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Why Isn’t White Castle A Fast-Food Giant?

If you've ever eaten a hamburger at a fast-food restaurant,

White Castle deserves at least some of the credit.

White Castle is a fast-food chain with a small footprint in

the Midwest and Northeast.

It's famous for small, cheap burgers and its appearance in the

movie "Harold and Kumar Go To White Castle."

But you might not know that White Castle is widely thought of

as the first fast-food hamburger chain in the United States.

It also played a key role in making the hamburger synonymous

with American cuisine.

An American classic, White Castle Slider, doesn't get any

better. White Castle started in 1921 in Wichita Kansas,

decades before McDonald's or Burger King opened.

By 1961, it says it was the first fast-food hamburger chain to

sell over a billion burgers in the U.S.

But odds are, there isn't even a White Castle in your

neighborhood. As of 2019, White Castle has around 370

locations in 13 states, a practically unchanged store count

for the last 20 years.

Compared to big fast-food chains, White Castle's footprint is

tiny. So why is it that with a highly loyal customer base and

a nearly 30-year head start on the competition, White Castle

hasn't become a global fast-food chain like McDonald's or

Burger King. Why did the chain stay small?

White Castle has remained a family-owned, privately held

company since it started in 1921.

Fry cook Walter Andersen started a food stand in 1916, that

grew to four successful but small hamburger stands in Wichita

Kansas. As legend has it, one day while Anderson was still a

short-order cook in a local Wichita diner, he got frustrated

that the meatballs he was cooking stuck to the grill, so he

smashed one with his spatula.

Customers loved the resulting thin patties, which were also

faster to cook, meaning that he could sell more of them.

In 1921, Anderson met insurance and real estate businessman

Edgar Waldo "Billy" Ingram.

The two partnered and Ingram rebranded Anderson's business as

White Castle. Almost 100 years later, Ingram's great

granddaughter is now running White Castle.

Before White Castle, hamburgers had a negative reputation in

the early 20th century.

Famous exposes published in that era raised public suspicion

of unsanitary practices in the ground meat industry.

Ingram knew changing the public's mind about ground beef was

integral to White Castle's success.

That's why every aspect of the first White Castles were

designed with cleanliness in mind--even down to the name.

"White" signified purity and cleanliness and "Castle"

represented strength and stability.

And it worked--White Castle grew quickly expanding throughout

the Midwest in the 1920s.

White Castle played a key role in making the hamburger an

acceptable part of the American diet which helped pave the way

for other rivals.

Before White Castle, many burgers sold at fairs and outside

factories were just meatballs placed between slices of bread.

The flat patties and buns made popular by White Castle set the

stage for the modern burger.

White Castle grew rapidly in the 1920s and even weathered the

Great Depression in the '30s because its founders streamlined

the business, which included buying out Anderson's half of the

company and relocating its headquarters to its geographic

center in Columbus Ohio.

But when the U.S. entered World War 2 in 1941, White Castle

suffered from food shortages and labor scarcity that hindered

its growth. White Castle's profits fell significantly.

In 1954, Burger King was founded.

A year later, in 1955, the first McDonald's opened in

Illinois. Through franchising, these companies grew to be

national and then international brands in a matter of decades.

A White Castle historian called McDonald's the only

"life-and-death threat to White Castle" because its system was

faster and extremely popular.

For the 25 years after McDonald's emerged as a competitor,

White Castle grew —but slowly.

Over time, its footprint actually shrank--from having

restaurants in 14 cities in 1930 but only 10 cities by 1979.

In the 1980s, despite being much smaller than rival national

chains, White Castle reclaimed its position as a leading fast

food hamburger chain, expanding to about 300 restaurants in

new markets. The bulk of its restaurants have remained in the

Midwest and Northeast.

Its U.S. sales in fiscal year 2018 were $556.1

million.

For comparison, McDonald's U.S.

revenue was nearly 14 times that, at about $7.7

billion.

But that's exactly what White Castle's founder intended.

White Castle didn't franchise or go public, two mechanisms

that fueled the expansion of other fast-food chains.

Without pressure from shareholders or franchisees, White

Castle has had more freedom to experiment than a corporation

that has to show profits and growth every quarter.

Founder Billy Ingram also held out on franchising because he

wanted to keep complete control over every aspect of the

business, right down to the type of porcelain the original

white castles were built with.

There are certainly other models out there.

That would allow you to grow faster but you have to give up

control and you have to give up the ownership of the customer

and the ownership of the team member and that's just not

something that we have ever really been interested in doing.

And so each generation--we're in the fourth generation now--

has really, you know, certainly studied all the different

models and we still keep coming back to that this model has

worked well for us for almost 100 years and that we believe

it's a good model for us to continue into the future.

But it's traditional expansion strategy might be changing.

White Castle is now showing signs that it's ready to expand

beyond the Midwest.

Starting in 2014, White Castle has set its sights west--moving

away from its Midwestern stronghold.

White Castle has had a strong presence in cities like Chicago

and St. Louis. Now it's taking on Las Vegas and Scottsdale,

Arizona. It has multiple stores in Las Vegas, and open one in

Arizona in October 2019.

The Las Vegas locations, the first of which opened in 2015,

represent a shift for the company.

After more than 90 years of refusing to franchise in the

United States, White Castle partnered with its first licensee

ever to open stores in Las Vegas.

The licensee got White Castle prime real estate on the Las

Vegas strip in the Casino Royale.

There's another family business that's based there and they

reached out to us and our standard response is always no, we

don't franchise, we don't license.

They were so persuasive and so compelling.

And we realized they shared a lot of the same values in terms

of being a family-owned business.

And when they told us they could get us a presence on the Las

Vegas Strip at a really, really highly visible location, we

thought as we change from third generation and fourth

generation leadership, why not try something new.

But White Castle says this relationship is the exception, not

the rule. The company doesn't plan to use licensing as a model

for growth in the future.

We have chosen to do all of our stores company-owned so we

don't grow as fast as other brands, we're very purposeful

about where we want to grow.

You won't see us opening 100 in one year.

But you will see us being very very thoughtful about where we

open and when we open.

These expansions actually come as White Castle's overall

footprint has grown smaller.

From 2009 to 2013, it closed net 44 stores, as it shutters

less profitable restaurants.

But its total revenue has stayed roughly flat over those 10

years, hovering between $540 million to $5645 million, so the

restaurants the company has kept open are more profitable.

We have definitely closed some locations as time has gone on.

Some of the locations we had in the 1930s and 1940s just

aren't as viable in terms of how many people live in that area

or what changes have been made to local walkways and

expressways that have been built. You know, a mile away, there

aren't as many cars going by as they were.

So we've been able to steadily grow revenue and meet our

targets as we reimagine the landscape a little bit.

In 2009 White Castle's 418 restaurants had average sales per

restaurant of $1.3

million dollars. That's an important indicator in the

restaurant industry. Fast forward to fiscal year 2018, and

thanks in part to its small footprint, menu innovation and

price increases, White Castle sales per unit were up nearly 14

percent. White Castle says it's growing very intentionally and

choosing new markets carefully.

In the past, White Castle expanded by entering a city en

masse, opening between five and 10 locations in a new city.

In the 80s and 90s, White Castle expanded to four new markets

at once--Philadelphia, Kansas City, Nashville and Dayton.

They weren't successful. White Castle didn't adapt its

operating model to fit the individual cities and it poured too

much money into setting up new stores and building the supply

chain. White Castle realized that flooding a new market with

lots of restaurants wasn't working.

Opening lots of stores at once was expensive.

So we've been more selective and thought about the restaurant

growth as; hey let's find locations that really can be just

really, really ultra successful and great locations, easy to

find and kind of, you know, their own oasis in new markets

especially. Having lots of stores close together also led to

another common problem: cannibalizing sales.

The big brands try to get in and dominate a market and go in

and have the ability to get on media and have enough locations

to support that media spend.

And I think with White Castle, because it's such a unique

brand and it is a destination because of the types of products

and the way people use it, that they're less inclined to have

to do that. You know, penetration in markets doesn't hurt but

I don't think it's critical for every brand particularly if

you're more of a destination.

White Castle wouldn't say which state it would expand to next,

but they did share with CNBC that it's always considering new

markets--even internationally.

White Castle opened two restaurants in Shanghai in 2017

through a partnership with a Chinese private equity firm.

It was White Castle's first entrance into China, a popular

destination for American chains looking to expand.

Basically the way they describe it is a really well-run

private equity group in China approached them.

They had a love for the brand they had really good ideas and

White Castle said, why not?

They had really nothing to lose and it's a pretty good

opportunity for the company if it works out.

White Castle's presence in Shanghai has grown to four stores

as of October 2019.

White Castle leadership says the stores have steadily grown in

sales and exceeded expectations, but wouldn't give specifics.

This isn't the first time White Castle has tried to expand

internationally. In the 80s and 90s, White Castle tried--and

failed--to open stores abroad.

By 1989 White Castle had opened six restaurants in Japan.

It also opened six more restaurants across Malaysia and

Singapore to beef up the company's presence in Asia.

But the expansion stopped and the stores closed just a few

years after opening due to low demand.

In looking at the failure what we realize is we weren't

strategic about it that really we were opportunistic so

someone came to us and said they were interested from a

different country and it seemed like they had good resources.

We said yes without really thoughtfully discerning whether we

might be successful there or not.

One mistake White Castle made in its attempt to expand abroad

was that it didn't take enough time to research local tastes

and customize its menu.

A menu that works in the U.S.

doesn't always work in international markets.

With the Shanghai restaurants that opened in 2017, White

Castle tailored its menu to local tastes.

Customers can get a Peking duck slider made with duck breast

slices and cucumber or a Mapo Tofu beef slider, in addition to

the same classic sliders available in the U.S..

CNBC went to one of White Castle's restaurants in Shanghai to

see how the American chain was resonating with locals.

It's too soon to say whether White Castle will catch on in

China. But one thing is clear -- in China, White Castle

doesn't have the low cost reputation that has helped it

succeed in the States.

In 1987 White Castle started selling some of its menu items in

retail stores. At the time this was unprecedented.

It was one of the first restaurant brands ever to try it.

Retail remains one big difference between White Castle and its

competitors like McDonald's.

Those chains don't sell their burgers in the freezer aisle.

Retail has been a huge boon for business.

Retail sales make up about 20 percent of White Castle's total

sales and that number is growing.

According to euromonitor estimates, in 2018, the retail

business had sales of one hundred and ninety nine million

dollars. That's a 40 percent increase from 2013.

It's rank in the frozen ready meals category is also on the

rise. Plus, it's been huge for building brand awareness.

The company says by offering its products in grocery stores

across the U.S., Canada and military bases, White Castle has

become a national, not just regional brand.

Outside of the retail business, White Castle has also used

unique marketing and branding strategies to spread its name

across the country.

It is, after all, the restaurant that agreed to be featured as

a destination for hungry stoners in the 2004 classic, Harold

and Kumar Go To White Castle.

While some brands might have avoided association with a movie

about stoners and marijuana, White Castle embraced the film.

It helped White Castle connect to a new generation of

customers -- and the company told CNBC that sales hit an

all-time record the week after the movie was released.

White Castle continues to embrace this image as a late-night

stop. We made a conscious decision to be open 24 hours and to

be there for all of our customers morning noon or night.

So sometimes that's when someone's just ended work on a shift.

Sometimes it's after a night out with friends and we haven't

ran away from that at all.

Its cameo in Harold and Kumar is just one example of the

company's eccentric marketing strategies.

White Castle has tried selling wine pairings with its sliders

and offers table service dinners for Valentine's Day.

It was the first fast food chain to sell the Impossible burger

and worked with Wu Tang Clan to produce a series about the hip

hop group eating the vegan sliders in space.

You find your niche from a marketing and branding perspective

and then you go with it, strong.

It's fun and different and kind of kitschy and not taking

themselves too seriously.

The marketing and retail strategies seem to have worked.

White Castle is at the top of the list in the burger "cult"

status which measures devotion to a brand.

It beats out McDonald's in and out and Burger King in that

category, which shows that its fans are highly loyal to the

point of fanaticism.

In 2014, Time magazine deemed the two by two inch White Castle

Slider the most "influential burger of all time."

White Castle may rank high in hamburger loyalty but it falls

short in customer service ratings, ranking behind the big

burger brands.

Family-owned businesses have a high rate of failure, with

about 70 percent of family owned businesses failing or being

sold before the second generation takes over.

Just 10 percent make it to third generation leadership.

That is one of the reasons why White Castle, now entering its

fourth generation of leadership, is so unique.

White Castle's current CEO, Lisa Ingram, became the president

of White Castle in 2013 and took over as CEO in 2016 after her

father stepped down.

Ingram says her legacy at White Castle will be innovation and

cultural change. How do we become a more nimble organization,

how do we experiment more, how do we have fun more.

How do we embrace, you know, who we are more.

And how do we do it in a way that's inclusive and allows all

of our team members to feel like they're a part of something

really fun and really big.

Ingram represents a shift for White Castle — she has an MBA in

operations from The Ohio State University and worked in the

tech industry at large companies before joining the family

business. She broke from tradition by hiring three executives

from outside of White Castle to join her leadership team.

Ingram's experience working for other businesses made her

realize the company needed leaders with fresh eyes.

That's always a real challenge.

I think with family businesses because family business can be

very insular.

And you can listen to a lot of people that have been around

for a long time, and they offer great insight and you want to

make sure that you never lose that.

One of the things that I have done though.

Having worked outside in other industries and in other

companies, I really felt like we needed to have some outside

voices at the table as well.

And so three of my executive team, I hired from the outside,

which we did not do a lot of previously and they have brought

a very different perspective which is fabulous.

White Castle's sales at U.S.

restaurants are up about eight percent since Ingram was

appointed to company president in 2013.

She took over as CEO in 2016.

Yeah I think she represents all the things you want to see in

the restaurant industry. She represents leadership.

Someone who went out and did things outside of the restaurant

industry and got executive leadership training and education.

White Castle doesn't share much financial information but

company leadership says it has three goals to reach by its

100th birthday in 2021 — being a best place to work hitting

one billion dollars in revenue and hitting a specific profit

goal. As it expands domestically and internationally, it's

clear that White Castle thinks it has quite a lot of room to

grow.