kiosks and I’ve actually seen young people waiting in line to use the kiosks where there’s a person standing behind the counter, waiting on nobody.”21 CARL’S JR. MARKETING STRATEGY Product In 2019, Carl’s Jr. offered the typical products that fast-food chains generally offered: burgers, fries, chicken, salad, shakes, and malts. Carl’s Jr.’s burgers were made to order, and the company offered unique upgrades and substitutions like sourdough toast, bacon, mushrooms, and Swiss cheese. Carl’s Jr.’s burgers were charbroiled (cooked over a charcoal fire) to ensure superior quality and taste. The company’s most iconic offerings included the Famous Star and Super Star burgers, which had been available since the restaurant’s early days. Another iconic offering was the Western Bacon Cheeseburger, which was introduced in the 1980s.22 In 2003, Carl’s Jr. rolled out a line of Angus beef Thickburgers, which were priced (and promoted) as Six Dollar Thickburgers.23 In recent years, Carl’s Jr. had added a variety of new products, some of which were very innovative for the fast-food industry. In 2010, Carl’s Jr. introduced Hand-Breaded Chicken Tenders,24 while in 2011, the company became the first national fast-food chain to sell turkey burgers.25 In December 2014, Carl’s Jr. rolled out a Grass-Fed All-Natural Burger, which featured a grass-fed, free-range charbroiled beef patty without any hormones, antibiotics, or steroids. The company was the first in the fast- food industry to offer a burger with an all-natural patty. Shortly thereafter, in 2015, Carl’s Jr. unveiled an All-Natural Turkey Burger, another industry first.26 In January 2019, in an initiative dubbed “Beyond

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Meat,” Carl’s Jr. introduced the Beyond Famous Star burger—a burger with a plant-based patty instead of a meat-based patty. This was yet another industry first. “The new Beyond Famous Star is a true industry game changer,” commented Jason Marker, the Carl’s Jr. CEO.27 In addition to offering standard fast-food fare with a twist, Carl’s Jr. offered a variety of unique menu items such as curly fries, onion rings, jalapeno poppers, tacos, nachos, quesadillas, burritos, cookies, milkshakes, and malts. Further, the company offered a full menu of breakfast items like biscuit and croissant sandwiches, cinnamon rolls, hash browns, coffee, and breakfast burritos, as well as more substantial offerings such as omelettes and steak and eggs.28 Price In 2019, Carl’s Jr.’s prices were similar to those of other higher-end fast-food restaurants. The company typically offered value meals as well as various combos to help keep prices affordable. Carl’s Jr. had also routinely offered special items in certain regions, as well as limited-time deals and coupons.29 Place By 2019, Carl’s Jr. had numerous locations throughout the world. The company had approximately 1,300 restaurants in 17 states (mostly in the West and the Southwest) and approximately 540 restaurants in various international markets. The company had 284 outlets in Mexico; 65 restaurants in Russia; 32 in Canada; 27 in both Indonesia and Turkey; 21 in Ecuador; 20 in China; 16 in Denmark; eight in both Australia and Malaysia; seven in both Thailand and Vietnam; six in both Brazil and Chile; three each in Spain, Japan, and Cambodia; two in both Colombia and Belarus; and one in France.30 Carl’s Jr. stores had a modern and solid appearance. The store exteriors featured a brick layout, modern signage, and a fresh look. Store interiors featured what the company called the “Contemporary Star” design. This design was both youthful and colourful, and it had a focus on comfort. The design appealed to all demographics and had received extremely positive customer feedback.31 Promotion In the mid-2000s, Carl’s Jr. became known for its racy, edgy, and provocative ads. Since approximately 2005, the company’s ads had featured scantily clad models posed suggestively with the company’s product in an attempt to appeal to Carl’s Jr.’s target market. These edgy ads debuted in the company’s commercial for its Spicy BBQ Six Dollar Burger. This ad featured Paris Hilton washing a Bentley car in a skimpy bikini and then crawling on the car before taking a bite of the burger. The ad aired on TV, and Carl’s Jr. also featured it on its website, which eventually crashed due to an extremely high volume of traffic.32 A series of similar ads followed, featuring various models, including Audrina Patridge, Padma Lakshmi, Kim Kardashian, Kate Upton, Hannah Ferguson, and Heidi Klum. While the models marketed different products, the nature of the ads was the same: a gorgeous, barely dressed model interacted with a Carl’s Jr. burger in a sexually suggestive manner.33 In 2015, the company released an ad for its new All-Natural Burger, featuring model Charlotte McKinney walking naked through a farmers’ market (with strategically placed fruits and vegetables). The ad ended with McKinney taking a large bite of the All-Natural Burger while in a bra and underwear.34

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In general, Carl’s Jr.’s ads received mixed reviews. While the advertisements were widely viewed—for instance, McKinney’s 2015 ad generated over 12 million views on Carl’s Jr.’s YouTube channel and over 4.5 billion media impressions worldwide35—they also received significant criticism. General objections were that Carl’s Jr.’s ads objectified women and damaged their self-esteem. In particular, critics claimed that McKinney’s 2015 ad “sets feminism back four decades.”36 In 2019, it was difficult to ascertain these ads’ impact on the bottom line. On the one hand, the ads generated significant awareness for the brand, which likely resulted in some sales increases. On the other hand, some consumers, especially female consumers, considered the ads offensive and irritating, which undoubtedly adversely affected the company’s bottom line.37 Carl’s Jr. had always defended its promotion strategy. “We don’t have anything to be ashamed of,” Puzder stated. “We believe in putting hot models in our commercials, because ugly ones don’t sell burgers.”38 On another occasion, Puzder commented, “I like our ads. I like beautiful women eating burgers in bikinis. I think it’s very American.”39 Despite the company’s continued defence of its promotional strategy, in March 2017, Carl’s Jr. decided to reverse course: it eliminated the provocative ads.40 There seemed to be a few reasons for Carl’s Jr.’s shift in strategy. One factor was that, according to Carl’s Jr.’s research, the high quality of the company’s food and ingredients were lost on its consumers, and the company was motivated to change this. “We do an unbelievable amount of things in a restaurant to prepare our food, we buy ingredients unlike any others, but our research showed we weren’t getting any credit for it,” commented Haley. “People didn’t know it, or we told them so long ago they forgot.”41 Another factor in Carl’s Jr.’s shift in strategy was the different priorities of the current group of males in the 18–34 age range. Millennials were more focused on the health benefits, ingredients, and quality of fast food than prior generations had been. Further, the utilization of scantily clad women suddenly did not seem to be the right choice for relaying the brand’s message. “We had a great story to tell them, about our all- natural products they were unaware of, and we felt like we needed a vehicle to tell them more directly and consistently than our approach of the past,” commented Haley.42 Although the company denied it, the social movement toward a more positive image of women could have also affected the company’s shift in strategy. A number of big brands like Dove, Always, Microsoft Corporation, and GoDaddy Inc. had embraced female-empowering messages.43 Carl’s Jr.’s approach in this current climate would likely be subject to greater criticism than in the past, and the effect of such an approach would likely be weaker, as provocative images of women were easily found online. According to Puzder, “young, hungry guys aren’t as affected by the racy ads with the swimsuit models because you can get a lot of that on the internet now. It’s not like it was 10, 12 years ago when we started this.”44 The company may have privately decided that the costs of this approach outweighed the benefits. To reverse course, the company ran an ad that featured a fictional character, Carl Hardee Sr. In the ad, Carl Sr. had returned to the office to take the reins from his son, Carl Hardee Jr., who was responsible for the provocative ads of the past. Carl Sr. then announced that “when [he] started this company, it was about one thing: pioneering a new way ‘to food,’ caring food, cut-no-corners food, for you, to eat with your mouth.” This seemingly suggested that the company was returning to its roots, with a greater focus on the product.45 In 2018, this ad was followed up with the “Call of Carl’s” campaign, which featured close-up shots of its products with a voice-over from Academy Award winner Matthew McConaughey. These new campaigns were run under the company’s new slogan: “Pioneers of the Great American Burger.”46 Along with traditional promotion, Carl’s Jr. also engaged its audience through social media. The company was active on Facebook, Twitter, and YouTube. Carl’s Jr. used social media to interact with its customers in a digital space, further communicate its message, and develop online promotional campaigns.47

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RELATIONSHIP WITH HARDEE’S Carl’s Jr. and Hardee’s began as separate chains. Hardee’s was founded by Wilbur Hardee in North Carolina in 1961 and eventually expanded throughout the Midwest and the South.48 Over the years, Hardee’s opened restaurants in smaller towns that major fast-food chains such as McDonald’s and Burger King had ignored. As a result, Hardee’s was popular with older, hard-working, blue-collar customers.49 Overall, the company’s location strategy was successful; by the mid-1990s, Hardee’s was the country’s number-four fast-food chain, with approximately 2,500 locations scattered throughout the Midwest and the South.50 During the same time period, Carl’s Jr. expanded its operations throughout California and in nearby states in the Southwest.51 In 1997, Carl’s Jr. bought out Hardee’s for $327 million. The merger gave each company instant access to geographic areas that they had not previously expanded into. At the time of the merger, Hardee’s had approximately 3,100 locations worldwide (2,500 in the United States), while Carl’s Jr. had approximately 700 locations, most of which were in California. The merger was expected to help Carl’s Jr. in the breakfast category and to help Hardee’s with its lunch and dinner menus.52 Carl’s Jr. believed that the merger with Hardee’s would help it compete with major fast-food chains like McDonald’s, Burger King, and Wendy’s.53 Throughout the merger, the two fast-food chains kept their distinct names and their distinct personalities. However, the same red-and-yellow colour scheme, the same mascot—an anthropomorphic star called “Happy Star”—the same store design, and the same signage were used in both chains. This created the impression that the two companies were the same, except for the name. In time, this became true. However, in the early days of the merger, there were some distinct differences in terms of both the products offered and the marketing strategies utilized. Initially, Carl’s Jr. and Hardee’s operated separate menus, but over time each chain adopted the other’s menu items, until both chains offered almost identical menus. The same thing happened with respect to marketing strategies: initially, the two companies had separate marketing programs, but over time the two chains adopted Carl’s Jr.’s edgy advertising approach.54 In early 2018, parent company CKE Restaurants announced that the two chains would be managed as separate entities. The decision was the result of extensive market research that revealed Carl’s Jr. and Hardee’s to be separate brands with distinct personalities and very different types of customers.55 Jeff Jenkins, chief marketing officer at CKE Restaurants, commented that Carl’s Jr.’s customers

listen to EDM [electronic dance music], they’re into esports and gaming, they’re into soccer. They are coming to Carl’s Jr. in the afternoon, and in the evenings they’re going out to the movies or going to a club. Then you look at the Hardee’s customer, and they're talking about college sports, fishing, country music, and NASCAR, and they come in the morning a lot. A lot of times that trip in the morning is a pre-outdoor activity, whether it be going to their favorite fishing spot or going on a hunting trip.56

Consistent with this description, CKE Restaurants reported that, while breakfast made up 47 per cent of Hardee’s business, it made up only 17 per cent of Carl’s Jr.’s business.57 Marker noted that the two chains had very different personalities and thus benefitted from being operated separately: “Carl’s Jr. is West Coast cool, bold, aggressive, impossible to ignore, famous for very disruptive advertising strategies. Hardee’s is far more authentic and proud. We refer to it as down-home food done right.” Marker also commented that the chains “have distinct customers. They grew up very differently. Their customers love them for who they are.”58

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The separation of the two chains was expected to help each brand experience significantly greater growth. Marker noted that “these are two iconic, regional brands, and they have the opportunity to become more relevant and more contemporary. . . . There’s this huge amount of brand loyalty and enlightened brand equity in regional brands.”59 Jenkins stated that “We’ll see completely different menus and completely different assets. We want to stand out [so] when you’re driving down the road [we] capture your attention to tell you what we stand for. And I think by separating the brands that allows us to really tap into the culinary trends that are going on regionally.”60 Early returns on the separation were positive. Research showed that, since the two companies became separate entities, brand love—which was romantic in nature and generally referred to the emotional and passionate relationship that a consumer had with a particular brand61—increased by 10 per cent for Carl’s Jr. and by more than 20 per cent for Hardee’s. Brand love was captured through fan interaction on social media as well as through customer ratings of overall approval of the brand. “Those are truly amazing numbers. After a successful campaign, you are lucky if you see a 5% spike,” commented Jenkins.62

EMERGING TRENDS IN THE FAST-FOOD INDUSTRY The fast-food industry had experienced many changes and trends throughout its history, and in 2019, a number of new trends emerged. One was an expected increased reliance on foreign cuisines, such as Korean, Filipino, and Iranian. “You have flavors and ingredients from Africa, from the Middle East that have been progressively gaining importance, but we think that will really pop up this year [2019]. Filipino food is another example of that,” commented Daniel Boutarel, a managing associate at the New England Consulting Group. Another trend was the utilization of plant-based ingredients, such as cauliflower, broccoli, avocado, guacamole, and yucca. “I’ve been seeing a ton of root vegetables, and that is on the heels of the hero ingredient of [yucca],” noted Liz Moskow, the culinary director of Sterling-Rice Group.63 Fries were expected to be increasingly featured in the fast-food industry, perhaps with a different twist than before (e.g., Taco Bell’s nacho fries). Companies were expected to start topping fries with a variety of new and interesting toppings, such as melted cheese, bacon, or pork. This was expected to drive Instagram photos. Growth of the drinks category was also expected. In particular, cold drinks were expected to be increasingly featured. For instance, McDonald’s had introduced the McCafé Cold Brew Coffee, while Dunkin’ Donuts had introduced an Energy Cold Brew drink. Further, coffee cherry tea and various sweet, creamy drinks were also significantly more popular than before. Extras, in terms of sauces, sprinkles, or small add-ons, were expected to be on the rise in order to add intrigue to fast-food offerings. These could be anything from “a balsamic honey glaze or an overly spicy ‘I dare you to try this’ addition,” commented Moskow.64 Fast-food outlets and chains were expected to continue to close, as labour costs were high. Further, costs associated with making technological and/or operational improvements were also high. “Restaurants [will be] closing underperforming stores and opening up better optimized stores for what consumers are looking for,” noted R.J