In the past, CKR management has been very clear about its menu strategy:
"While many of our competitors responded to the ongoing macroeconomic challenges by offering low priced margin impairing products, we continued to differentiate our brands by focusing on premium priced innovative products."
"So, while other places are hopping on the value bandwagon and, thus, promoting their smallest and lowest-quality menu items, we'll keep doing what we do best by giving our customers what they really crave: big, delicious, premium-quality burgers."
"I don't think the competitors can maintain this level of discounting and actual food giveaways for very long. So we're going to maintain our discipline and our profitability and try and address those issues in the short term."
"The two ways we will not deal with the issues are by trying to drive business through discounting our products, serving inferior products, or massively couponing."
CKR has stressed that it offers good "value" by selling premium $6 burgers that are comparable to the more expensive burgers found at casual dining restaurants. It has also said in recent past that it must also offer affordable items for its customers that have less money to spend, but that it would never risk hurting margins by selling items at a price lower than cost. Yet, today when discussing its more affordable items, management said that CKR has the best tasting burgers and chicken sandwiches for $0.99. This sounds a little like a dollar menu to me! And based on comments made by CKR CEO Andrew Puzder last year, the company is selling these items below cost.
"As long as we serve a burger that's as good or better, and I think better, particularly this Prime Rib burger, than the casual dining places serve, and as long as we approach it as a -- you know, we market value different than other companies. You've probably seen the fake restaurant ads but we're not saying come in and get a piece of gut fill for $0.99, when everybody knows you couldn't go to the grocery store and make something for $0.99 that was edible, and you're not paying labor and rent. Instead of doing that, we say look, here, you know, people are willing to pay $14 for this burger in a restaurant. You can get it at Carl's or Hardee's for $4, $5, or $6."
Last quarter, management acknowledged that it would be adding more affordable items to its menu but that it would not use media support to promote them. Today, the company said it would promote some of these lower priced items outside of its four walls to increase awareness of its value items. Specifically, the company will advertise its Teriyaki burger that will sell for $2.89 and its 2 for $4 Western Burgers. The company also said that it has begun testing a new snack menu to address its affordability issues. Using advertising dollars to promote these lower priced items for the first time and testing a new snack or lower priced menu sounded like a "value initiative" to me. However, when I asked management about these "value initiatives," the CEO seemed a bit confused as to what I was referring.
This company has spent so much time defending its position on keeping its focus on a premium menu strategy and maintaining industry-leading restaurant-level margins that the CEO seemed to question my use of the word "value," which in this industry, often goes hand in hand with discounting. Although he allocated a good portion of today's earnings call to a discussion around creating awareness of the value inherent in the company's $6 burgers and the affordability of some of CKR's products, such as the burger and chicken sandwich for $0.99, the company will most likely not go far enough with its promotion of these products to really drive traffic because management will not want to be accused of discounting.
After today's conference call, I was left questioning what direction CKR is headed? Will CKE only pursue premium products in an attempt to preserve the high margins to which investors have become accustomed while sacrificing traffic? Or will they begin to go after the bottom feeder customers with more advertising of its lower priced items? Management seems a little unsure as well, saying that it will manage for the long-term and not for short-term sales pops in one breath and that it will do what it can to adapt to the new consumer environment in another. Either way, margins are at risk, but CKR risks losing substantial market share at Carl's Jr. if it does not act fast with a coherent market strategy to drive traffic.
Making matters worse for CKR is the fact that McDonald's will likely roll out its Angus burger in August with significant couponing. This premium burger offering at McDonald's will only create more competition for Carl's Jr. in the coming months.