TALKBACK

Executive Q&A: CKE's Andy Puzder Won't Serve 'Inedible' Food

By David Farkas, Senior Editor --Chain Leader,06/10/2009

CKE Restaurants President and CEO Andy Puzder.

Why is CKE still hanging onto a full-price strategy amid the segment's heavy discounts and value menus?

I did a market tour about a month ago in Atlanta and Jacksonville, and I ate products that are selling for 99 cents. I considered them inedible. We used to sell Famous Stars for 99 cents. They were our classic burgers with lettuce, tomato, pickle, mustard and ketchup. Now you can't sell them for 99 cents because commodity prices have gone way up in the past couple of years.

Although commodity prices have tempered this year.

They have both lost money and degraded their products. At the rate we are printing money in this country, the notion there won't be commodity price inflation over the next two years is almost unfathomable. So when commodity prices go up and customers still expect a 99-cent price point, these chains will be in a lot of trouble.

So how do you stay competitive?

The way we compete successfully is by going in the opposite direction. I remember four or five years ago, when I would meet with 30-year-old securities analysts and hedge-fund managers who knew how to run our business better than we did, I'd hear: "Andy, you got to serve salads and apple sauce. Wendy's and McDonald's are serving these healthy products, and if you don't you'll get killed. We said, "No, we are not doing that. We're doing Paris Hilton and Monster Thickburgers."

That appears to be the same strategy even in this economy.

People talk about McDonald's, Burger King, Wendy's, Carl's and Hardee's. Well, really, we don't belong in that sentence. Neither of our brands is national. The way we compete with the big guys is premium products and cutting-edge advertising. And we do things differently than they do.

In fact, there are some other regional brands that have gone in that direction [following national chains]. They experienced huge losses of margin. One lost 4.7 percent. You give me 4.7 percent of my margin to spend, to buy sales, and I'll have positive sales. Another brand was up 0.4 percent [same-store sales], and their margins were 16.2 percent. Well, we were down 1.8 percent [Q1 FY '10] and our margins will be around 20 percent.

Yet your same-store sales have been soft.

Our problem hasn't been a decline in burger sales per se. The bigger problem has been a decline in combo sales.

You told investors recently that male customers now order a burger and a coke but not fries.

This is just an example I use to get people to understand the issue. If I'm standing in a restaurant I'll hear a guy who two years ago would have said, "Give me a Western Bacon Cheeseburger combo." Today, they say, "Give me a Western Bacon Cheeseburger and a glass of water." That can meaningfully impact our business. We are out there testing that to see if we can combat that and make the combo a little more desirable purchase.

What are you doing?

We're putting in a smaller cup size. It's hard for a guy to come in and buy a burger for $1.29 and a beverage for a $1.29. We're addressing value concerns and affordability concerns. We are not getting on the everything-in-the-store-has-to-be-99-cents bandwagon.

Puzder believes "cutting-edge" commercials keep Carl's Jr. competitive. In recent years the chain has used beautiful women in that cause. This month, for instance, "Hills" star Audrina Partridge appears in a new spot for the Carl's Jr. Teriyaki Six Dollar Burger.

Right now, it is a test in just one store to see if we can make the biscuits. At Carl's, breakfast is about 50 percent burgers and breakfast is about 15 percent of sales. At Hardee's, we don't even turn the charbroilers on in the morning. The question is, is there a level of complexity with burgers and biscuits that we can't handle operationally? And if we can do this, will it be popular?

Where is the test store?

It's in Orange Country. We have finance and accounting in Anaheim, and the unit is fairly close to that service center.

Will breakfast at Carl's require new equipment?

You have to put ovens in and have room for them. That's one of the questions we have to answer.

Do you get any pushback from your senior team who want a value menu?

We have a 99-cent Big Burger that's the best 99-cent product out there. We coupon. In fact, in January, we did a two-for-$3 Famous Stars TV promotion. That's a value offering. There's no dispute within the company that value in this economy is important. What I won't do is 99-cent products that are inedible and focus a menu around them. People will remember what your food tastes like when this economy recovers.

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