If Carrols Restaurant Group CEO Deborah Derby knew franchisor Burger King was going to acquire her company’s nearly 1,100 restaurants in a $1 billion deal announced this week, she certainly didn’t show her cards during last week’s ICR Conference.
Derby, who has served on Carrols’ board since 2018 and was named CEO in April after the unexpected death of Paulo Pena, provided an update on her company’s Burger King restaurants since the parent company implemented its $400 million Reclaim the Flame initiative in late 2022, aimed at turning around sliding sales and profitability levels. The tenor of her update during an interview at ICR? Unquestionably upbeat.
Of course, that update came on the heels of Carrols’ preliminary Q4 results, which included a 7.2% increase in BK’s same-store sales and a 2.9% increase in traffic. For Derby, this momentum is plenty of proof the Reclaim the Flame efforts are working and they’re working “very quickly.” Those efforts include focused investments in advertising, digital platforms, technology, remodels, relocations, operations – all aimed at modernizing the brand.
Photo: Deborah Derby
Burger King prioritized operational and building improvements first – fresh coats of paint, cleaning up the parking lots, etc. – hoping to get customers to take notice. Then, the company turned on its successful “You Rule” marketing campaign. This intentional sequencing is why Reclaim the Flame is working thus far, Derby said.
“They didn’t run out and spend the marketing right away,” she said. “The initial part they focused on was operational roundtables with the franchisees. The other part was on the matching funds – it wasn’t remodels, but repairs and maintenance, getting it freshened up. They did that in the first quarter and then the second quarter, they focused on the marketing, when they knew customers would be willing to come in and come back.”
The company then turned its focus to remodeling, providing contributions and incentives for A-level operators and for operators who choose the Sizzle prototype, for example.
“They really set it up to induce people, but also recognized that if you can’t get all the way there, they’re still going to provide some level of support to get this under way,” Derby said, adding that Carrols was on pace to modernize about 50% of its roster by the end of this year. The overall goal was to get 90% modernized by 2030. “That’s a pretty rapid time to get that much done because for so many years, things have been ignored, particularly during Covid where you couldn’t get the returns to do the remodels that were required.”
This “rapid” timeframe was shared last week. With Burger King’s acquisition this week, however, the plan is to expedite that remodeling effort. There are plenty of reasons for this. Though Carrols has just a handful of restaurants that have so far been remodeled (under 10 at this time) they have “in some cases far exceeded what we planned for,” Derby said. Still, keeping the cost down has been a challenge, as remodeling/construction costs are much higher than they were pre-Covid. Of course, Burger King has much deeper pockets than its franchisee and expects to have Carrols’ restaurants remodeled “in the next five years or so.”
To accomplish this truncated timeline, Burger King plans to invest approximately $500 million of capital, funded by Carrols’ operating cash flow, to remodel the approximately 600 acquired restaurants not currently in the modern image.
Another incentive for the company? It’s lost market share over the past several years to Wendy’s and, especially, McDonald’s. Not coincidentally, McDonald’s CEO Chris Kempczinski often touts his chain’s “modernized” restaurants as a competitive advantage after the company spent time and money remodeling much of its estate prior to the pandemic.
With the Carrols acquisition, there is no doubt a sense of urgency for Burger King to get caught up here. That urgency was also made clear to Derby upon her hire, and she said she wouldn’t have considered taking on the role had it not been for the “new regime.”
“I knew this new regime was looking through the lens of a franchisee. Those that ran the business before were smart people, but they were focused on growing their topline growth on the sales side, so having us build new restaurants, et cetera. It wasn’t the things that were generating a return for a franchisee,” she said. “When I saw Patrick Doyle come in (as executive chairman) and make a $30 million personal investment and knowing his track record at Domino’s … He wasn’t going to let this fail.”
For those unaware, Doyle’s track record includes turning around Domino’s as CEO from 2010 to 2018. During that time, he led the company to 29 consecutive quarters of same-store sales growth and systemwide sales growth from $5.6 billion to $13 billion. Derby, who has retail experience with Toys ‘R Us, was hesitant about moving from the board to the captain’s chair until she realized how quickly his leadership, and the $400 million Reclaim the Flame efforts, were positively impacting the system. Consider Carrols’ Q4 numbers as a good example here.
In addition to making bold investments, Derby was also impressed with the company’s approach to value, innovation, and operational simplicity. In Q4, Burger King adjusted its two-for-$5 promotion to include wraps, for instance, in addition to junior Whoppers.
“That resonated,” Derby said. “Consumers want wraps, but when Burger King rolled them out, they didn’t add a new tender product, but rather chopped up its sandwich (chicken patty). The beauty of the BK wrap was operational simplicity, using something that’s already there. Second, they picked something that appealed to our core customer and added the wrap as an add-on, but also attracted new customers who just want a lighter type of food. And the $2.99 price point got the value customer, yet at a great margin, so we didn’t mind doing it. It was perfectly done.”
During my conversation with Derby, I did ask about Carrols growth plans; companies presenting at ICR had bullish development narratives, after all. Her answer, in retrospect, seems a bit more telling now than it did just a week ago: “For the next couple of years, we have enough organic growth with the remodels, that’s where we’re going to focus. That’s the lowest risk; we know what we’re getting and if we’re getting mid-teen returns, we’re going to be pretty happy with that. I am optimistic. You couldn’t ask for more things moving in the right direction.”
It's worth noting that Burger King’s high-level strategy with this acquisition is to eventually refranchise Carrols’ restaurants once the remodels are done. Targeted franchisees, however, will be much, much smaller and the company recently changed its expansion policy to reflect this adjustment. That policy states that only A and B graded operators are allowed to build or acquire existing restaurants with an emphasis on concentrating portfolios to be fewer than 50 units contiguous geographically and with local ownership.
“We’re working to find (franchisees) who take an ownership and operator mentality. Partners who visit their restaurants regularly and get to know their team members and customers and who are hands-on,” Doyle said during the company’s Q1 earnings call in May. “I’ve seen firsthand the benefits of having locally engaged operators.”
Nation’s Restaurant News reached out to Burger King parent company RBI to learn if Derby or anyone from the Carrols team will be retained during or after the acquisition.
Contact Alicia Kelso at [email protected]