Burger King (NYSE: BKW ) is serving up Whoppers in many languages. Since being acquired by private equity firm 3G Capital in 2010, the company has dispersed its dealmakers around the globe, from Brazil to Macedonia. 3G Capital knows something about international growth: Three of its four founders are the controlling shareholders of Anheuser-Busch InBev. Jorge Paulo Lemann, Carlos Alberto Sicupira, and Marcel Herrmann Telles embraced the concept of global expansion when they merged Brazilian brewer AmBev with Dutch brewer InBev in 2004. The merged company acquired U.S. based Anheuser-Busch in 2008, and is today the largest brewer in the world.
The three Brazilian billionaires are employing a different strategy with Burger King, one which relies less on outright mergers and acquisitions. Burger King has embarked on the partnering route, pursuing joint ventures with strong local franchisees in key growth markets. The company believes that it will grow more quickly, with less capital investment, if it reduces company-owned stores and ramps up its franchisee base. It views local operators with proven track records as the key to this growth plan. In December, Burger King announced a multi-country master franchise joint venture agreement with Central American Burger King franchisee Beboca Ltd. The joint venture will be named BK Centro America, and the new entity will become the master franchisor for Guatemala, Honduras, Nicaragua, El Salvador, Costa Rica, and Panama.
The Beboca deal is interesting, as for the first time, BK is allowing a joint-venture partner to develop restaurants in multiple countries. Until now, Burger King has inked agreements within single national markets. The Beboca transaction wraps up a year of joint-venture agreements around the globe, with the pace accelerating toward year-end. Burger King also partnered up with franchisees in Colombia, South Africa, and Mexico in the fourth quarter of 2012.
Take our restaurants, please!
There are currently 12,667 restaurants in the Burger King system worldwide. Although 95% of these locations are franchised, the company is still busy reducing its owned stores by "refranchising," that is, selling store locations to current system operators or new franchisees. As unusual as this may seem for a multibillion-dollar quick-service company, management's stated future goal is to become a 100% franchised company.
The near-term results of refranchising are promising. By sacrificing corporate-owned store revenue, Burger King is improving its margin. Through the first three quarters of 2012, total revenue declined 11% from the prior year, from $1.2 billion to $987 million, largely due to lost revenues from refranchising company stores. But operating income increased 11% over the same period, from $274 million in 2011 to $306 million. If management can correctly implement its strategy, revenue will decline in the near term, and start to increase again as the joint venture agreements contribute new franchise sales. This future revenue should carry a higher margin, as the company will no longer have the fixed costs of operating its own stores on its profit-and-loss statement.
A convincing reason to refranchise
Burger King is also looking over its shoulder at the success of McDonald's (NYSE: MCD ) in its international expansion, particularly on the franchising side of the business. Arcos Dorados Holdings (NYSE: ARCO ) , the largest McDonald's franchisee, and the largest fast-food operator in Latin America, paid out $132.6 million in royalty fees to McDonald's through the first three quarters of 2012. The King would love to have multiple franchisees like Arcos Dorados on the different continents in which it is pursuing joint-venture agreements.
The caveat with Burger King's plan is that in refranchising and diminishing corporate-owned stores, the company cedes its destiny to the success or failure of its franchisees. Most of the stakes it is taking in its joint ventures are minority stakes. McDonald's, by contrast, believes that it is important for a franchisor to operate a significant number of locations in order to develop personnel, hone best practices, and improve benchmarking standards. Burger King's evolving business model may wrest market share away from the golden arches in the coming years, but it remains to be seen how successfully the company can guide its franchisees without operational skin in the game. For now, investors with some risk tolerance should add the symbol BKW to their watchlist in 2013.
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