Flameout

This is the story of the greatest might-have-been in the history of the fast-food business. In the summer of 1971, the Burger Chef Systems Corporation directed a 1,200-restaurant empire spread across 39 states. The company—that invented the milkshake machine, the first practical soft-serve ice cream machine and the gas-powered hamburger flame broiler—was adding a new restaurant every other day, while McDonald’s, run by the enigmatic Ray Kroc, was growing at a slower rate and led by fewer than 100 locations. Within a year, it seemed, Burger Chef would overtake McDonald’s to become the industry leader. But by 1982 the Burger Chef name fades into history.

Possibly the greatest cautionary tale in business history.

On May 13, 1926 he filed for United States Patent 1,738,752 on the first “fun house” ride in the world, which he built at Riverside. He also developed one of the first ice-shaving machines to produce snow cones for the park.

It’s amazing how many fast food restaurants start with a technological innovation. For McDonalds it was the unique way to make fries. For KFC the unique way to cook chicken (one of the hardest feats at the time) with consistency. For Panda Express it’s the unique point of sale that let Peggy Cheng be an operational savant.

The North Pole was also selling something new in the city: frozen custard. Frank stopped and asked how the machine that produced the custard operated, but “Pop” quickly ripped the manufacturer’s label off the machine. Surprised by the reaction, Mr. Spencer told him he didn’t want any competition, so he didn’t want Frank to see who produced the machine and buy his own.

This is hilarious, and also strangely practical?

Frank had one secret weapon, his knowledge of a new material called stainless steel gained while using it for amusement park ride components. Frank correctly guessed that the wooden model at The North Pole would not hold up to the stresses of the salt and ice used to cool the mixture in the time before mechanical refrigeration. He applied for a patent on the improved machine.

Again, culinary innovation so often is preceded by technological innovation.

Frank Jr. soon suggested to his father that by adding a small impeller to mix up the brine, the sand would remain suspended and not clog the machine. Thus, at age 14 Frank Jr. made his first invention, United States Patent 3,145,017—and promptly put himself out of a job as the traveling repair boy.

That’s incredible.

Despite his practical experience in mechanical engineering, he selected chemical engineering as his major, since organic chemistry was a growing field offering many jobs in the down economy. Frank Jr. struggled from the start. He had a hard time spelling words correctly, having to take a basic spelling exam for a core English class four times before an exasperated teaching assistant finally passed him. Later he would find out his trouble was due to undiagnosed dyslexia, an experience that would shape him later in life.

It’s unreal how many successful entrepreneurs are dyslexic.

In order to protect the important dairy farming business, the State Legislature passed a law stating that any product containing less than 10 percent butterfat could not be called ice cream. Dairy Queen’s mix had less, and unwilling to change their formula for one state, they simply avoided developing in Indiana at all.

Since the dawn of time, the dairy industry has had politicians by the balls.

General Equipment had tried before to market their machines through other outlets, most notably to one Ray Kroc who would later build McDonald’s into an international corporation. At the time, Ray represented the company that made the “Multimixer,” which blended milkshakes in metal cups using multiple spindles arrayed around the machine. Kroc declined the offer, convinced that milkshakes produced with traditional hand-dipped ice cream were superior to the product that came from soft serve machines.

Worlds collide! Read all about Ray Kroc here.

The first device that could turn out a fully completed milkshake with the turn of a spigot was perfected in 1953. They called it the “SaniShake,” and started to heavily market it as an easier and cleaner way to produce a milkshake than the traditional hand-dipped method.

And so the milkshake revolution is born.

James W. McLamore and David Edgerton, were convinced the secret to success was in creating a well-designed system for both producing food and ordering it, too. They asked customers to buy tickets at one window for different food products, which they would then turn in at a second window in exchange for the food. The system was new and unfamiliar to many, and more than a few customers became irate when they got only paper tickets instead of food when they handed their money through the window.

It’s funny, but at one point literally everything we take for granted in this day and age was new! BurgerChef literally created the two window system that is so standard everywhere.

The restaurant used a unique machine called an “Insta-Broiler,” which cooked hamburger patties by passing them in front of electric “Calrod” heating coils, similar to the burners used on many electric stoves today. Familiar with General Equipment through other purchases, they took the machine to Frank and Don and asked them if they’d be willing to produce it for them. In exchange, they would be free to resell it in every state except Florida, which James and David believed would protect them from competition for the foreseeable future.

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James and David loved the new reliable design and agreed to buy the first machines for their new franchised operation, “Insta-Burger King,” which was later shortened to “Burger King.” Since the design was all their own, Frank, Don and Bob were free to sell it to anyone—including operators in Florida. The machine was the first fast-food flame broiler and made better tasting hamburgers more quickly than any other known method.

Again, basically every major fast food restaurant had a technological innovation underpinning it. In the case of Burger King, it was this ‘Insta-Broiler’. It’s crazy to think that McDonald’s, the more successful burger chain, started out being known for its fries, but it still beats Burger King anyway.

One company that was not interested was McDonald’s, according to Frank Thomas. In fact, General Equipment continued to try and sell several of its machines to Ray Kroc, but he doggedly stuck to his labor-intensive Multimixer shake machines and to frying burgers on a griddle.

My respect for him only grows. A true grinder.

The showroom restaurant was a quick success, but not necessarily for its original purpose. It turns out that the food produced by General Equipment’s machines was superior to most other local restaurants, and soon hungry crowds formed at lunch and dinnertime. The management trio started exploring the idea of sending General Equipment into the restaurant business directly.

That is how you know you have good restaurant technology.

[A] small but growing number of entrepreneurs weren’t looking to piece together a restaurant. Instead, they wanted a simple way to buy into the hot 15-cent hamburger trend. They wanted a “turn key” operation—that is, a ready-made restaurant that they could simply walk into and start operating. Just like Dairy Queen in the decade before, these potential businessmen found themselves locked out of proven concepts by master franchise agreements that covered large geographic areas.

And thus, the real Burger Chef business model was formed. Franchising but with a turn key restaurant.

Though the management trio well understood the restaurant equipment business, they didn’t have a “system” or a method of producing and delivering food quickly and at a low cost. Dick and Mac McDonald had focused first on this aspect, building what they later called the “Speedee Service System” and inventing cooking tools and serving implements along the way.

A good idea with a mediocre team will soon become a bad idea. A bad idea with an excellent team will soon be thrown away in favor of a better idea. The plain truth is that Burger Chef’s team were not excellent operators.

In the days before widespread sign ordinances and uniform building codes, restaurants tried to outshine their competitors by building the most easily recognizable (and sometimes outrageous) restaurant and sign designs. Some of the most memorable American icons were born in this era, including the giant star-topped Holiday Inn “Great Sign.”

A fascinating piece of history. Honestly I think we lose more with the uniform building codes! Strips away all character.

Many operators turned a small profit themselves immediately upon opening their restaurants, but it usually took three years before the new location was operating at peak levels.

That’s a rather long payback period.

Fast food continues to be the first job of most Americans. Each location required nearly 80 employees, and employee turnover occurred roughly four times a year. New franchisees that otherwise had a perfect business model and impeccable experience often struggled due to bad hiring decisions.

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One of the first challenges the fledgling organization faced was the development of a repeatable, reliable training method for new employees to overcome the crippling turnover rate.

Four times a year! That is brutal.

Frank Thomas, Jr. was not without need of training himself. Disturbed by feedback that he was pushy and inflexible, Frank employed a psychologist to help him channel and employ his emotions to help achieve goals faster.

At least he took the feedback seriously.

Burger Chef was in business to make the individual entrepreneur successful. The franchisees were the most important part of the company and helping them make customers delighted with the product and the company was the top job. As they were independent business owners, they could not be treated as employees but as partners in a joint venture.

A good franchise that treats its franchisees well.

If one of his workers died and the family was not well off, Frank was known to secretly buy the widow’s house and rent it back at an artificially low rate so the family could stay.

He’s just an all around good dude. I couldn’t help but really like him as I read this book. He’s an engineer at heart, not a business operator. That’s his downfall, but at the end of the day he was an extremely talented, extremely kind person.

They were serving nearly 1 million customers every day, and were ranked as the 25th largest food service operation in America.

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In 1965, just 7 years after starting out, they grossed $75 million in revenue, a staggering number in 1965 dollars.

The growth was astonishing. I can’t emphasize enough: there really was no way McDonald’s should have won.

One major problem generated by the rising beef price was the sign. The 15-cent price was featured prominently at the top of nearly every sign installed since the chain began. These were hastily covered by white plastic boxes embossed with a red diamond, but soon a new sign design was developed, and operators were encouraged to replace them whenever possible. Still, since each franchisee was an independent business person, Burger Chef had very limited power to enforce the sign design change. The franchise agreements drawn up nearly a decade before were deficit in their powers to force franchisees to make major financial investments for design changes—an issue that would come back to haunt them again.

Too much freedom, not enough authority. This is not going to end well.

“During those days, it was McDonald’s and Burger Chef. McDonald’s grilled and Burger Chef flame-broiled,” said Bill Mitchell, referring to the mid-1960s hamburger landscape.

Once again, it really was anyone’s game here. There were only two major players in town.

Another franchisee in Southwest Indiana had been responsible for the first menu change in 1962. His restaurant was in a predominantly Catholic neighborhood in Terre Haute, and he suggested providing a fish sandwich to boost his business on Fridays. About that same time, several fish suppliers had developed a frozen block of processed fish, prepared fresh right on the boat. It was cut apart and breaded while still frozen, which resulted in a fresh, good-tasting product. The sandwich was added to the menu at 25 cents, and other franchisees quickly adopted it as well. Burger Chef had beaten McDonald’s to the new offering, as well as all other major hamburger chains.

Fish is now a regular staple at most fast food restaurants. Time and time again, these guys actually came first.

Hungry customers had been asking for more substantial options, and so the company developed a double deck, two-patty hamburger which they dubbed the “Big Shef,” again beating McDonald’s and the other major chains.

Once again, they innovated first. The saddest part in all this is that you can be the first to innovate so many times in a row and still lose. There is a reason this is the ultimate cautionary tale.

One underappreciated driver of growth was deep involvement in the community and arts, for Frank Thomas in particular. He felt that a positive community image was incredibly important, especially in a consumer service industry like the restaurant business.

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This support extended to funding assistance for a fledgling FM classical music station. The company’s active advertising support caught the attention of the Metropolitan Arts Council for Indianapolis, and they tapped Frank to serve as chairman in 1967.

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Frank was soon asked to lead the Indiana Council for the Arts. Funded through the National Endowment for the Arts, it had gotten off to a shaky start under inexperienced leaders.

Frank really was a man of the people. He was active in the rotary club, the YMCA, NAACP, the Indianapolis museum of art, and so much more. This guy was involved everywhere because he wanted Burger Chef to have a positive impact in the community.

The Burger Chef formula was to co-sign leases on property for new restaurants, which made the Burger Chef System one of the largest real estate companies in America. However, banks were becoming increasingly reluctant to loan money to the company for new SaniServ production machinery, for operating equipment like printing presses, and for the development of company-owned restaurants because of the large and growing risk of lease default. In addition, despite having a large network of restaurants, the franchise model meant that the core company had a remarkably small amount of assets to collateralize loans. McDonald’s and Burger King, now Burger Chef’s major competitors, were suffering the same problem.

This was very similar to the McDonald’s playbook.

Scarcely three months after the first overture, in a nod to the pressure the trio was under, General Foods announced a definitive agreement to purchase Burger Chef Systems, Inc. in November 1967, to be effective in January 1968.

Good for him for getting out honestly. He made his money, did well for the community, and got everything he wanted. And he genuinely thought that this would help Burger Chef. They were struggling for cash (so were McDonalds and Burger King in this era), and this larger, cash-flush parent company was going to buy them out and scale this bad boy up! What could go wrong?

Initially, the plan was for Frank and his associates to run Burger Chef as a separate, wholly-owned subsidiary of General Foods.

No happy ending story ever begins with “initially”. Not one.

General Foods is a well-respected corporation that concentrates in consumer food processing and distribution. Some of the best-known brands in eating were part of the General Foods’ stable, including Jell-O, Log Cabin syrup, and Sanka decaffeinated coffee. With this kind of experience, it was no surprise that the company was eager to enter the fast-growing, fast food business. Unfortunately for the franchisees, what General Foods’ management lacked was years of knowledge and experience. According to Frank Thomas himself, the company spent “a hell of a lot of money” trying many concepts that had already been tested and discarded in years past.

That makes sense. The guy who got you to 1000 restaurants knows nothing; throw away everything he suggests and re-try with the same ideas.

One of the first things General Foods did was commission an expensive, new, high-concept logo and image for the restaurants featuring a stylized orange parallelogram flame atop a brown circle, which vaguely resembled a hamburger patty on fire. Trouble was that no one equated this logo with food or with Burger Chef. Worse, the franchisees had to foot the majority of the bill for the conversion to the new image, ranging from simple items like wraps and packaging to more expensive outdoor signage and restaurant finishes.

Oh boy.

This owner-operator resistance was a theme that would continue to haunt Burger Chef for more than a decade, as the scrappy franchisees resisted the button-down corporate culture of General Foods.

I don’t blame them; corporate has no idea what’s going on.

One of the hidden secrets to Burger Chef’s success up to that point was commissioned field sales agents. These individuals sought out new franchisees, often recruiting hard-charging entrepreneurs like themselves to build new restaurants. Because they got a share of the profits of any restaurant developed under their guidance, it was in their best interest to work as hard as they could to not only find the right people and locations for new restaurants, but to ensure their success as well.

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Those new managers promptly boarded airplanes and fired the commissioned sales agents in favor of regional managers. Though no doubt a cost-saving move, in time these positions became simply stepping stones to higher level corporate careers, often in other parts of the General Foods empire. The grizzled owner-operator veterans had the predictable reaction to people who they didn’t seem as completely aligned to their success, and the frustration level grew.

It’s like Ray Kroc himself was directing management on how to mismanage his competitor.

[I]n November 1970 he resigned, stating, “If I had stayed with them, I couldn’t change.” Thus, the founder and creator of the country’s fastest-growing fast-food chain was gone.

And with him, any chances that Burger Chef would be remotely successful.

“In those days, [we] were inventing the industry day-by-day,” essentially flying blind as they built out the organization. From an experienced corporate executive’s perspective, it would appear to Phil Korn as if Burger Chef was undisciplined and chaotic. To Frank Thomas, this was simply the nature of a fast-growing pioneer organization.

When you’re doing something for the first time, there are no rules! Embrace it.

General Foods had a “lawyer-happy culture” as it “seemed like every department had their own attorney.” In the entire history of Burger Chef before the acquisition, there had been a total of two lawsuits. Within two years of the start of the decade there were more than 80 pending lawsuits.

Another sign of disfunction.

The “young MBAs from Harvard” as Frank would describe them “made a study of everything,” overanalyzing performance and statistics and driving existing franchisees insane with anger. Frank summarizes that “many were splitting off —it was a disaster.”

I cannot think of a single profession that entrepreneurs universally hate more than MBA’s.

“When I’d go to meetings in White Plains, each Vice President had his own personal attorney sitting behind him in the meeting. Any dispute with a franchisee and they would litigate. [With over] eighty lawsuits going, nobody wanted to take responsibility for anything.” Frank became increasingly frustrated.

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Low-slung with a curved roofline and featuring the “ball and flame” logo, it was such a departure from existing restaurants that no regular patron of Burger Chef recognized the building’s purpose; thus alienating their loyal customers with the architecture itself.

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This marked the ninth sign change in 13 years, a testament to the chaos and pointless, expensive experimentation of the early 1970s by General Foods management. Most franchisees initially ignored the new sign, assuming it to be short-lived like the others.

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In a few short years almost no two Burger Chef restaurants looked alike.

Honestly how can you even blame the franchisees at this point?

[T]he value of Burger Chef’s restaurant design as a roadside draw to travelers evaporated. Worse, it gave patrons the impression that Burger Chef was a loosely run organization, which effectively punished the operators who’d spent the significant money to upgrade over franchisees who did no renovating.

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McDonald’s, in contrast, elected to financially support their operators and franchisees with total demolition and reconstruction of every restaurant in the chain to a distinctive brown, mansard roof design.

The shortest two paragraph explanation for my McDonald’s won.

General Foods’ arrogant attitude, incessant fiddling with the formula, multiple branding and message changes and the executive disconnects in New York from the heart of operations had the predictable effect: Instead of rebounding from the 1972-73 correction, restaurant growth slowed to a trickle. Instead of keeping pace with McDonald’s, as had been the trend just a few years earlier, Burger Chef was now hopelessly behind as McDonald’s began its major push into overseas markets.

And that’s all she wrote.

Thus, a great enterprise which began at the hands of a wayward amusement park designer, carried by the inspired leadership of his sons and relatives through extraordinary innovation and tumultuous times, and eventually squandered by corporate carelessness came to an end.

An incredibly sad story. Don’t sell your company, folks. Especially not to old-school corporations like this.

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In case you’re wondering, General Foods is not still in business anymore. It was “absorbed” by Kraft Heinz. You can read more about them here.