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Marketing Strategy of Culver Franchising System, Inc.
Marketing Strategy of Culver Franchising System, Inc. - December 16th, 2010
Culver’s is a privately owned and operated fast casual restaurant chain that operates primarily in the Midwestern United States. The first Culver’s opened in 1984 in Sauk City, Wisconsin. Since then, it has grown to over 400 restaurants stretching from Kentucky and Ohio to Wyoming, and from Texas and Arizona to North Dakota.
Incorporated: 1984 as Culver's Frozen Custard and Butter Burgers
Sales: $350 million (2003 est.)
NAIC: 722211 Limited-Service Restaurants
1961: George and Ruth Culver begin operating an A&W Rootbeer stand.
1976: Craig Culver buys his parents' old A&W.
1984: Culver relaunches the rootbeer stand as the first Culver's restaurant.
1987: The first franchised Culver's opens.
1997: The first Culver's outside of the Midwest opens.
2000: The chain's 100th location opens.
Culver's Franchising System, Inc. operates a chain of casual restaurants called Culver's Frozen Custard. The company began with a single restaurant in Sauk City, Wisconsin, and as of 2003 had roughly 200 stores, almost all run as franchises. Most Culver's restaurants are found in the Midwest, though the company also has outposts in Texas and Kentucky. Culver's restaurants occupy a middle ground between fast food and family dining. The average restaurant seats 120 patrons, and the average check is $7, $2 higher than McDonald's. The principal menu items are a butter-basted hamburger called the Butter Burger, and a high-fat ice cream known as frozen custard. The chain began expanding rapidly in the mid-1990s, and its sales have grown at a rate far outpacing the industry average. The company is owned and managed by Craig Culver and his family.
Beginnings As a Rootbeer Stand
Craig Culver started the restaurant chain that bears his name in 1984. But the original Culver's, in Sauk City, Wisconsin, was a business his parents had once run as Sauk City A&W Rootbeer. George and Ruth Culver owned and managed the A&W from 1961 to 1968. They then sold the business and bought another restaurant, the Farm Kitchen Restaurant in nearby Baraboo, Wisconsin. Later, the Culvers managed a country club in another small Wisconsin town. Craig Culver meanwhile graduated from college and became a restaurant manager for McDonald's. After two years at McDonald's, Culver was itching to go into business for himself. With his father's help, he bought back the Sauk City A&W. Culver operated the A&W from 1976 to 1982. Culver sold the A&W in 1982, and then gave it another try two years later. Craig Culver repurchased the A&W and transformed it.
Culver reopened the restaurant as Culver's Frozen Custard and Butter Burgers. The building had a crisp blue and white color scheme, it offered drive-through service as well as a casual dining room, all food was made to order as opposed to sitting ready under warming lights, and servers brought food to the table. The menu centered on some Wisconsin favorites. Frozen custard was a longstanding dessert specialty of the area, though most frozen custard outlets operated only in the summer. Culver knew frozen custard was popular, because his own family was willing to drive 50 miles to Milwaukee to get it. (Frozen custard differs from conventional ice cream by having a higher butterfat content, and it also contains egg yolks.) His new restaurant served the treat year-round, offering chocolate, vanilla, and one of dozens of flavors of the day.
Initially, Culver's did not succeed, and Craig Culver admitted he might have sold the restaurant early on. Without money to advertise, the restaurant depended on word of mouth to bring customers in. The store was located right across the street from a Hardee's. This was a popular chain restaurant offering similar food, and it drew business while Culver's sat empty. In its first year, Culver's had sales of $300,000, and ran in the red by $40,000. In 1985, the restaurant broke even. Culver's did not make its first profit until the next year. The restaurant gradually built up a local clientele, and drew tourist trade as well. Sales grew strongly over the next several years, and Culver was able to remodel the aging building.
Growth of Franchising in the 1980s
Craig Culver had not been running the restaurant for very long before he decided to expand by leasing the concept to franchisees. Culver gave his experienced father the credit for the move. "I didn't really want to do it, but my dad pushed it," he told the Wisconsin State Journal (June 15, 1995). The company got in touch with a Chicago firm that specialized in franchise arrangements and set up the framework for a regional chain.
The franchising idea followed the example of the initial restaurant: at first a flop, then a growing success. The company first signed an agreement with a man who opened a Culver's in Richland Center, Wisconsin in 1987. The arrangement was unsatisfactory at both ends, and after a year, Culver's terminated the contract. But Culver's next franchisee became the model for all who followed. This was Tom Wakefield, who opened a Culver's in Baraboo in 1990. Wakefield had a background in business administration, he loved Culver's food, and he was willing to work long hours to make the business a success. Wakefield eventually opened a second Culver's franchise, and then worked for the company lining up new franchisees. From early on, Culver's required a large investment from its franchisees. Franchisees paid a fee of $25,000 in the early 1990s. This was up to $50,000 a decade later. The cost of the building and land brought the initial investment to more than $1 million in the chain's early years. The initial cost had grown to close to $2 million in the early 2000s, while a McDonald's franchise, by contrast, called for an investment of about $700,000.
Culver trained franchisees himself, requiring them to work in his restaurant full time for at least a week. At first, the new locations were all relatively close to Sauk City, in small Wisconsin towns. Culver visited franchisees unannounced, paying meticulous attention to the cleanliness and appearance of the restaurant. The chain still mostly depended on word of mouth to get people in the doors. As it expanded into western parts of Wisconsin, the company found it had to overcome a common misconception that frozen custard was some kind of pudding. But by 1995, the chain had gained a lot of momentum in Wisconsin. It had grown to 45 restaurants, and it began to push into neighboring Minnesota and Illinois.
Building to a Regional Chain in the 1990s
By 1995, Culver's chainwide sales stood at slightly less than $30 million. The company put a halt on new franchises within Wisconsin that year and concentrated on opening new locations out of state. The chain was growing in a widening circle, making it more difficult for Craig Culver to keep in touch personally with all his franchisees. But despite how much the chain had mushroomed, Culver continued to handle much of the interviewing and training of franchisees himself. He sought out promising locations, looking for spots where at least 10,000 cars passed every day, where there was weekend tourist trade, and where the restaurant might draw a lunch crowd.
The Culver's formula seemed successful wherever it landed, though the chain often seemed to puzzle restaurant industry analysts. The restaurants had a drive-through service that required patrons to wait some three to five minutes for food to be prepared. This was a much longer wait than at a conventional fast-food drive-through. Yet customers seemed content with Culver's pace. The chain also spent little on advertising. But its reputation for quality was apparently enough to pull people in.
The chain added ten new stores in 1995, 1996, and 1997. Each new store added about $1.1 million in sales. Stores that had been open at least one year also increased in sales. Systemwide, this figure, known as same-store sales, grew by 7 percent in 1996 and then by more than 14 percent in 1997. By 1999, total sales surpassed $100 million for the first time in the company's history, standing at $116 million. By this time Culver's had opened almost 100 units. The chain also left the Midwest for the first time, when Craig Culver's sister and her husband opened the first of several Texas franchises in 1997. Texas was potentially a huge market. Culver's Frozen Custard also began penetrating farther into the Midwest, with new outposts in Sioux Falls, North Dakota and Lincoln, Nebraska.
By 1999, Craig Culver decided Wisconsin was saturated, and he pushed the chain to grow in the farthest reaches of its territory. He also brought out a new restaurant, called the Blue Spoon Creamery Café. This was a somewhat upscale version of the original Culver's. It served deli sandwiches and cappucino as well as fresh baked goods in a dressier space. The first Blue Spoon opened next to the Culver Franchising System headquarters in Prairie du Sac.
Beyond the Small Town in the 2000s
Overall sales for the chain grew by more than 40 percent in 1999. The company opened its 100th location in 2000 and began gearing up for even faster growth. The company planned to have close to 500 units by 2005. The individual restaurants were getting bigger, moving from a format that seated 98 customers to one that seated 128. The chain also revamped its strategy somewhat, moving into big cities and suburbs instead of small towns. Culver's had started out a small-town restaurant, and most of its early locations were in towns of a similar size and character to Sauk City. But by 2000 it was clear that Culver's could hold its own in places like Dallas and Chicago. The suburbs of big cities tended to be easy and relatively inexpensive locations for new stores, too. Suburban locations gave new restaurant franchisees the chance of high returns, so the company adjusted its growth plan to emphasize markets other than small towns. By 2000, Culver's had opened the fourth of its company-owned stores. These were used to train new owners. Training had gotten more rigorous, with a full 16 weeks of education and hands-on operating experience required of new franchisees.
Culver's had an impressive track record. Between 1995 and 2000, sales for the chain overall grew an astounding 425 percent. With plans to open at least 50 new restaurants a year after 2000, the chain predicted that its sales would triple over the next five years. Culver's had few direct competitors because of the odd niche it occupied. It was not exactly fast food, though close to 40 percent of its sales came through its drive-throughs. It was still a very small business compared to the nationwide chains of hamburger restaurants like McDonald's and Burger King. It had a higher per-store volume than McDonald's, at $1.6 million in the early 2000s, and an operating margin better than many fast-food chains, at 10.5 percent. Culver's also seemed to have a menu that was difficult for competitors to reproduce. About one-third of the chain's sales came from its frozen custard. Craig Culver told Nation's Restaurant News (January 28, 2002) that skeptics warned him that frozen custard was impossible to franchise: "You have to be so hands on. Making custard is almost an art. The owner had to be there all the time, and you couldn't replicate it." But Culver had successfully trained more than a hundred owner-operators in the delicate craft of custard-making. Frozen custard gave the Culver's chain a unique draw wherever it went.
Part of the Culver's chain's strength seemed to lie in the tight control Craig Culver still maintained over the business. Although by 2003 the chain had grown to almost 200 locations, getting ever further from Sauk City, Culver continued to personally monitor his franchisees. He worked with trainees and kept up his random quality-control inspections, as well as steering sales meetings and plotting corporate strategy. The company increased its advertising budget significantly in 2003, upping its spending from $4 million to $10 million. The company also moved its advertising account from a small Wisconsin agency to one in Minneapolis. Its new television ads featured Craig Culver himself. The humorous spots nevertheless highlighted the true nature of the chain, which was still a family-owned business that owed everything to the vision of its founder. During a period of weakness in the U.S. economy overall, Culver's managed to grow 30 percent over 2002. This was lower than the previous year, when sales growth was close to 40 percent. Yet Culver's was still outdistancing its competitors. Its most comparable competitors were other regional chains, such as Steak 'n' Shake and Sonic. These grew by 2.5 percent and 11 percent, respectively, in 2002. Culver's seemed to have bright prospects as it moved forward with new store openings in the mid-2000s.
Principal Competitors: The Steak 'n' Shake Company; Wendy's International, Inc.; Sonic Corporation; McDonald's Corporation.
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