“How hard can it be to sell hamburgers in a recession?” asks Michael Corkery of the Wall Street Journal‘s Deal Journal blog.
It’s a good question. McDonald’s (MCD) has generally done quite well for the duration of the downturn. It has focused on value while continuing to plan for better times by offering higher-end items like gourmet coffee and pricey Angus burgers. Meanwhile, Andrew Puzder, chief of CKE Restaurants (CKE), which owns Hardee’s and Carl’s Jr., has obstinately refused to make his fast food a value play—concentrating instead on creating advertisements based on bad dirty jokes. And sales have plummeted as a result, quarter after quarter. Puzder at one point in part blamed “socialism” for his troubles. Now, CKE is being taken private in a deal with $928 million. The buyer is Thomas Lee Partners, the private-equity firm that was part of a group that took Dunkin’ Donuts private in 2005.
“Thomas Lee Partners apparently thinks it can do a better job than the current managers of Hardee’s and Carl Jr.’s,” Corkery writes. Yeah, well, so could I—and I’ve never sold more than one burger at a time.
Thomas Lee reportedly said it will keep current managers, presumably including Puzder, in their jobs. But expect the private-equity firm to demand big changes. And don’t be surprised if Puzder doesn’t stay long.
CKE’s troubles began well before the recession. Really, things haven’t been good since 2005, but they only got worse after the recession hit. The company “has consistently underperformed such restaurant chains as Jack in the Box and Ruby Tuesday’s,” writes Corkery, “despite a strong brand and the fact that inexpensive restaurant food tends to sell relatively well in tough economic times.” But that’s the point—for fast food, CKE’s fare wasn’t “inexpensive.”
If during a recession you’re pricing between McDonald’s and casual chains like Ruby Tuesday (RT), what customer base are you trying to attract? Puzder seemed to think Hardee’s and Carl’s Jr. were so much better than McDonald’s and Burger King (BKC) that eventually, people would catch on. They never did.
So now, expect cost cuts, perhaps massive ones, especially cuts in labor. And expect those cuts to be even deeper than they otherwise might have been, because Thomas Lee will almost certainly lower prices to increase foot traffic, and margins are already thin and getting thinner.
As for whether the inane, quasi-pornographic ads will continue, we can’t yet know. But private-equity firms are notorious for their parsimony. I’ll be surprised if Thomas Lee proves willing to keep paying big money to Kim Kardashian to have on-camera sex with salads.
The classic American outfitter, J. Crew, currently available only in North America and Japan, has plans to spread its global wings through a new agreement with Net-A-Porter that will take them first into Canada and next into the U.K.
