History of Burger King - History and Ownership - Pillsbury Company

Pillsbury Company

In 1967, after eight years of private operation, the Pillsbury Company acquired Burger King and its parent company Burger King Corporation. At the time of the purchase, BK had grown to 274 restaurants in the United States and had an estimated value of $18 million (USD). One of the main issues that Pillsbury had to control was the lack of consistency within the franchise framework. McLamore and Edgerton's franchise system allowed the company to expand a great clip, however it lacked a system of checks and controls on its franchises which in turn created a poor reputation for the chain in regards to its products and image. Additionally, the agreements gave the company little power to prevent its franchises from exercising power of the company itself.

One of the prime examples of the deficiencies in its former franchise structure was the relationship between Burger King and Louisiana-based franchisee Chart House. Chart House started out its history as Self Service Restaurants Inc. when two businessmen brothers Billy and Jimmy Trotter opened their own BK franchise group in that state in 1963. By 1970 the company had grown to over 350 store across the country, with its own purchasing system, training program and inspection system. In 1973 Chart House attempted to purchase the chain from Pillsbury for $100 million (USD), an offer which Pillsbury declined. After Chart House's bid failed, its owners Billy and Jimmy Trotter put forth a second plan that would have 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 between 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. In the early 1980s Chart House spun off its Burger King holdings and re-focused 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.

With the ongoing conflict with Chart House on the mind of the company's board in 1978, Burger King 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 hour's 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. Beyond the changes to the franchise system, Smith also restructured Burger King's corporate operations in order to better compete against his former company as well as then up and coming chain Wendy's. One of his first changes was to modify the menu with the addition of the Burger King specialty sandwich line in 1979, which significantly expanded the breadth of the BK menu with many non-hamburger sandwiches including new chicken and fish offerings. The new line was one of the first attempts by a major fast food chain to target a specific demographic, in this case adults aged between 18 and 34 years, members of which were presumably willing spend more on a higher quality product. The new products were successful and the company's sales increased by 15%.

After Smith's departure from the company for soft drinks producer PepsiCo in 1980, the company began to see a system-wide decline in sales. Pillsbury executive vice president of restaurant operations Norman E. Brinker was tasked with turning the brand around and strengthening its position against its main rival, McDonald's. One of his first acts was to initiate an advertising plan emphasizing claims that Burger King's flame-broiled burgers were better and larger than its rival's. The program, arguably the first attack ads on a food chain by a competitor, was controversial in that before it fast food ads only made allusions to the competition in a vague manner, never mentioning them by name. McDonald's sued Burger King, their ad agency at the time the J. Walter Thompson Company. The child actress Sarah Michelle Gellar was also implicated in the lawsuit because of her appearance in these television commercials. The suit was settled the following year on undisclosed terms. Despite the controversy, the ad plan boosted same store sales when sales took off. The whole situation at the time became known as the Burger Wars. Brinker continued working for the company in this capacity until 1982 when he was promoted to president of Pillsbury's food service division. His new role expanded his oversight to include the company's other chains beyond Burger King. Brinker left the company in 1984 to take over Dallas-based gourmet burger chain Chili's.

With the departure of Smith and Brinker, Pillsbury allowed many of their changes to be relaxed, as well as scaled back on construction of new locations which had the effect of stalling corporate growth. By failing to follow through on the changes of the two men, Pillsbury caused its own value to diminish as it derived more than one third of its sales and two thirds of its profits from the burger chain. When the British alcoholic beverages company Grand Metropolitan PLC made a hostile bid for Pillsbury, the company devised a plan to spin off the financially flailing restaurant unit in hopes to raise an estimated US$2 billion that could be used to fend off the unwanted suitor. The complex, potentially tax-free stock split plan would have led to the chain, along with its distribution system Distron, becoming a separate entity for the first time in over twenty years.

Hoping that the special dividends created by the spin-off would have convinced shareholders not to accept the hostile bid, Pillsbury had its plans partially scuttled when the company's franchisees rejected the plan despite parts of which that would have given the franchises part ownership in the company and a seat on its new board. In a letter to Pillsbury chairman Phillip L. Smith, franchise representative Bill N. Pothitos stated that franchisees disapproved of the transaction on the grounds that they "strongly oppose this proposed course of conduct for one reason and one reason alone: It so restricts the ability of the Burger King Corporation to engage in future competitive growth and reinvestment in the Burger King system that our economic interests and investments will be placed in jeopardy." Another option floated by the company in December 1988 was to sell Burger King to a third party, a proposal that drew a favorable response from its franchises, never came to fruition.

On top of the failure of the franchises to approve the spin-off, a series of lawsuits complicated the divestiture. Two legal challenges to the parent company were filed by investors, one in Pillsbury's home state of Minnesota and another in the state where it was incorporated, Delaware, in which the legality of the stock tender plan was questioned. These three events eventually forced Pillsbury to give up its bid to fend off Grand Metropolitan and agree to be acquired in November 1988.