Cleared for Takeoff
Once-dormant Krystal wants to double up.

By Scott Hume, Managing Editor

"I don’t know anyone who has a Burger King story, but I think there’s no one who doesn’t have a Krystal story,” Phil Sanford says of the 380-unit regional burger chain he bought in 1997. “It just has that kind of magic.”

Since its founding in Chattanooga, Tenn., in 1932 (11 years after a similar concept, White Castle, opened in Ohio), The Krystal Co. has had fiercely loyal customers in its Southeast territory who love its 21/2-in square, steamed hamburgers. What it didn’t have for most of its history was an aggressive plan. Sanford, however, has an ambitious one. At the end of 1999, Krystal had a net gain of 17 units over the previous year. If that doesn’t sound ambitious, consider that the chain had grown by all of two stores the previous year.

Sanford thinks the chain will hit 400 units by year-end (a net gain of 32), says he has contractual commitments for 200 units in the pipeline and believes it can double in size over the next five years. This confidence, he says, stems from his belief in the power of brands in general and of the Krystal brand in particular.

He spent many years in the soft-drink bottling business where brand power reigns supreme. When his company was acquired by a major bottler, he used his profits to finance the purchase of Krystal. Raised in the South, he long had been among the devotees of the chain, which had been family-controlled for decades. He took it private and began retooling.

“The company was structurally good, but it needed polishing,” says Sanford, its chairman and chief executive. It came equipped, though, with “one of those wonderful brands that there just aren’t too many of,” he says. He invested heavily in technology to bring management and operations up to date, “but that fresh, steamed-in flavor, we didn’t change that a bit.”

CAUTIOUS CHANGES

A big burger that previous management had added to the menu was judged contrary to the brand heritage and scrapped, replaced by the Krystal Chik, an appropriately small chicken sandwich, and Southern Vidalia onion rings (available seasonally when Vidalias can be had). A Cheddar Cheese Krystal was recently added.

To better cater to Krystal’s drive-thru customers—who account for a whopping 70% of sales—Sanford’s team developed Krystal Go Cups, french fry containers that, as for beverages, are shaped to neatly fit in car cup holders.

A FRANCHISING LATECOMER

Most of the growth will come from new franchised rather than company-owned stores, a major course change for Krystal, which only began franchising in 1990. The company is pursuing multiunit agreements to jumpstart the growth.

A deal recently signed with System Restaurant Group Holdings calling for the opening of 60 Krystal units in the Tampa, Fla., area over the next few years is the largest franchise agreement in the company’s history.

“There are a lot of opportunities in the restaurant industry, but Krystal has great brand equity and a management team committed to protecting that equity,” says Bob Langford, SRG Holdings’ chairman, who, like Sanford, was schooled in the soft-drink trenches.

Langford also says the unit-level economics of Krystal make it especially attractive. Because so much business is done at the drive-thru window, units and staffing needs are smaller than with most quick-service restaurants. That’s important in Florida where real estate is expensive and the labor pool is especially shallow. Still, the average Krystal unit’s annual sales top $1 million.

“This was an opportunity to take a Southern icon into 12 counties [from Tampa to Sarasota, Fla.], and I understand the value of a brand,” Langford says. “People have an emotional attachment to Krystal that’s unparalleled.”

Building mass rather than spreading out will allow Krystal to do more advertising in key markets, Sanford says, and it recently hired a new agency to handle what is now a $15 million budget.