Burger King And Its Successful Implemantaion of Change

Burger King (BK)

Founded in 1954, BK is the world’s second largest fast food chain serving more than 11 million guests on daily basis. It was acquired by 3G Capital (3G) in 2010. At the time of acquisition, it had lousy sales and falling profits. Financial crisis of 2008 hit strongly its customer base, especially the so-called “super fans” (18-34 aged males with an appetite for burgers). Its main competitor McDonald’s on average had twice the sales volume per U.S. outlet and outperformed on the strength of new products. Franchise owners’ (the primary source of its revenues) discontent was mounting about low margins, poor menu choices, unbalanced focus on customer groups and deteriorating infrastructure; in 2013, local franchise owners sued BK over making them to sell double cheeseburgers for $1. Obsessed with advertising spend on “the Creepy King” targeting super-fans, BK management were unsuccessful in adding new consumer base. The consortium composed of Goldman Sachs, Bain Capital and TPG Capital, owners since 2002, failed to stop the company’s declining profit margins.

Under 3G, within a few years, BK’s operating margins grew from 24% in Q2 in 2011 to 58% in Q2 in 2014. Through implementation of its “four-pillar” strategy - focused efforts on menu, marketing, image and operations - BK’s per restaurant sales in US grew from approximately $1.1m in 2011 to over $1.3m in 2016, which translates into pretty much doubling operating profit per restaurant for its franchises; net restaurant growth accelerated from 170 restaurants per year in 2010 to 735 in 2016, representing a 4.2 times increase.

The key factor explaining BK’s success is the result of systematic actions taken by its owners, as such, a brief overview of 3G, its management philosophy, strategic design and organizational culture is important to understand BK’s transformation. 3G Capital is a global investment firm, with expertise in retail and consumer sector. It was founded in 2004, by three Brazilian billionaires as a vehicle to invest in US companies. Their portfolio of companies includes Anheuser-Busch-InBev, Heinz, Kraft, Tim Hortons and Popeyes. The strategic design and culture of 3G comes from shared vision of its founders which differentiates them from other industry players, continuous reinforcement of processes, systematic promotion of the beliefs and values, and generous incentives for those who champion their management philosophy. 3G Capital is different from other private equity firms in several ways. First and foremost, it does not have traditional “exit as fast as you can” mindset characteristic for private equity firms, seeking to ramp-up the company and sell for a higher return. Its fundamental approach is to acquire companies that can be owned forever. They have owned Anheuser-Busch-InBev since 1989 and few other companies for more than a decade. Secondly, 3G Company implements the operator-ownership model. Coupled with its “ownership forever” approach operator-ownership allows 3G to apply disciplined operational approach to each acquisition through leadership teams nurtured within the company, extreme focus on costs, strict performance management and relentless enforcement of values. Thirdly, efficiency and lean management is part of 3G’s organizational DNA, and an obsession spearheaded by its founders. Cost-cutting, getting rid of executive perks are usually the primary steps in all acquisitions; within a year of acquisition 3G Capital found $10bn in savings and divestments in Anheuser-Bush; Kraft Heinz’s pre-tax cost savings was 3 times higher than industry average, according to a report on Financial Times. The company uses zero-based budget approach and requires each manager to justify their expenses from scratch on annual basis.

As for organizational culture, meritocracy and ownership are fundamental elements of 3G culture; the company nurtures performance-driven competitive environment and each employee feels pressure to deliver results. The best performers are recognized through variable compensation system and through promotions to senior roles to become stewards of company’s resources. Performance is above everything; age, position or status are secondary. 3G is a strong advocate of “promotion within the company”. Each leader is required to identify at least two potential successors, from which one must be ready to take on the position within six months. Ownership means accountability as an individual, but also as a team; in 2016, when AmBev did not meet its performance targets in Brazil, none of its employees got bonus, with a logic that if the company doesn’t accomplish goals nobody gets bonus, be it a president or a front-line employee. To be successful in any 3G Company one must fit into the culture. “Cultural fit is the only leg of the [merit] tripod that is absolutely non-negotiable. Values such as integrity, meritocracy, ownership mindset, and the pursuit of excellence are not a matter of training and are deal breakers”[1].

Transformation of BK under New Management

3G Capital applied its traditional approach to transforming Burger King, by cutting staff numbers, slashing costs, establishing new executive team, strong performance management, along with promotion of a new culture and values. Bernardo Hees, partner at 3G Capital, was appointed CEO in 2010. He had no experience in fast food business, but was a successful graduate of 3G school. Daniel Schwarz (CEO since 2013) was brought to Burger King as a CFO, when he was only 29. Current CFO Josh Kobza is 31, Sami Siddiqui, Head of Investor Relations is 29. Just weeks into office, Hees fired about half of the 600 employees at Burger King's Miami headquarters. As usual, they kept doors open for those who could not fit into the new organization.

BK gave away the ownership of its restaurants by re-franchising, kept only 52, which is around 0.5% of ownership compared to 19% by McDonald’s, 18% in Wendy’s and 49% by Panera Bread. This allowed the owners to cut its corporate employees size from 38,884 to 1,200; most of these employees were hired by the franchise owners.

BK changed its marketing strategy, targeting to diversify its customer base beyond so called super-fans to families, women and the health-conscious. They changed their tagline from “Have It Your Way” to “Be Your Way” in attempt to building connection with its customer’s lifestyle, promoting diversity and individualism at the same time. Moreover, they dropped the “King” mascot in their commercials replacing them with celebrities to appeal to the larger audiences.

BK sold its corporate jets, cancelled annual party organized at a chateau in Italy (owned by BK’s EMEA division). Cost-cutting efforts did not include only corporate jets and annual parties; it also included small items such as replacing cell-phones with Skype for long-distance calls, using scans and emails for sending documents rather than using FedEx, along with the view that “every area of an organization has opportunities to improve efficiency and no expense is off-limits”[2].

The physical layout of the office was changed within a month: cubicles were removed and replaced with pods. New owners replaced some artifacts which symbolized old culture and statuses with new ones that promoted 3G’s values. “Mahogany Row” fancy lavish offices for company executives and their secretaries ceased existence. Executives also share an open-plan office, reminding employees (especially those inherited from previous ownership) and visitors about efficiency, informality and transparency. By putting four to six people together around one table in an open-plan, executives also sought to increase communication among the employees. CEO Daniel Schwarz’s performance goals hang on the walls behind his desk, continuously color-coded green, yellow and red to show progress against targets. This was reinforcing 3G Capital’s philosophy of increasing culture of transparency and cooperation among people across the firm.

They changed attitude towards franchisees. The new leadership understood that no one was more qualified than experienced franchisees to operate restaurants; they were treated as the most important stakeholders and their concerns were seriously studied. Executive team members spent time with them ensure healthy relationships. BK hired 140 coaches to work with franchisees on boosting their profitability and increase efficiencies. This move also relieved 3G from spending more than $400 million in upgrading the restaurants, as franchisees covered major bulk of the associated costs.

CEO Daniel Schwartz played detrimental role in executing the transformation of the company. His first leadership job was in BK, as a CFO when he was only 29. He supported Bernardo Hees in executing cost-cutting efforts. In the words of Martin Franklin, BK Board member, “Bernardo was the conductor, Daniel was the first violin”. He led BK’s global expansion and has grown the number of BK restaurants by 21% in four years. Daniel believes that change cannot be run from corporate desk or by phone, thus split his early months between Burger King's kitchens (he worked the broiler, assembled sandwiches, took orders and cleaned toilets) and corporate office, trying find out why the sales were deteriorating, while competitors showed double-digit growth. Time spent in the restaurants helped him first in identifying simplifications in the menu and later introducing the largest number of new menu items in BK’s history through a measured approach. As a believer in management by walking around, he spends as much time as possible traveling and visiting franchise partners. He follows advice from his manager at 3G about the importance of ‘you can't just manage the business — you need to manage the people, and let the people manage the business”, by continuously looking for the hardest workers of BK and promoting them to leadership positions. He now has a high-performing young executive team and continuously promotes startup environment. “I like people who genuinely are looking for a project and not a job”[3] and the one question he asks in many interviews is “Are you smart or do you work hard?3” and he would always hire those who demonstrated humility and humbleness. He also champions 3G culture in BK passionately. During his visits, he explains 3G ownership culture and mentality to employees. He also has required his corporate staff members to spend few days in a year in the company’s restaurants.

Key takeaways:

• To manage change effectively, your organizational culture and values should support your strategy; especially, if you are after transforming with interventions such as layoffs and cost-cutting. 3G Capital was successful in applying its cost-cutting agenda because it was perfectly aligned with its “ownership” (“ownership forever” and “responsibility of employees as owners”) culture.
• It is critical to have routine and mandatory mechanisms that reinforce your strategy systematically. In all 3G Capital owned companies including BK, continuous focus on costs is reinforced, zero-based budgeting is a good example.
• Change implementation can be effective only when your leaders champion your values and lead by example. BK’s transformation would not have been possible without “home-grown partners” like Bernardo Hees and Daniel Schwartz. None had experience in fast food industry, but both were strong believers and champions of 3G way of doing business.
• Beware of resistance to change; management should explicitly announce its “boundary conditions” characterizing so-called cultural fit. Keeping the doors open for those who cannot/won’t adapt is critical; even more important is to ensure that you have the right compensation mechanisms to motivate those who support your agenda and drive it further.