Fat Profits

http://www.portfolio.com/news-markets/national-news/portfolio/2008/01/13/CKE-Hardees-Profile/

Fat Profits
by Joe Keohane
February 2008 Issue

You want onion rings with that? They're already in the burger—along with bacon, cheese, BBQ sauce, and a corporate philosophy that says to hell with the health police. How a fast-food chain is pushing gluttony to new extremes and changing America's attitude toward eating.

It was a patriotic statement that went a bit too far afield: an attempt to create the "ultimate picnic burger." Called the Fourth of July Burger, it was tested last summer at seven locations by the West Coast fast-food chain Carl's Jr. and consisted of a huge beef patty topped with pickles, ketchup, mustard, potato chips, and a hot dog. Stacked high and loaded with fat and calories, it was the food equivalent of the national anthem played through a sousaphone, a perfect distillation of a peculiarly American form of balls-out, postmodern gluttony that, at least outwardly, we're all supposed to be ashamed of right now.

Yet for all its pomp and glory, it didn't quite work. When John Koncki, director of product development for Carl's Jr., talks about it now, he comes across a little wistful. It tasted really good, he says, but the name and the concept proved too much for the testers. "Sometimes," the earnest Koncki says, "some of the sandwiches are so unique that consumers can't wrap their heads around them."

The uniqueness isn't the only thing that's hard to get your head around. During the past few years, CKE Restaurants, the parent company of Carl's Jr. and Hardee's, has employed an audacious go-for-bloat approach that defies just about everything you've come to assume about the business of modern fast food. (See nutrition data for CKE franchises and other fast-food chains.) In an age when other chains have been forced to at least pretend that they care about the health of their customers and have started offering packets of apples and things sprinkled with walnuts and yogurt, Hardee's and Carl's Jr. are purposely running in the opposite direction, unapologetically creating an arsenal of higher-priced, high-fat, high-calorie monstrosities—pioneering avant-garde concepts such as "meat as a condiment" and "fast-food porn"—and putting the message out to increasingly receptive consumers with ads that are often as controversial as the burgers themselves.

That message may be revolutionary or totally evil or maybe both, but in any case, it goes like this: Anyone can make Americans fat (hell, everyone already has), but only one fast-food company can make them fat and allow them to feel good about it, even get them to feel like they're making a statement and striking a blow against the forces of political correctness. It's downright Jeffersonian in its own weird way, and judging by the growth of both chains, it's working extraordinarily well. Since 2000, CKE's average sales per store have increased by 31 percent, a rate greater than any other burger chain's, save for the nostalgia-mongering Sonic drive-ins, with which CKE is tied. And its stock soared, from about $2 in 2001 to more than $22 last June, before slipping back to around $15 at the end of the year.

Even more interesting is the growing influence of CKE—a regional company that, with more than 3,000 locations, operates the country's 11th- and 12th-largest fast-food chains—on the way fast food is perceived and marketed in America. With its sheer audacity, its philosophy that no one ever went broke overestimating the American appetite, CKE functions as a sort of id for the larger chains, a direct line into the lizard brain of the male fast-food eater. It has envisioned a future even more gluttonous than the present, it has made money, and now others are taking notice.

After a period of collective indigestion induced by the 2004 documentary Super Size Me and the 2001 book Fast Food Nation and its subsequent film adaptation, much of the industry is returning to its traditional customers—men—and its traditional food—meat—served up in ever-greater quantities. Although CKE's signature behemoths—the Carl's Jr. Double Six Dollar Burger and Hardee's Monster Thickburger, both introduced in 2004—out-calorie all comers, Burger King narrowed the gap with its Triple Whopper With Cheese (2005); Wendy's unveiled the Baconator (2007), which we'll get to shortly; and Taco Bell awakened the industry to new possibilities with its 2006 campaign, which urged customers to enjoy a "fourth meal" each day.

The greasy gridiron is becoming well trod, but the first footprints were CKE's. Conrad Lyon, a restaurant-industry analyst for FTN Midwest Securities, says Hardee's and Carl's Jr. "were the ones that really just threw it in your face, so to speak, and did so in a somewhat egregious way."

Andrew Puzder, 57, chief executive of CKE, sits behind an imposing desk in his office at company headquarters in Carpinteria, California (which, for what it's worth, has a gym and no cafeteria), wearing jeans and an untucked Abercrombie & Fitch button-down. Although he spends a lot of time visiting restaurants, eating at a Carl's Jr. or a Hardee's four or five times a week and opting most consistently for his favorite, the Carl's Jr. Six Dollar Burger, he's fit and sinewy, an avid weight lifter and runner—living proof, he says, that customers don't have to be overweight if they exercise and balance their diets. "I think you need the variety of things," he says. "I eat a lot of fruit and vegetables too." Asked whether he thinks it's ironic that a fitness buff runs a company famous for health-destroying burgers, he says, "I think it's an irony that I'm running CKE, even if I didn't exercise. I was a trial lawyer. I think they all thought they were bringing me in to take the company into bankruptcy."

Puzder was working for a law firm in St. Louis when he met CKE founder Carl Karcher and wound up representing the fast-food magnate in a securities-fraud case. The two men became close; Karcher hired Puzder to handle his personal trust and then, in 1997, to serve as CKE's corporate counsel. That same year, CKE acquired the grimy, moribund Hardee's Food Systems. In June 2000, Puzder was appointed Hardee's president and chief executive, and he became CKE's president and C.E.O. soon afterward. Once he took the helm, he began visiting Hardee's restaurants and was appalled at what he found. The places were filthy, the service was terrible, and the cut-rate food wasn't any good. Puzder instituted policies to take care of the first two problems and then started in on the menu. Working with the ad agency Mendelsohn Zien, a Los Angeles-based firm known for its provocative spots and affinity for companies on life support, Puzder scrapped the old menu, which offered everything from cheap burgers to fried chicken to hot dogs, and devised a new one that focused on bigger burgers for "young, hungry guys" (a phrase chanted like a mantra at headquarters) who were sick of being told what they should and should not eat.

Under Puzder, in 2001, the similarly struggling Carl's Jr. introduced the Six Dollar Burger, a half-pound, premium offering intended to rival the fare of "sit-down" restaurants like T.G.I. Friday's. It was meant to taste like a $6 burger: The retail price was $3.95, expensive for a fast-food chain, but Puzder believes that fast-food customers are more discerning than people think they are and want higher-quality ingredients—such as beef from an Angus cow—than those found in ordinary patties.

The Six Dollar Burger did well with customers and in 2002 won the Silver Skillet Award from Restaurant Business magazine. Puzder saw the future. "I think a lot of this everybody's-gonna-eat-healthy thing is more a concern of people in the media than a concern of people who come into our restaurants," he says. Fast-food customers had indeed been clamoring for healthy alternatives, which prompted an industrywide stampede toward salads and orange slices, but just because customers wanted them on the menu didn't necessarily mean they wanted to eat them. For all the buzz created by snack wraps and yogurt parfaits, burgers and fries remain the two most frequently ordered items in American restaurants, according to industry research group NPD Foodworld. In fact, the addition of salads at McDonald's and other chains is partly aimed at drawing more burger-eating men by placating wives and girlfriends who would otherwise veto the restaurant choice. "What people say they want and what they do don't match up," says Darren Tristano, an executive vice president at Technomic, a food-industry research and consulting firm. "If they say, 'I'm gonna order more salads,' they're going to order more french fries." CKE marketing head Brad Haley, who looks a bit like a golfer with his short-sleeve shirt, goatee, and nascent paunch, echoes the sentiment. "People say what makes them feel better about themselves in surveys."

So Hardee's dispensed with any semblance of social conscience and in 2003 introduced the Thickburger. In 2004, this begat the downright lurid Monster Thickburger, a messy two-thirds of a pound of charbroiled Angus beef containing more than 1,400 calories and 107 grams of fat. Soon afterward, when McDonald's, under fire in the wake of Super Size Me, responded to critics by phasing out its supersize menu, Thickburgers were there to help fill the void. Sales soared, nutritionists cried foul, and a string of burgers of escalating perversity followed from both Hardee's and Carl's Jr.: the Breakfast Burger (a huge patty crowned with a fried egg, bacon, and hash browns), the Philly Cheese Steak Thickburger (topped with sliced steak and cheese), and the Pastrami Burger (take a guess).

When the latter two prompted a horrified Jay Leno to denounce CKE for using meat as "a condiment for other meats," CKE was delighted and started touting "meat as a condiment" in its promotional materials. "When we do a big, decadent burger," says Haley, a man whose office fridge is full of nothing but springwater and Diet Coke, "we'll send the press release to Jay Leno, and we're not afraid if he says, 'This disgusting thing is 5,000 calories.'?"

Leno's disgust has become a reliable boost to CKE's sales. Every time the company introduces a new item, he attacks it, but not before running down its entire list of ingredients in detail, as he did in late 2007 when Hardee's unveiled its contribution to the rapidly growing breakfast market, the Country Breakfast Burrito. Consisting of two eggs, ham, bacon, sausage, cheese, and sausage gravy in a flour tortilla, it has 60 grams of fat and more than 900 calories—the biggest in the land, a belt notch ahead of the Carl's Jr. Breakfast Burger, which comes in at 830 calories. When Haley was quoted as saying that the burrito finally makes a big country breakfast portable, Leno, in one of two separate bits he did on the breakfast beast, quipped, "See, this way you can take it with you in the ambulance after your heart stops." Says Puzder: "A lot of people think Leno's on the payroll."

Some other major fast-food chains have been heading down the same path as Hardee's. Six weeks after Hardee's Country Breakfast Burrito appeared, McDonald's countered with the 610-calorie McSkillet Burrito, featuring egg, sausage, potatoes, and American and Monterey Jack cheeses. In the past four years, Burger King and McDonald's have introduced Angus burgers, and Burger King went for sheer excess with its colossal Meatnormous omelet and BK Stackers (multiple patties in one bun). Burger King began offering stackers in 2006 because "we went out and talked to superfans, and they told us a menu gap we had was a really indulgent meat-and-cheese burger," says John Schaufelberger, head of global product innovation. Since then, Burger King's share price has nearly doubled. A spokeswoman for McDonald's said it is testing the Angus burger in response to customer wishes. McDonald's has otherwise lagged in the big-burger arms race but has dramatically boosted its share price in the past five years via a multipronged approach involving everything from premium coffee and better service to an expanded menu and the ubiquitous I'm Lovin' It marketing campaign.

Last summer, Wendy's introduced the Baconator—two hamburger patties, two slices of American cheese, and no fewer than six strips of bacon. Wendy's spokesman Denny Lynch says research shows that customers had an unslakable yearning for more bacon. "Well, if they like two strips of bacon, would they like three? And if they like three, how about six? And that's where the Baconator came from," he says, adding, "there is a trend toward large, indulgent hamburgers." Wendy's (which now also serves stacker-style burgers) reinforced that trend in November, when it announced it would be creating a Philly Style Hoagie Burger—two patties covered with salami, ham, and creamy Italian dressing. And both Burger King and Wendy's have run quirky, somewhat absurdist ads tailored specifically for the young, hungry, male sensibility, though their spots aren't nearly as provocative as CKE's. In 2006, for instance, Burger King launched its I Am Man campaign, in which fed-up men who marched down the street decrying "chick food" opted for Burger King's Texas Double Whopper.

Newton, Mississippi, is a place of churches, farmland, and small, low-slung, porch-heavy houses. But the highway on the outskirts of town is strewn with the sorts of chain restaurants that have contributed to Mississippi's standing as the fattest state in the nation. A whopping 30.6 percent of its residents are obese, according to the nonprofit group Trust for America's Health.

Vying for the attention of passersby are a McDonald's, a Sonic, a K.F.C., a Taco Bell, and, in the shadow of a Wal-Mart Supercenter poised atop a grassy incline, a Hardee's.

This is prime Hardee's country. According to CKE's internal market numbers, two-thirds of Hardee's locations are in small towns, mostly in the Southeast and Midwest. Blue-collar white males are well represented in Hardee's customer base, and one-third of all its customers fall within the coveted 18- to 34-year-old demographic. More than 70 percent of Thickburgers are bought by men. Carl's Jr.'s patrons also skew male, though they're more moneyed; 29 percent make more than $75,000 a year.

"We have a lot of young, hungry guys, a lot of construction workers," says Bill Boddie, who owns the most Hardee's franchises—343 restaurants in North Carolina, Kentucky, South Carolina, and Virginia. "And they burn up calories. They want something big, and they want something good to eat. They're the ones who buy the huge burgers and the huge breakfast burritos."

At around 1 p.m. on a Sunday, the Newton Hardee's is starting to fill up. It's a beige-and-red box, incongruously colorful against its mostly gray setting, giving it the air of forced gaiety and desolation one tends to find in fast-food restaurants located by highway interchanges. A good number of patrons come in wearing their church clothes. The clean interior is adorned with comment cards and vintage photos of Hardee's restaurants before they went to seed in the '90s. Like Carl's Jr., Hardee's offers limited table service, so after ordering, you take a seat and one of the employees working the counter brings your meal to you. Tony Adams, a big, bearded 45-year-old wearing jeans, cowboy boots, and a blue-and-white trucker hat, has been working as a cattle-and-crop researcher for the state for 26 years. His current title is dairy herdsman. Today, he sits in the middle of the dining room with his diminutive, white-haired mother, Arlie Mae Adams, who is clad in a robin's-egg-blue outfit and gold flats. They're regulars: Tony says he eats at Hardee's four times a month, sometimes breakfast, sometimes lunch or dinner. He's quietly, methodically working on a Philly Cheese Steak Thickburger, a large fries, and a tankard of soda. It takes him a solid 15 minutes to get through it all. Arlie Mae is eating a comparatively dainty Big Chicken Fillet Sandwich (770 calories) and fries and drinking a "small" Coke, which is about the size of her thigh. A quote printed on her cup, which reads "Hardee's knows what America wants," is attributed to the Marshall Independent, a Minnesota newspaper.

His lunch effectively vanquished, Tony packs up his wrappers, ambles across the dining room, and dumps them in the trash, then plunks himself back down at the table. "It was good," he says, leaning back in his chair. Asked whether he buys into the notion that a fast-food chain shouldn't sell such hefty fare, he rolls his eyes and snorts. "I wouldn't agree with that," he says. "I don't got no complaints."

"To me," chimes in Arlie Mae, "Hardee's is the best fast food in town."

There's a certain kind of genius at work here, evidence of a well-thought-out defensive game. By not merely disclosing the fat and calorie content of its products but actively boasting about it, CKE effectively declaws the so-called food police, who act on the assumption that people eat fast food only because they don't know it's bad for them. This frankness makes CKE less vulnerable to the sort of social, political, and even legal pressure that its rivals—particularly McDonald's, which offers pedometers with its Go Active Adult Happy Meal—feel so acutely. Far from shameful, it's a point of manly pride to go to Hardee's for lunch and scarf down a Monster Thickburger, a chocolate shake (made with real ice cream, it has three times the fat of the McDonald's version), and a medium fries, which adds up to 170 grams of fat and 2,760 calories. And the more society's nannies say you shouldn't, the more you kind of want to.

The same subversive approach is applied to the company's advertising. In general, CKE doesn't market directly to children. It did recently sign a promotional deal with the producers of the animated film Igor—which stars, coincidentally, Jay Leno. But Puzder says the agreement involves only in-restaurant publicity (small posters as well as toys or action figures given away with meals), not TV or radio, which spares the company trouble with its detractors.

Instead, CKE continues to target the aforementioned "young, hungry guys," along with the people who, for whatever reason, aspire to be like them. This gives the firm a fair amount of leeway. Its most famous ad starred a soaked, soapy, scantily clad Paris Hilton washing a car while eating the mammoth Spicy BBQ Six Dollar Burger. The spot created a big stir, which culminated in Bill O'Reilly's expressing his outrage in two separate segments (during which the ad ran continuously), telling Puzder, "Families looking at this…a lot of them are going to go, 'Well, we hate you. We hate you.'?" Puzder says, "They complained about the sex in the ad, and I said there wasn't even a guy in it. It was a beautiful woman in a bathing suit eating a burger and washing a car. What could be more American?"

Other ads have included a gorgeous woman riding a mechanical bull while eating a Western Bacon Six Dollar Burger, an attractive woman inserting her entire fist into her mouth to demonstrate the oral capacity one would need to down a Monster Thickburger in a single go, and a Playmate-flanked Hugh Hefner holding one of several varieties of the Six Dollar Burger, with the tagline, "Because guys don't like the same thing night after night." The Hefner spot drew fire from televangelist Robert Schuller, who was quoted in news reports as saying that devout Christian Carl Karcher was "just heartbroken" by the wanton carnal innuendo on display. Puzder says Karcher, who maintained an office at CKE's offices in Anaheim until his death January 11 at the age of 90, "hated the ads for 12 years" but understood their necessity. Puzder, a Catholic, says, "I'm probably more a member of the religious right than I am anything else, so these are my people I'm offending. That's kind of a weird thing, but I can't run the business to the aesthetic tastes of any particular group in the country. And I will tell you, when we run these ads, sales go up and they don't come down."

While the stocks of other fast-food chains had mixed results in the second half of 2007, CKE's share price tumbled. Puzder says an unfounded report in June that CKE was a buyout target artificially drove up the stock price, which was then buffeted by rising food and fuel costs. He says the company, which owns 30 percent of its restaurants and franchises the rest, is more vulnerable to cost increases than Burger King or McDonald's, which have a much higher proportion of franchised outlets, where local owners bear the risk. CKE has sold about 136 of its Hardee's to franchisees in the past year, Puzder adds, "so we've reduced our exposure" as well as raised money to build and remodel more restaurants. It also sold off the underperforming La Salsa chain to focus on Green Burrito and Red Burrito, which are often located within Carl's Jr. and Hardee's locations, respectively. CKE is looking to expand Carl's Jr. to Canada and push Hardee's deeper into its U.S. markets, focusing especially on Texas and the Atlanta area. "We have a lot of room to grow," Puzder says.

Amid all the bluster, CKE has made a couple of concessions. Carl's Jr. offers a charbroiled-chicken salad that has just seven grams of fat, and Hardee's serves a barbecued-chicken sandwich. "It's a very healthy sandwich. I think we sell about two a day," Pudzer quips. Both chains offer token salads, just lettuce and tomato, that don't sell either. Recently CKE pulled the Double Six Dollar Burger from the Carl's Jr. menu in California and plans to do the same nationwide, due to a lawsuit alleging that the two mammoth patties contain an unacceptable amount, according to California law, of a carcinogen commonly created by grilling meats. This means a burger so big it may actually have been illegal. It's still available to customers upon request, which is tantamount to the public's giving informed consent under the law. And on the ad side, a recent spot for the Carl's Jr. patty-melt sandwich—featuring a young, blond teacher with no backside to speak of gyrating on her desk while her students rap about how they like "flat buns"—drew such heated protest from teachers that Puzder withdrew it. "I can defend the sex," he says, "but I can't fight teachers."

All that being said, he plans to stay the course. CKE's bare-bones product-development team of 16 people tests new Carl's Jr. items at corporate headquarters on a sampling of its own employees. One of the female testers, public relations manager Beth Mansfield, appears dazed after enduring one such session. It was "three solid hours of eating," she says. If a quorum can't be assembled, CKE calls in some employees from the office next door, which houses an alternative-energy firm by the name of Clipper Windpower.

Late last year, Carl's Jr. all but parodied the smoothie craze with its Strawberry Banana Smoothie (made with ice cream, it has nearly 700 calories). The development team is currently working on a Cap'n Crunch shake, featuring vanilla ice cream and crushed Cap'n Crunch cereal. The next sandwich is going to be a spicy jalapeño burger for Hardee's, with sliced jalapeños and a liberal slathering of its zesty Southwest sauce.

Beyond that, CKE is tight-lipped. But whatever it is that CKE ends up unleashing on the world, it's safe to say it will be huge, fattening, delicious, and marketed, however unwittingly, by Jay Leno, Bill O'Reilly, and entire battalions of the gastronomically correct.