1200 North Harbor Boulevard
"Carl Karcher Enterprises will always strive to be regarded as one of the premier organizations in the food service industry. We will earn this regard by consistently exceeding the legitimate and competitive expectations of our guests, our employees, our shareholders, and our franchise owners."
CKE Restaurants, Inc., known as Carl Karcher Enterprises, Inc. for much of its history, is a multi-brand restaurant empire, focusing mostly on fast food, especially hamburgers. From its beginnings as a hot dog cart run by company founder Carl N. Karcher, CKE grew into a firm with more than 4,000 owned or franchised restaurants across the United States, under the flagship Carl's Jr. brand, as well as such 1990s-acquired brands as Hardee's, Taco Bueno, and Casa Bonita. As of mid-1997, CKE also owned family-dining specialist Summit Family Restaurants Inc.--which owned or franchised 117 JB's Restaurants, HomeTown Buffets, and Galaxy Diners--but planned to divest most or all of these holdings. The company also made various strategic investments in the mid-1990s in the Rally's and Checkers double drive-thru hamburger chains (which were the subject of a proposed merger as of mid-1997).
Early History
Carl N. Karcher was born in 1917 in Upper Sandusky, Ohio, the third of eight children. Karcher's great-grandfather had immigrated to the Ohio Valley from Germany in 1840, leading to a growing population of Karchers in northwest Ohio. It was the Karcher who left Ohio, however, who set Carl Karcher on the road to entrepreneurial success. Karcher had been helping on his father's farm since he quit school after the eighth grade. But when his uncle offered him a job at his Anaheim, California feed and seed store in 1937, Karcher and his brother, Ralph, set off for the West Coast.
Karcher did not remain with his uncle for long. By 1939, Karcher had secured a job as deliveryman at the Armstrong Bakery in Los Angeles and had married Margaret Heinz. On his 75-mile delivery route, Karcher noticed the growing number of hot-dog carts and stands on various Los Angeles street corners. When a customer offered him the chance to purchase one for himself, Karcher acted quickly. Over his wife's objections, he secured a $311 loan using their new 1941 Plymouth as collateral. Fifteen dollars in cash provided the rest of the $326 needed to buy the cart and put Karcher in business on July 17, 1941.
Karcher located his cart at Florence and Central in South-Central Los Angeles, across the street from a Goodyear plant busy with wartime work. First day receipts were $14.75 from the sale of hot dogs, chili dogs, tamales, and soft drinks. Karcher displayed his knack for innovation when he started to offer curb-side service, enabling his customers to remain in their cars.
In May 1942, Karcher bought a second hot-dog cart--with the full support of his wife this time--which he relocated near a service station on another busy intersection. Later in the year a third was added, also near a service station. The next year Karcher added a fourth unit, which was not a cart but a stand--a small building with five stools placed around an outside counter for on-premise eating.
Though Karchers' enterprise was successful, Margaret Karcher wished to be closer to her family in Anaheim. Carl Karcher decided to expand his business; he soon found a Bob's Restaurant for sale, not far from where Margaret's family lived. Eager to move into the family restaurant sector, Karcher bought the facility's furnishings and equipment for $4,200 and signed a 12-year lease at $120 per month. The Karchers purchased a house down the street from the restaurant.
In January 1945, the newly named Carl's Drive-in Barbeque opened in Anaheim, serving a variety of sandwiches, chicken fried steak, barbecued ribs, and hamburgers. The hamburgers proved to be particularly popular and were added to the hot-dog stand menus after 15-inch grills were installed at each location in 1946. At Carl's Drive-in, Karcher installed a large neon sign with a flashing star on top to draw attention to a menu that was "out of this world." The star later evolved into the "happy star" logo that became synonymous with the Carl's Jr. chain.
Carl's Jr. Launch Highlighted 1950s
In the late 1940s and early 1950s Karcher's enterprises became increasingly sophisticated. The hot-dog carts and tiny stands evolved into larger hamburger stands with warehouse rooms to store supplies on-site, brick exteriors, and an overhang as standard features.
The 1950s were a time of increasing affluence in America and eating out became more common. At the same time the pace of life was quickening, providing the right ingredients for the explosion of what would later be called "fast food." Karcher recognized these trends and decided to create mini-versions of the full-service Carl's Drive-in Barbeque, calling the smaller spinoffs Carl's Jr. The first Carl's Jr. opened in Anaheim in 1956, followed quickly by a second in nearby Brea. Each Carl's Jr. had about a thousand square feet of space, two customer windows--one to place orders and another to pick them up--, and a small patio with redwood picnic tables for on-site eating. The Carl's Jr. menu was much more varied than the typical quick-service restaurant of the time--notably McDonald's. Carl's Jr. served hot dogs, shrimp baskets, hamburgers, tacos, and even pizza. The star logo was featured at each site, though now personified with the addition of a freckled, smiling face; this "happy star" wore booties and held a shake in one hand and a hamburger in the other. Carl Karcher asked his brother Don to manage the Carl's Jr. operations.
By the end of the 1950s, there were four Carl's Jr. restaurants in Orange County, one of which had briefly experimented with a drive-thru years before drive-thrus became standard fast-food restaurant features. Other Carl's Jr. innovations of the time were not so quickly abandoned. An inside take-out window and an enclosed patio were both quickly accepted by the public, as was the procedure of paying for one's order before receiving it--unheard of at the time but later standard practice in the industry.
Slow Growth and Miscues in the 1960s
The 1960s were a time of slow growth and missteps for the operations of Carl Karcher. Karcher owned five separate corporations when, in 1964, he hired management consultant Irving J. Mills as a consultant. Under Mills's guidance, the five corporations were consolidated in 1966 under Carl Karcher Enterprises, Inc. The firm was divided into two branches. Don Karcher became vice-president of field operations, overseeing all restaurants, while another brother, Frank, became vice-president of services, overseeing purchasing, construction, financing, real estate, and public relations.
Mills next suggested that Karcher Enterprises needed a theme to differentiate itself within the exploding fast-food scene. Designers and architects developed a railroad-themed concept called Carl's Whistle Stop and three opened in 1966 in La Habra, Garden Grove, and Long Beach. The Whistle Stops were among the first fast-food restaurants with ordering areas that were enclosed and air-conditioned. They failed, at least in part, because they were ahead of their time. People mistook the Whistle Stops for coffee shops because the order windows were hidden inside (and because of the buildings' architecture). This confusion led Karcher to convert the Whistle Stops to Carl's Jr. restaurants, with outside walk-up windows. Ironically, within a few years enclosed, air-conditioned ordering areas became the industry norm and the converted Whistle Stop units were changed back to their original inside ordering area style.
A second failure of the mid-1960s came when the company decided to expand by purchasing three full-service, Scottish-themed coffee shops called Scot's. They were never successful, however, and were sold soon after the Whistle Stops were converted. Mills soon parted ways with the company, which proceeded to return to its roots.
Carl's Jr. Revamped in the Late 1960s
In 1968, Carl Karcher Enterprises had 25 restaurants in operation when Karcher decided to refocus on the Carl's Jr. brand. His concept of a "new" Carl's Jr. featured a more attractive exterior with used brick and a tiled roof; upgraded interiors with carpets, cushioned booths, and music; and a retooled ordering procedure whereby customers still ordered and paid for food at an outside walk-up window but now were served their food at tables by employees--so-called partial dining room service. Most of these changes were firsts for the fast-food industry. The most radical change, however, was a streamlining of the menu in order to offer quicker service--Karcher decided to offer only hamburgers, hot dogs, french fries, malts, and soft drinks.
Despite numerous objections raised by others at Karcher Enterprises, the first revamped Carl's Jr. opened in Fullerton in 1968 and met with immediate success. This restaurant was the first in the company to rack up $1,000 in a single day's sales. It also helped Karcher Enterprises's 1968 sales reach almost $5 million.
Other Carl's Jr. restaurants were soon converted to the new format and the company embarked on an expansion plan which enabled it to reach the 40-restaurant mark by the end of the decade. The Carl's Jr. "happy star" logo appeared in San Diego County and the San Fernando Valley for the first time. To support the expansion, advertising increased, featuring the star and the slogan "It's out of this world."
As growth increased, Karcher Enterprises became more concerned with quality control and training. The company developed its first procedures manual to ensure that customers received the same product from all Carl's Jr. restaurants and created a training department to make training more uniform.
Tremendous Expansion in the 1970s
Carl's Jr. transformed into a major regional chain during the 1970s. In that decade, Carl Karcher Enterprises grew from 40 restaurants to 289, from 300 employees to 8,500, and from $5.6 million in annual revenue to $138.6 million. Carl's Jr. and additional innovations led the way.
In 1974 Carl's Jr. successfully reintroduced the drive-thru abandoned a decade earlier. Two years later, the industry's first soup and salad bar appeared in a Carl's Jr.; this innovation was rolled out chainwide three years later. Carl's Jr. expanded outside Southern California for the first time in 1975, when seven units opened in Northern California. The following year Karcher Enterprises built a 29,000-square-foot corporate headquarters in Anaheim, then two years later added a $5-million, 145,000-square-foot commissary and warehouse adjacent to the headquarters. The company also began to manufacture most of the products it sold.
During the late 1970s several of the older Carl's Jr. units were remodeled, and some were upgraded with drive-thrus. In 1977 the 200th Carl's Jr. opened. With the chain's expansion going so well, the company decided it was time to expand outside California. After a year spent investigating possible areas, Las Vegas, Nevada, was identified as the best site for the first out-of-state unit. This was a logical choice because of the city's proximity to Southern California and because 60 percent of Las Vegas tourists came from Southern California. In June 1979 the first Carl's Jr. in Nevada opened.
Karcher Enterprises suffered one notable failure in the 1970s when it decided to start its own chain of Mexican fast-food restaurants, called Taco de Carlos. Attempting to cash in on the increasing popularity of Mexican food, the company opened the first Taco de Carlos in 1972 and had 17 of them operating by decade-end. The chain was never given the attention necessary for success and was abandoned in the early 1980s and all of the units were sold, 12 of them to Del Taco for $2.2 million.
Various Setbacks Plague Company in the 1980s
Carl's Jr. had become the largest privately held, nonfranchised restaurant chain in the United States by the 1980s. After the successes of the 1970s, management boldly set goals for the year 1990: 1,000 Carl's Jr. restaurants and $1 billion in annual revenue. Unfortunately, the company would fall far short of these figures. In 1980 Carl Karcher promoted Don Karcher to president and chief operating officer of Karcher Enterprises. Carl Karcher remained chairman and CEO.
To reach their lofty goals, the Karchers needed to accelerate Carl's Jr.'s expansion program. To help finance the expansion, they decided to take the company public, raising $13.79 million through the October 1981 initial public offering. In 1981 the 300th Carl's Jr. opened. The following year the Carl's Jr. chain entered its third state when a Yuma, Arizona, restaurant opened in June. That same year several locations began to offer 24-hour service. In 1984, Carl's Jr. was franchised for the first time, an unusually long-delayed entry into franchising for a fast-food chain.
In the mid-1980s, Carl's Jr. ran aground from overexpansion and excessive tinkering with the menu. Earlier in the decade the chain had successfully introduced a Western Bacon Cheeseburger and a Charbroiler Chicken Sandwich. Then in an attempt to be a cross between a fast-food restaurant and a coffee shop, four charbroiler dinners were added to the menu in 1983&mdashøp sirloin steak, boneless chicken breast, rainbow trout, and ground beef steak. Each came with a choice of baked potato, fried zucchini, or wedge-cut potatoes and garlic toast. The dinners were served on platters rather than paper plates, and customers were provided with silverware, not plastic utensils. Unfortunately, the charbroiler dinners created a host of problems: the need to install dishwashers, traffic backups at the drive-thrus thanks to the length of time it took to prepare the dinners, and general customer confusion over what Carl's Jr. was. In 1985, the chain abandoned the dinners in another return to roots; restaurants signs which had read "Carl's Jr. Restaurant" were changed back to "Carl's Jr. Charbroiled Hamburgers." Prices were cut and all-you-can-drink beverage bars were added.
Compounding the company's difficulty was the chain's expansion into Texas, which began in 1984, just as the state economy was entering a prolonged depression. Texas had been chosen as the first state in a national roll-out of the Carl's Jr. brand. The three dozen units established there never came close to meeting sales expectations and by early 1987 Carl's Jr. had pulled out of the state entirely, taking a $15 million writeoff as a result and posting a loss for fiscal 1986. The company decided to limit the areas where it would build company-owned stores to California and Arizona and also converted a number of company-owned units to franchised units. Over the next few years, national expansion was placed on the back burner; instead more than 200 older Carl's Jr. restaurants were remodeled.
By 1988 the chain included 383 units and Carl Karcher Enterprises posted record earnings of $16 million. Carl Karcher credited the turnaround in part to the 1986 hiring of Raymond Perry as vice-president of operations; Perry had more than 20 years of restaurant experience, including serving as president of Straw Hat Pizza.
The Securities and Exchange Commission (SEC) filed a lawsuit against Carl Karcher in April 1988 alleging that in late 1984 he had tipped off relatives to an upcoming announcement that profits were expected to drop by half. Karcher vigorously denied the insider-trading charges, but in July 1989, he and six relatives agreed to settle the case by paying a total of $664,245, without admitting guilt. In related insider-trading cases, Al DeShano, the company's accountant, agreed to pay $24,794; and six other Karcher family members, including Don Karcher, settled with the SEC for $187,561.
As if all these problems were not enough, the Carl's Jr. chain had the added burden of a chairman and CEO who took public positions on controversial issues. Carl Karcher was a dedicated conservative Republican and had served as the party's finance chairman for Orange County, one of the most conservative counties in the country. His support for right-wing Republican John Schmitz, who had tried in the 1970s to ban homosexuals from teaching in public schools, came to the attention of gay rights groups. And Karcher's adamant opposition to abortion--a result of his devout Catholicism--led to demonstrations at Carl's Jr. restaurants organized by abortion rights groups in the late 1980s and early 1990s. In 1991 opposition from gay and abortion rights groups led students at California State University, Northridge, to narrowly vote down the establishment of a Carl's Jr. on their campus.
Meanwhile, Carl's Jr. brand expanded internationally for the first time. In 1988 a license agreement was signed with the Friendly Corporation of Osaka, Japan, to develop at least 30 Carl's Jr. restaurants in Japan by 1993. Two years later a license agreement with Malaysia-based MBf International (later known as MBf Holding Berhad) called for 16 restaurants to be built in the Pacific Rim--including Malaysia, Singapore, Hong Kong, Australia, New Zealand, Taiwan, Thailand, the Philippines, and Indonesia--over five years. In 1995 a new joint venture agreement with MBf was signed and called for 130 Carl's Jr. units to be built in a five-year span. In October 1990 Carl Karcher Enterprises signed an agreement with a third licensee, Valores Matalicos, to expand the chain into Mexico.
Management Chaos in the Early 1990s
The early 1990s were marked by turbulence in the management ranks at Carl Karcher Enterprises. Perry had been considered an heir apparent to the aging Karcher, but was abruptly dismissed from his number three position in 1991. Then Don Karcher died of cancer the following year. Carl Karcher began to lose control of the company board at the same time he was experiencing personal financial difficulties. In December 1992 Karcher attempted to simultaneously regain control and solve his money woes through a $103 million leveraged buyout of Carl Karcher Enterprises that he proposed with the Los Angeles investment firm, Freeman Spogli & Co. The deal might have earned him $43 million. The board rejected the offer, then the following month appointed Donald Doyle, former head of Kentucky Fried Chicken USA, CEO and president, with Karcher remaining chairman. In addition to the management upheaval, chainwide sales were beginning to level off thanks to fierce competition in the industry and the company posted a fiscal 1993 loss of $5.5 million, the first loss since fiscal 1986.
Karcher and Doyle clashed throughout 1993, most notably over a Karcher proposal to test dual-branded restaurants featuring both Carl's Jr. fare and that of the ailing Mexican food chain Green Burrito, run by Anaheim-based GB Foods Inc. If approved by the board, Karcher's financial problems would have reportedly been solved. In August the board rejected the proposal, which led Karcher to threaten a proxy fight to oust certain board members. In October the board voted Karcher out as chairman for interfering with long-term management strategy, replacing him with long-time board member Elizabeth A. Sanders.
Two months later Karcher was back on the board but with the more or less honorary title of chairman emeritus. To regain his seat and to solve his financial woes Karcher struck a deal with a partnership led by William P. Foley II, an entrepreneur who had built Fidelity National Title into the nation's fourth-largest title insurance company. Foley's partnership paid off Karcher's $23 million bank loan in exchange for the 3.8 million shares of company stock posted as collateral. The partnership then controlled about 25 percent of the stock, gaining Foley a seat on the board.
For the next several months Sanders and Doyle led Carl Karcher Enterprises and decided that for Carl's Jr. to better compete its traditional premium pricing strategy should be changed to one based on lower prices. When sales continued to drop during fiscal 1994, Foley stepped in to challenge Doyle's leadership. Doyle soon resigned, Foley was appointed chairman and CEO, and Foley brought in Bay Area franchisee Tom Thompson as president and COO. Also in 1994 the new board received shareholder approval for a new corporate structure, which created a new parent company called CKE Restaurants, Inc., with subsidiary Carl Karcher Enterprises, Inc. in charge of the Carl's Jr. chain.
Mid-1990s Transformation into Multi-Brand Empire
In July 1994 the CKE board reversed course and approved a test of dual Carl's Jr./Green Burrito restaurants. Then in a further twist CKE decided early in 1995 to abandon the dual branding with Green Burrito and instead develop a dual concept with its own Mexican concept called Picante Grill. GB Foods subsequently sued CKE, calling the new concept a "knock-off." Finally in June 1995 the two parties settled their differences and agreed to develop a minimum of 140 dual-branded locations. Twenty-two of them were operating in fiscal 1996 and posted sales 25 percent sales higher than when the units were simply Carl's Jr. outlets. Also in 1995 the company signed a deal with UNOCAL 76 Products Company to open Carl's Jr. restaurants within ten UNOCAL Fast Break convenience stores and gasoline stations in California. Remarkably, Foley and Thompson had turned the Carl's Jr. chain around.
The defining move toward improvement came in mid-1995 when the chain abandoned value pricing and developed a new advertising campaign which emphasized quality and quantity through the slogan "If it doesn't get all over the place, it doesn't belong in your face." According to a company annual report, ads featured "big, messy, juicy burgers dripping on a variety of targets including a basketball player's high-tops, a motorcycle cop, and an unsuspecting pigeon." Backed by the campaign, same-store sales began increasing for the first time in five years.
With Carl's Jr. on the rebound, CKE officials confidently looked outside the company for undervalued restaurant properties for acquisition or investment. In April 1996 CKE spent $4.1 million for a 15-percent stake in the struggling Rally's Hamburgers, Inc., operator of a chain of nearly 500 Rally's double drive-thrus. This stake was increased to 18 percent later in 1996 and CKE also began managing 28 Rally's in California and Arizona. The two companies also agreed not to compete against each other in the same markets--Rally's was primarily located in the southeastern United States--and Rally's borrowed Carl's Jr.'s "messy" advertising strategy to turn around its fortunes.
CKE acquired Summit Family Restaurants Inc., which operated the 104-unit JB's Restaurant chain, six Galaxy Diners, and 16 HomeTown Buffets as a franchisee. CKE quickly made Summit profitable again but just as quickly determined that it did not want to focus on family dining and so would likely divest most of these holdings and earn a profit in the process.
In October 1996 CKE bought Casa Bonita Incorporated from Unigate PLC for $42 million in cash, gaining the 107-unit Taco Bueno fast-food chain and two Casa Bonita family restaurants, which featured entertainment. The deal returned CKE not only to the Mexican food sector that the company abandoned when it gave up on Taco de Carlos but also to that nettlesome state of Texas, which was where Casa Bonita was headquartered and where it operated 67 Taco Bueno units.
Continuing a whirlwind year, in November 1996 CKE became involved with another struggling double drive-thru hamburger chain when it purchased $12.9 million of Checkers Drive-In Restaurants, Inc. senior secured debt. CKE followed up by acquiring a 10 percent stake in the 475-unit Checkers in February 1997. In April CKE helped to craft a proposed merger of Checkers and Rally's, which if consummated would combine the similar chains into a single system of nearly 1,000 units.
CKE's stock split 3-for-2 in January 1997 and the company announced an amendment to its dual-brand agreement with GB Foods whereby the original 140-unit commitment was increased to a minimum of 306 stores, with a minimum of 60 restaurants to be converted each year over a five-year span. But the company announced a real blockbuster in April 1997 when it said it would acquire Hardee's Food Systems Inc. from Imasco Ltd. of Montreal for about $327 million--the number seven burger chain buying the number four chain. Hardee's, yet another struggling burger chain, boasted 3,100 units located in 41 states and 10 foreign countries and had 1996 revenues of almost $3 billion. Its U.S. units were strongest in the Midwest and Southeast, which meshed well with Carl's Jr.'s predominance in the West. CKE planned to test dual-branded Carl's Jr./Hardee's units, with Hardee's strong breakfast lineup teaming with Carl's Jr.'s lunch and dinner sandwiches.
After a few years of Foley's leadership, CKE was barely recognizable as the same company. Fiscal 1997 revenue reached a healthy $614.1 million, while net income was a record $22.3 million. With the addition of the Hardee's brand, it was even questionable whether Carl's Jr. was still the firm's top brand. Future prospects appeared bright for this multi-brand giant, although somewhat difficult to predict given the dynamism of the mid-1990s.
Principal Subsidiaries: Boston Pacific, Inc.; Carl Karcher Enterprises, Inc.; Casa Bonita Incorporated; Hardee's Food Systems Inc.; Summit Family Restaurants Inc.; Checkers Drive-In Restaurants, Inc. (10%); Rally's Hamburgers, Inc. (18%).
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