Burger King Franchises - History

History

The company known today as Burger King itself began as a franchise; the predecessor of Burger King was founded in 1953 in Jacksonville, Florida as Insta-Burger King. The original founders and owners, Kieth J. Kramer and Matthew Burns, opened their first stores around a piece of equipment known as the Insta-Broiler. The Insta-Broiler oven proved so successful at cooking burgers, Kramer and Burns required all of their franchises to carry the device. The rights to open stores in Miami, Florida belonged to two businessmen named James McLamore and David R. Edgerton and their company South Florida restaurants, Inc. Due to operational issues with the Insta-Broiler, in 1954 McLamore and Edgarton made the decision to replace the Insta-Broiler with a mechanized gas grill they called a flame broiler. Even though the company had rapidly expanded throughout the state until its operations totaled more than 40 locations in 1955, the original Insta-Burger King ran into financial difficulties and the pair of McLamore and Edgarton purchased the national rights to the chain and rechristened the company as Burger King of Miami.

When McLamore and Edgarton's Burger King Corporation began a full franchising system in 1961, it relied on a regional franchising model where franchisees would purchase the right to open stores within a defined geographic region. These franchise agreements granted the company very little oversight control over its franchisees and resulted in issues of product quality control, store image and design and operations procedures.

In 1967, after eight years of private operation, the Pillsbury Company acquired the Burger King brand and its parent company Burger King Corporation. At the time of the purchase, the chain had grown to 274 restaurants in the United States. Pillsbury continued to grow the company utilizing the existing franchise system despite its flaws. The power of its independent franchises came to a head in 1973 when Chart House, owner of 350 restaurants and one of its largest franchise groups, attempted to purchase the chain from Pillsbury for $100 million (USD) which Pillsbury declined. When Chart House's bid failed, its owners Billy and Jimmy Trotter put forth a second plan that would require Pillsbury and Chart House spin off their respective holdings and merge the two entities into a separate company. Again Pillsbury declined the proposed divestiture. After the failed attempts to acquire the company, the relationship with Chart House and the Trotters soured; when Chart House purchased several restaurants in Boston and Houston in 1979, Burger King sued the selling franchisees for failing to comply with the right of first refusal clause in their contracts. Burger King won the case, successfully preventing the sale. The two parties did eventually reach a settlement where Chart House kept the Houston locations in their portfolio. Chart House eventually spun off its Burger King holdings and refocused on its higher end chains; its Burger King holding company, DiversiFoods, was eventually acquired by Pillsbury $390 million (USD) in 1984 and folded into Burger King's operations.

The regional licensing model remained in place until 1978 when the company hired McDonald's executive Donald N. Smith to help revamp the company. Smith initiated a restructuring of all future franchising agreements, disallowing new owners from living more than an hours drive from their restaurants, preventing corporations from owning franchises and prohibiting franchisees from operating other chains. This new policy effectively limited the size of franchisees and prevented larger franchises from challenging Burger King as Chart House had. Smith also altered the way the company dealt with new properties by making the company the primary owner of new locations and rent or lease the restaurants to its franchises. This policy would allow the company to take over the operations of failing stores or evict those owners who would not conform to the company guidelines and policies. However, by 1988 Burger King parent Pillsbury had relaxed many of Smith's changes, scaled back on construction of new locations and stalling growth. When Pillsbury was acquired in 1989 by Grand Metropolitan, the company fell further into decline, a pattern which continued under Grand Met successor Diageo. This institutionalized neglect further hurt the standing of the brand, in turn causing significant financial damage to Burger King's franchises.

By 2001 and nearly eighteen years of stagnant growth, many of its franchises were in some sort of financial distress. The lack of growth severely impacted Burger King's largest franchise, the nearly 400-store AmeriKing; the company, which until this point had been struggling under a nearly $300 million debt load and been shedding stores across the US, was forced to enter Chapter 11 bankruptcy. The failure of AmeriKing accompanied with declining market position deeply affected the value of the company, and put negotiations between Diageo and the TPC Capital-lead group on hold. The developments eventually forced Diageo to lower the total selling price by almost three-quarters of a billion dollars. After the sale, newly appointed CEO Bradley Blum initiated a program to help the roughly 20 percent of its franchises, including its four largest, who were in financial distress, bankruptcy or had ceased operations altogether. Partnering with the California-based Trinity Capital, LLC, the company established the Franchisee Financial Restructuring Initiative, a program to address the financial issues facing BK's financially distressed franchisees. The initiative was designed to assist franchisees in restructuring their businesses in order to meet financial obligations, focus on restaurant operational excellence, reinvest in their operations and return to profitability.

Individual owners also took advantage of the AmeriKing failure; one of the BK regional owners, Miami-based Al Cabrera, purchased 130 stores located primarily in the Chicago and the upper mid-west, from the failed company for a bargain basement price of $16 million, or approximately 88 percent of their original value. The new company, which started out as Core Value Partners and eventually became Heartland Foods, also purchased 120 additional stores from distressed owners and completely revamped them. The resulting purchases made Mr. Cabrerra BKB's largest minority franchisee and Heartland one of Burger King's top franchises. By 2006, the company was valued at over $150 million, and was sold to New York-based GSO Capital Partners. Other purchasers included a three-way group of NFL athletes Kevin Faulk, Marcus Allen and Michael Strahan who collectively purchased 17 stores in the cities of Norfolk and Richmond, Virginia; and Cincinnati-based franchisee Dave Devoy, who purchased 32 AmeriKing stores. After investing in new decor, equipment and staff retraining, many of the formerly failing stores have shown growth upwards of 20 percent.

With the sale of Burger King to 3G Capital of Brazil in 2010, Burger King made the decision to sell off almost all corporate owned stores to its franchises by the end of 2013. On major move towards this goal was the sale of over 275 stores to corporate franchise group Carrols Corporation of New York and nearly 100 stores to the minority held Magic Burger of Florida.