How chairman and CEO Philip Sanford is using image and franchising to restore Krystal's shine.

CEO Phillip Sanford on challenges at Krystal: "You know the adage about a foundation having been built on sand? There was an awful lot of work we had to do—and continue to do—to have a good foundation for growth."

What you will see at Krystal: small, square, onion-flavored burgers that aresomething of a Southern quick-service icon. What you won't see: quick-service standards like movie tie-ins, value sizing, or other traffic-driving gimmicks. As the nation's second oldest quick-service chain, founded in 1932, Krystal believes it can rely solely on the strength of its brand.

Under chairman and CEO Philip Sanford, the 382-unit purveyor of tiny burgers is thinking big. Krystal is making major investments in a new restaurant design, a streamlined menu, and a multi-unit franchising program. This year, as part of an aggressive five-year growth plan, the company signed an agreement to build sixty new units in the Tampa, Florida, area—the largest franchise contract in its history. It's also got multi-unit agreements in place for restaurants in other areas of Florida and Virginia, Tennessee, and Kentucky. Sanford says the industry will see two kinds of growth from Krystal—both further penetration in areas where the chain is established and spreading out into new markets.

Sanford took Krystal private when his Port Royal Holdings acquired the company from its founding family in 1997. The company does not release financials, but research for The QSR 50, in which Krystal ranks thirty-first, shows the company achieved a 5-percent increase in systemwide sales in 1999 over 1998, along with 3.5-percent growth in sales per unit.

From there, Sanford sees only tremendous opportunity for growth. He talked recently with the editor of QSR about his strategy for the Krystal brand.

What did you see in Krystal that made you want to acquire the company?

Sanford: Krystal, the second-oldest restaurant company in America, was founded in 1932 right here in Chattanooga. I had lived and worked here for years for Coca-Cola Bottling, which also started in Chattanooga. The Coca-Cola business is really a two-part story—Coca-Cola makes concentrate and sells it to bottlers, who produce the finished product. James F. Johnston in 1889 became the first bottler of Coca-Cola with his Johnston Coca-Cola Bottling Group in Chattanooga.

Fast-forward to about 1990: We're now a $1.5 billion private company . We had bought Coca-Cola bottling territories and franchises around the country. In 1990 we merged our company, Johnston Coca-Cola, with Coca-Cola Enterprises, the big bottler in Atlanta that did around $4 billion. We took over management, and at that time I moved to Atlanta to be one of the executive officers of Coca-Cola Enterprises. They represent about 75 percent of all the Coca-Cola sold in North America today; this year the company will do about $14 billion in sales.

Frankly, we were pretty successful at CCE, and that's what allowed me to think about what I wanted to do next. Having been here in Chattanooga for so long, I was intimately familiar with the Krystal Company. I knew that the timing looked right to make an approach to the controlling family. Krystal at that time was public in 1996, and it had some ups and downs. The Davenport family, the founders of Krystal Company, controlled about 54 percent of the company, even though it was public. So I came to a lock-up agreement with the Davenport family for their shares, tendered to the public for the balance of the shares, and then took the company private.

Sanford on the Krystal brand: "Krystal is a Southern icon. I don't know anyone who's got a Burger King story or a Hardee's story, but I don't know anyone who does not have a Krystal story."

So then you had this new acquisition. What were its assets and liabilities?

Sanford: I'll tell you a quick story—every word of it true. I call my mother, who's seventy-five years old and a sweetheart, a hell of a lady. I say, "Mother, I think I might have the opportunity to buy the Krystal Company." She says, "Oh, that's nice." Then she says, "I know how busy you are with your work at Coca-Cola—how will you do that and the Krystal Company?" And I said, "Mother, I'd be leaving Coca-Cola Enterprises." There's this long silence on the other end of the phone, and she says, "Why would you do that?"

If you grew up in the South, you know working for Coca-Cola is really a dream. I did wonder why I would leave that company, and that made me focus on the reasons. Krystal is not Coca-Cola; I wouldn't be that bold. But, Krystal is a Southern icon; it's part of the cultural fabric of the South. I don't know anyone who's got a Burger King story or a Hardee's story, but I don't know anyone who does not have a Krystal story. Krystal has a cultural affinity; there's an emotional attachment between our customers and the brand. That's something you just die for if you're in the brand business, and it's very rare that you have the opportunity to become the steward of a brand like that. I had that opportunity at Krystal.

Another important piece of it is that it's not a new concept. It's not a flyer, not something where you wonder if it's going to work or not. This is a seventy-year-old brand; we already know that it works. When I looked at Krystal, I saw the kind of brand that can be tremendously popular and exciting in terms of growth.

What was the downside?

Sanford: What comes to mind is the old adage about a foundation having been built on sand. There was an awful lot of work we had to do—and are continuing to do—to have a good foundation for growth. We needed all new IS systems, both internal and at the restaurant level. We needed point-of-sale systems. We needed a new image for all of our existing restaurants, which have all been done—we've now got the restaurant architecture that will carry us into the future, and we've already built a number of them. We needed new operating systems. And, candidly, we needed a lot of new people. For the past two and a half years we've been laying all those foundations.

Now we're getting into a dramatic growth phase in the company's history. The people are critically important in that regard. I've known Fred Exum, our president and chief operating officer, for twenty years, and he's the best operator in quick service. Our CFO, Larry Bentley, is a former partner at Arthur Andersen. Gordon Davenport, our head of marketing, was a global brand manager at Warner Lambert. Tom Ragan, our head of franchising, was head of franchising at Papa John's and was responsible for their explosive growth. A relatively new hire was Bill Barron in R&D and quality assurance, a position he held at Chick-fil-A. And there's another new marketing guy, Mark Williams, who came from Wendy's. So we're bringing a lot of talent into this organization as part of that foundation-building.

Would you say you've turned the corner with Krystal?

Sanford: Absolutely. For instance, we just signed a seven-year agreement for sixty new units in the Tampa and Saint Petersburg area with System Restaurant Group Holdings. These are professional restaurateurs—not just people who woke up one day with money and decided to go into the restaurant business. This is what they've done all their working careers. They have had large numbers of other restaurant concepts in their past and they came to us and showed a real interest. We have a number of those kinds of transactions going on, all over the Southeast.

There are two kinds of growth ahead of Krystal. First, we are underpenetrated everywhere we do business. The best example I can give you of that is in Atlanta, where we have sixty restaurants, while McDonald's has 225. Now, we might never have 225, but we absolutely can double sixty to 120. Then the second kind of growth is into contiguous territories. So, we're talking with [potential franchisees] now in areas like Louisiana, Arkansas, Texas, Missouri, northern Kentucky, West Virginia, and North and South Carolina. You'll see both kinds of growth from us—spreading out and further penetration where we already do business.

Would you say System Restaurant Group is pretty typical of the kind of franchisee you're looking for?

Sanford: Absolutely, although we have a lot of great existing franchisees who have four, five, or six restaurants and want to continue to grow. But, we are also talking to several large franchisees on the same order of magnitude that SRG is. There is a place for both in the Krystal system as it grows.

Sometimes older brands encounter resistance from longtime franchisees when the company tries to reimage and grow. Have you run into that?

Sanford: We have not run into that problem, and I'll tell you why: Our existing franchise community is really made up of a lot of good business people—people who are really committed to the brand. They saw the same thing I did—that it was a good structural apple but it really needed polishing. They all have been excited that we have done a lot of polishing. It reflects in their sales and their abilities to grow and their financial performance. Today we're looking for good, professional franchisees—people who are appropriately capitalized, who have professional operating management, who have a system in place, and who share the same passion about the brand we have.

Do you have in mind an eventual franchise/company ownership ratio?

Sanford: No. Rather than putting sort of an artificial number out there, I'll just say the vast majority of our growth is going to be on the franchise side, although we are going to continue to build some company restaurants. The reason we're franchising so much is it's more efficient—you can penetrate markets faster and more efficiently. And you know what else: That local franchisee knows his or her market better than we do. I'm a big believer in franchising. After so many years with the Coca-Cola Company, I'm a big believer in franchising.

Would you agree that franchisees often make better operators?

Sanford: There are certainly good operators in companies, and there are good operators in franchises. It is true in this business, as it is in a lot of businesses, that the people who are the most successful are the ones who pay attention to the details in their restaurants every single day. And oftentimes it is easier to do that on a local basis.

Tell me more about another part of your growth strategy—the new restaurant design called the KP 2000.

Sanford: It's a knockout. It debuted around September 1998, one year post-acquisition, and a lot of intensive design effort went into it to get it out there quickly. It was designed from the inside out, meaning that the production line and kitchen were engineered first from an efficiency perspective. Then we designed the restaurant around that production area. It was great to start with a clean sheet of paper because we could say, "If this was a perfect world, how would we do this?" and that is what we did. Fred Exum led that effort. He's got twenty-five years of experience that he could put against designing this restaurant. The interior spaces are bright and shiny, harking back to Krystal's heritage with white tile, chrome, shiny stainless steel, and very clean, contemporary appearances. We think it's a timeless design. It's got loose seating, which we think is important—as opposed to tables and chairs that are drilled into the floors—and it's carpeted in the customer seating area. The total customer experience is so important today because people have so many choices. You want to provide an experience that is the best quick-service experience they can have. That's what we hope this design does.

You said you had converted all the company restaurants. What kinds of results are you seeing from those in terms of top-line sales?

Sanford: I'm not going to get into specifics, but we absolutely saw sales improvements from reimaging those restaurants—which means new logo, siding, lighting, and other exterior and interior elements, but not completely remodeling. Now the new restaurants that we're building are the KP 2000.

But, you know, the key to the whole thing is the food. It sounds very simple when you say it, but we have wonderful, indulgent, mouthwatering food. It's very flavorful food, and it's food that you can't get anywhere else. That is the enormous strength of our system and of the brand. If you want fresh, hot, small, square, steamed-in onion flavor, Krystal is the only place you can get that, and what an advantage. Someone recently asked me to talk about the niche Krystal occupies. We are the niche.

In these days of bacon-covered, bigger-is-better burgers, do you think the small size of Krystal's burgers could be a detriment?

Sanford: No, because we offer a completely different experience. Everyone in the restaurant business competes for share of stomach, if you will, but our products are very unique. Starting with the Krystal— a product that tastes different from anything else on the market. They can be eaten in multiples; you can order as many or as few as you want. They are a wonderful value proposition. And the vast majority of our locations are open twenty-four hours a day. We have a great breakfast menu, everything from a plated breakfast to the Sunriser sandwich. We don't rely on toys and playgrounds and movie tie-ins for our sales. Our food is our feature, and the reason is because we have great food.

Since you are moving towards nicer interiors and not doing promotion tie-ins, would you say Krystal is aimed more at the adult market?

Sanford: You know, in our operating area, the Southeast, the entire population is the quick-service customer. What you find in our restaurants is that the customers are defined only by the location of the restaurant. So in a suburban setting you'll see the mom and the kids in the mini-van going to soccer practice. In the rural setting, you'll see a bunch of pick-up trucks. In an inner-city setting, you might see, depending on the community where it's located, a more ethnic skew. So, really, the target audience is the entire population. As a brand, we don't skew demographically or ethnically. It's the entire population—and what a wonderful thing, in terms of brand.

How are you going to use the Krystal brand to your advantage in regions that may not be as familiar with Krystal as, say, Atlanta?

Sanford: As we grow out of the Southeast, we're seeing success. For instance, we have only two restaurants in Charlotte, and they both do great. We're talking with people right now about expanding in Charlotte. I think you'll see us grow there very shortly.

What do you think about Jack in the Box's successfully jumping coasts to Charlotte?

Sanford: I think Jack in the Box is a nice company. I don't think they enter into our decision about whether or not to be in Charlotte. They've got a different menu and orientation from ours. We're finding great success in the outlying areas where we don't have the seventy-year history. There is a lot of word of mouth out there about Krystal—there are very few people who haven't heard of the brand—and I think there is an interest or charisma or attraction to the brand, and that word spreads quickly. And, of course, we enhance that with our advertising and marketing.

What is your marketing strategy when you go into a new area?

Sanford: We do marketing that makes a difference on the local level and that gets us into the community. Good examples are marketing through schools and around local organizations and groups and community sports activities. We do radio and other promotional activities until we've grown to the size where we have a full broadcast plan going.

What will happen when Krystal bumps up against another area where there is a regional loyalty—say, Whataburger in Texas, or White Castle a little bit north of you?

Sanford: We compete against White Castle now in northern Kentucky, and they have some restaurants in Nashville—as a matter of fact, I think they have five or six restaurants in Nashville. They're a good company. I think our customers continue to vote with their pocketbooks, and they're voting for us. Regional chains in various parts of the country are strong. I was just at an In-and-Out Burger in California. That is a great company with a great product, and it's fun. In many ways, it reminds me of our company because of that great product and almost cult-like following. When we come into a new market, we introduce a product that hadn't been there, and people like it.

So newness can be an advantage?

Sanford: Absolutely.

Does your advertising drive home the point that you are different from the big burgers?

Sanford: Yes, it does. In fact, because we have a new ad agency, McKinney and Silver in Raleigh, North Carolina, you're going to see some wonderful new creative. We're very excited about this new partnership. You'll start seeing the new advertisements this fall.

Have you been watching the recent turnaround attempts at Checkers and Rally's?

Sanford: I'm aware of it through the trade press, and I can't say yet how business will turn out for Checkers and Rally's. We do operate some double drive-thrus with no dining rooms. I think there are [possibilities there] for Krystal—some applications for us with that delivery system. It's not the kind of format you want to go into to a new market with, because you want to establish the identity of the brand and give people to have a very clear picture of that brand imprint. But we think the double drive-thru for Krystal is usable, particularly in some drive-thru areas.

How did you go about streamlining Krystal's menu after the acquisition?

Sanford: The most important thing about the menu is it has to immediately say to you, "Oh, yeah, this is something Krystal has." In other words, there must be an alignment between your menu items and your brand imagery. If there is not, then you've got a problem. So we want our menu to say "Krystal" immediately.

As one example, when we got here there was actually a big hamburger on the menu. We took it off immediately—that was one of the first things we did. A big burger doesn't say Krystal. That's not what we do. There was also a big chicken sandwich on the menu. We took it off. So there were some things that had gotten away from the essence of the brand. We made a lot of decisions about that menu, all of which revolved around the question of whether or not the item is a true Krystal product. We have introduced some new products—for instance, the Krystal Chick has been a home run. It's a whole breast of meat, battered and deep fried. The chicken is cut so that it fits on a steamed Krystal bun. Now we've introduced a line extension, the Spicy Chick. That says Krystal—the size, the richness of the flavor, the whole profile of the item.

What other aspects of the menu influenced your strategy?

Sanford: We have a higher drive-thru percentage than a lot of other people in the business do, almost 70 percent. It's because our food is so portable. One of the things I saw when I got here, particularly coming out of the Coca-Cola business where packaging is very important, is this industry has not done a whole lot with packaging. I don't know about your car, but my car has a bunch of dead French fries down between the seats. We serve French fries now in a French fry cup that fits in your car's cup holder. I can't tell you the numbers of letters and phone calls and e-mails from customers about how great that packaging is. It makes our products easy to eat, and little things like that really are part of the essence of the brand.

Are there more changes to come, or do you have the menu in place, subject to some minor tweaking?

Sanford: I think we have [a good one] in place. Then again, one of the cornerstones of our planing is menu excitement, meaning we'll use limited-time offers to impart a sense of excitement. I'll give you a good example: We're the only chain that has not just onion rings, but Vidalia onion rings, and they are wonderful. Vidalia onions are not year-round—they come in for only part of the year. We use only true Vidalia onions for those rings, and we introduce them when they come in, in the late spring and early summer. Then when they go out of season, we don't have them anymore, but we can build a lot of excitement around [the next season]. We also just finished a limited-time offer with Krystal chicken wings. Fast food and chicken wings just aren't a combination you would put together. Our supplier, ConAgra, did a great job developing a wing just for us. It's a big, meaty wing, marinated and then cooked in our ovens in the restaurant. It's not messy; they don't get all over you. So that was a great limited-time offer. The Krystal Chik sandwich is a permanent menu item, but the Spicy Chick sandwich is a limited-time item that we bring in and out.

You've talked about the importance of the Krystal brand. Any thoughts on the challenges of building a brand in today's business environment?

Sanford: The challenge we have here at Krystal is not building a brand, but continuing to create excitement, emotion, intensity, and energy around a long-established brand. Brands—especially great brands—will take a lot of abuse, but for brands to be successful for a long period of time they have to be nurtured. That really is our challenge: doing the right thing as steward to a great brand. We have to keep it fresh, contemporary, exciting, and most importantly, growing. It's darn hard to have a successful brand that is not growing.

Krystal has a deal with Rudy's Farm to put Krystal burgers in grocery stores. Is there any concern that grocery sales might cannibalize your restaurant sales?

Sanford: No, not at all. Those are completely different occasions. The frozen, microwavable Krystals are home inventory items, and that is a different meal occasion and a different customer experience than going to a restaurant. It is a very good product, and Rudy's Farm does a great job with them. In fact, it is quite the opposite [of cannibalization]. I talk a lot about the Coca-Cola experience, [which showed me] the ubiquity of a brand always helps it. The more often you see it, the more places you see it, the more it becomes top of mind and the more successful it is. We don't worry about cannibalization at all.

I've seen a study KFC franchisees had Y&R do a study for them, showing KFC restaurants weren't getting the target number of customer occasions. The franchisees used it to protest Pepsi's nontraditional moves. You haven't heard any arguments like that?

Sanford: Well, you know, that is the challenge of the business. Simply put, I guess that is what we all get paid to do,—achieve the combination of more visits from our visits our loyal customers and more visits from our new or lapsed customers, and that is just the nature of the business. At Krystal, we want to increase all three of those categories—loyal, occasional, and new.

Tell me about the challenges of running a twenty-four-hour-a-day business.

Sanford: It is a challenge, but it's also gratifying because we provide a service for the consumer that very few companies do. It allows consumers to enjoy Krystal whenever they want to, as opposed to when we tell them to, and that is an important piece of the identity of the brand. There are so many people in this economy who work third and fourth shifts, and we provide a place for them to eat. It is a challenge, however, in terms of management and employees, but it's also very good use of fixed assets.

How do you find the right kinds of employees, particularly to work those difficult hours?

Sanford on hiring: "There is certainly a wrong way to go about hiring: We do not allow our managers to put up signs that say �now hiring.' What does that say to you as a customer?"

Sanford: You find them the same way you find your daytime employees, and that is you get out and recruit them. There is certainly a wrong way to go about hiring: We do not allow our managers to put signs or banners on a Krystal property that say "now hiring." Here's why: What does that say to you as a customer? We think it says to you, "Ah ha, they must be short-handed. There must be something wrong." Besides, if you are dependent on quality of the kinds of employees who just walk in off the street, then, quite frankly, the quality of your employees is not going to be great.

So we want our managers to be involved in the community. We want them to be involved in some way, however that might be, in the area around their restaurants. I like to tell the story about the manager who was telling me how much trouble he had hiring people. I said, "Let me just ask you something. When I drove here today, I saw there's a high school right across the street. Have you gone over there to talk with the guidance counselor and tell him you have jobs for young people who want jobs?" He said no. I said, "Look, when I drove in I also noticed a YMCA. Have you been up to the Y and talked to the director?" He had not. I said, "There is a Boys and Girls club down the other way. Have you been in there? There's a church right behind you—have you gone to the youth minister?" He said no. I told him, "You know what? I don't want to hear any more about how hard it is to hire."

Our point of view at Krystal is that you have to be in your community actively recruiting employees, not waiting for potential employees to come to you. That is a very important distinction. When you do that, you will find there are an enormous number of people, in fact, who want to work nights. It may be people who have a certain family situation that actually makes it better for them to work at night. It may be people who want to hold two jobs. It might be a retired person who would rather work at night than in the daytime. So when you really work at that aspect of it, it is no different from hiring people in the day. The key is you have to work at it.

What's your priority for the next year in your work?

Sanford: My number-one priority since the day I got here and for next year is to be a good steward of Krystal brand. In practical terms, that means doing all the right things to increase that environment and growth. And that is what we are doing.