CASE 6 White Castle System Inc. White Castle System, Inc. is an unusual competitor in the world of fast-food restaurants. Established in 1921, White Castle is generally considered the original fastfood hamburger chain. The name White Castle was chosen to connote more than a mere physical description of the restaurants. According to company history, ‘White’ signifies purity and cleanliness, while ‘Castle’ stands for strength, permanence, and stability. White Castle invented a limited menu, fast-food service, and developed and perfected methods that have become standard in the industry. Its 24-hours-a-day concept was an innovation and remains almost unique in fast-food operations. The company literally created the take-out food industry by developing packaging to keep its burgers warm. While most fast-food chains have come into prominence through franchising, White Castle has refused the franchise route domestically, preferring to retain complete ownership and control of its own units. White Castle stock is not publicly traded. The company is entirely held by the founding family, which takes an active interest in operations. White Castle was founded by the late E.W. “Billy” Ingram; E.W. “Edgar” Ingram, Jr., is retired but functions in the post of chairman of the board, and E.W. Ingram III is currently the president and chief executive officer. In an industry notorious for high personnel turnover, approximately 10 percent of White Castles over 9,000 employees have from 10 to 45 years of unbroken service. The company has the broadest benefits package of any fast-food organization, and the basic benefits are provided to every employee, regardless of station. Early growth was rapid. There were 100 units open as soon as 1930, but the number fell to below 70 when World War II brought meat rationing. After the Korean War the company grew again, establishing itself principally in urban areas “White Castle System, Inc.,” by William J. McDonald, reprinted from Cases in Strategic Marketing Management, 1998, Prentice-Hall, Inc. in the Northeast. Gross sales in 1989 were less than 1 percent of the nation’s fastfood revenue. Over the years, White Castle has concentrated on its menu of burgers, fries, and beverages. Although, just because White Castle has not introduced salad bars does no mean it lacks an innovative marketing strategy. Its ability to change has been demonstrated throughout its history and continues to be reflected in its recent telemarketing and frozen product efforts. A carefully considered promotional strategy, including aggressive public relations, contributes to White Castle’s continued success and helps differentiate it from other fast-food/quick service operations. However, as competitive pressures mount and as consumer preferences change, White Castle needs to continually reassess its marketing strategy, particularly its pricing and promotional activities to determine what approach will be most effective in the future. FAST-FOOD INDUSTRY TRENDS The restaurant business in general, and the fast-food industry in particular, is experiencing sluggish growth and diminished profits due to increased competition and fickle consumers (Table 6–1). Industry revenue only grew by about 6 percent in 1990 and future estimates make that figure sound bullish. During the boom times of the 1980s revenue growth was a high as 12 percent per year. The entire $147 billion eating place industry, from haute cuisine to the corner diner, is in a state of turmoil. Operating margins for several large publicly traded restaurant chains were squeezed sharply in 1988–1989. The malaise is partly the result of technology and changing eating patterns. On the technology front, the biggest threats to restaurants have been from microwave ovens and videocassette recorders. Consumer eating habits and preferences are evolving. Baby boomers find eating at home more economical and more convenient. Many millions of Americans are tired of eating out or cannot fit it into their schedules. Consumer lifestyles are changing and that is effecting what, how, and when they eat; they also appear to want more types of food to select from. If restaurants are the losers, then the winners are the purveyors of take-out and take-home food. For most restaurants, adaptability is the key to survival, including a willingness to change what is on the menu and how it is served. TABLE 6–1 Major Market and Industry Trends More competition Healthier items Menu expansion Slow market growth More emphasis on customer service Expanding hours of service More items at lower price points Higher operating expenses Changing labor forces Changing population demographics The $70–billion-a-year U.S. fast-food market, dominated by McDonald’s, has suffered as customers have defected to other chains for discounts, stayed at home for meals, and began shunning red meat and fried food. McDonald’s, which had revenues of about $6.5 billion in 1992, still reports healthy profits, but sales are increasing much faster overseas than domestically. In an effort to attract and keep customers, the average McDonald’s serves salad, chicken, and decaffeinated coffee as well as providing a more comfortable atmosphere. The next addition to the menu will be a McDonald’s pizza. McDonald’s hopes to lure people who stay at home into its restaurants with its new products. To address these issues many other fast-food companies are also making changes in how they operate and what they offer. Many outlets are moving to expanded menus, operate longer hours, and sell more items at lower price points. Burger King has even introduced a mini-burger similar to White Castle’s in size but with a different product design. Pillsbury Company’s restaurant group, which includes Burger King, Godfather’s Pizza, Quik Wok, Steak and Ale, and Bennigan’s, is attempting to apply more organizational discipline to help its bottom line. Wendy’s International revised its marketing approach after its first-ever loss in the first quarter of 1987. It developed a new advertising campaign in an attempt to reestablish the strength of its burger and spent more on training and store operations. AN INDUSTRY LEADER White Castle has a reputation as an industry leader in sales per store, often surpassing all other major fast- food restaurant chains. Comparing menu item unit sales for all menu prices at White Castle with similar figures from other fast-food restaurants also reveals that traffic at White Castle restaurants is higher than that of the competition. Average store location sales were over $1.5 million in 1992 for its 257 restaurants (surpassed only by McDonald’s sales per store) for total sales of $338 million. White Castle System revenue and income remained strong (Figs. 6–1 and 6–2). Gross sales in 1992 were more than $92 million. That is something of a surprise, given the overall slump in which the fast-food industry remains. Company Expansion White Castle is projecting growth of as many as 10 to 15 new stores per year in new and existing markets nationwide. Money for White Castle expansion comes for the most part from available funds, so growth has been controlled and steady. International Franchising In late 1988, the company entered into an Asian franchise agreement with a group of Malaysian investors. The first White Castle restaurants opened there in the second quarter of 1989. In the first quarter of 1992, White Castle opened a restaurant in the Bahamas. 340 330 Millions 320 310 300 290 280 1988 1989 1990 1991 1992 1991 1992 Year FIGURE 6–1 White Castle System Revenues Source: Estimated from various sources 33 Millions 32 31 30 29 28 1988 1989 1990 Year FIGURE 6.2 White Castle System Income Source: Estimated from various sources New Products The new Castle Meal “A Meal Fit For A Kid,” is being offered in all White Castle restaurants. It includes a White Castle hamburger or cheeseburger, fries, soft drink, and a free surprise for children. Breakfast and chicken sandwiches are offered at nearly all locations and are developing a loyal following of their own. Clam strips, grilled chicken, and bacon cheeseburger sandwiches are available at a few stores. The introduction of products such as these is a decision made by area managers in response to local demand. Expanding Distribution In the past, some people who have moved from a White Castle market to one with only White Castle competitors, telephoned the company to order dozens of the hamburgers for delivery by air express. White Castle observed that customers were “Buying ‘Em By The Sack” to take home, freeze, and reheat later in a microwave. This is possible because of the way White Castle prepares its hamburgers: they are steamgrilled, helping them to retain moisture essential to the freezing/reheating process. The company realized the potential in moving into a new area where there were no existing White Castle restaurants, and introducing its product. The resulting frozen White Castle hamburgers are marketed in most of the country on a constantly expanding basis. This decision to offer the product in grocery stores was thus based on intense consumer demand. A Quality Product White Castle started with a superior product. The chopped beef cooked in the White Castle hamburger sandwich is all beef from American grown beef inspected and U.S. graded. It is shaped and compressed into squares with five evenly spaced holes on White Castle equipment to cook quickly and uniformly. Equally unique is White Castle’s method of steam cooking. Others debate the merits of broiling, frying, grilling, etc. (some of which is just semantics). Below is a nutritional breakdown for an individual White Castle burger: Weight Fat Fiber Protein Ash Nitrogen-free extract Carbohydrates Salt Sodium Calories 2.06 oz. 7.94 g 2.13 g 5.88 g 35 g 13.25 g 15.38g 70g 266g 161.27 White Castle operates three bakeries and a meat-processing plant to supply its own stores. Promotional Efforts Historically, While Castle has focused its promotional efforts on local radio and television advertisements and coupon premiums. Today, a centralized marketing program directs messages to specific target markets, particularly the children of their current customer base. Television advertising includes: 1. Castle Meal commercials that air on weekdays and Saturday mornings to introduce the kid’s meal to 2 to 11 years olds. 2. Specific promotion and event advertising campaigns. Radio advertising promotions attract the attention of 18 to 49 year olds. The White Castle advertisements are perceived to be: 1. Highly credible. 2. Markedly different from the competition. 3. Straightforward and humorous. 4. A continuation of what consumers perceive to be the White Castle “story” or phenomenon. 5. Informational rather than hard-sell. White Castle has one of the most successful promotional strategies in the fastfood industry, predicated on the fact that White Castle is just plain different from the others. Word-of-mouth is an important facet of the campaign and this appears as strong as ever with no reason to feel it cannot continue. Because the company services a limited geographic area and limited number of outlets, regional advertising is important. Demand appears to be at an acceptable level, so increasing promotional efforts may be wasteful in terms of cost and detrimental in terms of ability to handle additional demand. In fact, if White Castle’s cult grows too large, it may lose this differentiating feature. Also, if it does too many special events activities, the enormous publicity generated may start to diminish as the act becomes “common place.” White Castle may want to feature some of its employees in advertising campaigns and space; given their longevity, they probably have definite stories to tell. Even this, however, would probably not have the impact of its slice-of-life commercials or the Don Adams spots. WHITE CASTLE’S COMPETITORS White Castle has many competitors; Table 6–2 lists most of them. But, there are many more, including the nonchain fast-food operations and the less well-known regional operators, plus less direct competition with supermarkets, convenience stores, diners, and regular restaurants. McDonald’s and Burger King are the closest rivals. While White Castle started in business before they did, they have grown rapidly in the last 20 years. These competitor’s marketing strategies are closely followed by White Castle, partly because they appear ready to copy some of its menu items and operating procedures. TABLE 6–2 White Castle System Competitors Burgers McDonald’s Burger King Roy Rogers Wendy’s International Burger Chef Chicken KFC Mexican Taco Bell Pizza Domino’s Little Caesar’s Godfathers Also, new rivals in the fast-food market are segmenting the business in ways that impact McDonald’s and Burger King as well as White Castle’s operations. Given the menu segmentation that is occurring, McDonald’s may soon become the Sears of fast food, a lumbering giant surrounded by much nimbler rivals. Currently, McDonald’s is rethinking its traditional approach to standardizing its decor and offerings across all locations. They are beginning to foster flexibility, meaning that franchisees can now launch experiments in their food and decor. They can test new formats, ranging from self-service to small cage-style outlets to serving McDonald’s fare on airplanes. This is a big gamble because the success of McDonald’s is based on mass production and absolute uniformity. Over the last decade, Burger King and McDonald’s engaged in the infamous advertising “Battle of the Burgers.” Wendy’s entered the fray in 1983 by declaring itself the winner. The battle continues today. White Castle, on the other hand, never had to enter the battle and might be declared a winner of the ultimate war in terms of sales volume and profitability. CONSUMER NEEDS SATISFIED BY WHITE CASTLE White Castle is satisfying consumer’s needs (Table 6–3) by enabling its customers to address those needs for food through an inexpensive meal with a unique taste that they have grown to love. Having been exposed to this unique tasting burger in childhood, as customers get older, they learn to associate the “white building” with small square burgers that taste delicious. This taste is a reminder of youthful days when they contemplated what to eat during late hours of the morning. White Castle’s convenient 24–hour service enables consumers to avoid the task of a high involvement decision, and many fast-food establishments do not offer this convenience. The limited menu offered by White Castle simplifies the decision-making process and contributes to fast service that customers are looking for. And, when parents dine with their children at White Castle, there may also be a limited amount of time. Thus, being able to place an order and leave lessens the frustration encountered by the parents on family outings. And, because parents are often concerned with the quality of food their children consume, White Castle’s offering of pure beef steamed burgers exactly fits the bill. Parents also relive their youthful White Castle dining experiences. The limited amount of bun and meat included with the burger and its relatively low price at 29 cents per unit allows customers to enjoy not just one but several of the miniature burgers. Customers can also buy them by the bag and obtain volume TABLE 6–3 Consumer Needs Being Satisfied by White Castle Inexpensive meal Unique taste Twenty–four hour service Quality products (all beef burgers, etc.) Youthful nostalgia Limited menu Fast service Fellowship discounts. The light, airy bun is an added unique characteristic of a White Castle hamburger that also gets imbedded in the taste preferences of the loyalists. WHITE CASTLES TARGET MARKET White Castle’s customers are predominantly upper-lower class individuals who look for an inexpensive, quality meal (Table 6–4). White Castle might not succeed in targeting a more lower-middle class market because it does not conform to what members of that social class desire in price points, ambiance, and perceived food quality. The location of most White Castles is also an issue because they tend to be built in more upper-lower class than lower-middle class neighborhoods. It is often said that White Castle invented the hamburger addict. As the saying goes, “once customers are hooked, they are hooked for life.” The chain’s continuing success is attributed to customer loyalty to products and service they can count on, supported by dedicated employees who are happy in their work. Loyal followers of White Castle are sometimes referred to as a “fanatic cult.” For example, as part of its 1980 anniversary celebration, Fountain Hills, Arizona, with a population of 2,700, imported 10,000 White Castle hamburgers. They sold out within an hour and a half. The next summer they ordered 100,000 and had Clayton Moore, who portrayed the “Lone Ranger,” ride shotgun on the truck making the delivery in case White Castle rustlers showed up. It was an annual event for several years. Then frozen White Castles became available in local supermarkets. Customers develop this high degree of brand loyalty from positive experiences in early life and from the reinforcing value of obtaining a valued good on a regular basis. Such attitudes are developed early in the individual’s family life through socialized eating habits and positive associations with White Castle experiences. Thus, many of the restaurant’s current customers were exposed to the unique taste of White Castle’s products as children, later patronizing with peers during their teens and young adulthood. TABLE 6–4 White Castle Target Market Demographic segmentation: Age: 15–60 Gender: male and female Marital status: single, married Income: lower-lower to upper lower Occupational: blue-collar, unskilled laborers Education: high school, some college Psychological segmentation: Lifestyle: family-oriented Sociocultural segmentation: Social class: lower to upper-lower Family lifecycle: bachelors, parenthood User behavior segmentaion: Usage rate: medium to heavy User status: aware Brand loyalty: strong Benefit segmentation: convenience, economy The following concepts are frequently used to explain the “fanatic cult” of White Castle loyalists: 1. Attitude development. Initial favorable experience with the product reinforced by subsequent purchases strengthened. Favorable attitudes, leading to repeat purchases and hard-core brand loyalty. 2. Benefits perceived to be important. Customers rate White Castle hamburgers high on attributes they value. This confidence and conviction is so intensive that customers are willing to go to extraordinary lengths to purchase the product. 3. Lifestyle. White Castle hamburgers invoke a lifestyle that is memorable or pleasant to the customers (i.e., first date, family trips). Buying at White Castle is a way to relive those times. 4. Learning. If the customer grew up conditioned by White Castle hamburgers and was satisfied by them, other alternatives may seem less attractive. 5. Family. Families play an important role in White Castle loyalty because they introduce family members to its menu. Those experiences also create strong associations with positive experiences that remain into adulthood. 6. Peer group. Among many, White Castle is the only hamburger worth eating, and buying them makes those customers part of a group. THE FUTURE The secrets to White Castle’s success lie in its devoted customers, its unique product design (including product quality), and value pricing. White Castle’s customers have acquired a passionate devotion to its good tasting little square burgers, which are uniquely prepared by steam, not fire. The White Castle story illustrates that a fast-food organization can be very successful without following a “me-too” strategy. And, it shows the importance of an innovative and focused promotional effort. Ultimately, the White Castle experience highlights the importance of brand loyalty and the factors leading to that loyalty, while pointing to the need to adapt to a changing environment and continuing to emphasize a firm’s basic strengths. However, White Castle’s past may be brighter than its future. Some argue that the firm has failed to capitalize on the uniqueness of its product offering and the loyalty of its customers. Now that the heavyweights in the fast-food industry are penetrating every niche in search of sales and profits, White Castle is in danger of losing its competitive advantage to rivals willing to imitate some of its menu, particularly its low-price points and its 24–hour operating policy. What marketing strategy would you recommend to White Castle to counter the threats to its business? What specific price, distribution, promotion, and product elements would you propose and why? How would you deal with the growth in competition in the fast-food market? Sources Oliphant, Jim. “White Castle: 70 Years of Sliders.” Columbus Monthly (February 1991): 26–32. “Best-Run Companies.” Restaurants & Institutions (May 29, 1989): 48–49, 62. Therrien, Lois. “McRisky.” Business Week (October 21, 1991): 114–122. White Castle public relations materials. “White Castle,” in Contemporary Cases in Consumer Behavior, Roger D. Blackwell, W. Wayne Talarzyk, and James F. Engel eds. (Chicago, IL: Dryden Press, 1990), pp. 255–270.