When Burger King
Has the King been overthrown?
Burger King's restaurants are 90% franchise-owned. Since this structure requires a lower capital commitment on the company's part, Burger King can open new restaurants at a faster clip. But while royalty income adds some stability to results, and lowers some risks, such as higher food and labor costs, it also means the company must share its gains. In addition, Burger King surrenders some control, and franchisees may be able to leave if times turn bad.
According to Chidsey, McDonald's
Should the company expand, just because it has fewer units than its rivals? Maybe so, since its former owner, Diageo plc
Seeking to regain the throne
Chidsey praised the company's improved advertising and marketing, including bringing back the goofy King character. Chidsey himself admits that the chain's eponymous, silent monarch is "creepy and weird." I agree; personally, my younger kids don't want to go there, because of the "scary guy."
Chidsey also mentioned improving operations, including a new performance measurement system to see how franchises are faring and hold them accountable. The company instituted a Guest Trac system, in which customers fill out a grade for the restaurant. However, management only gets credit if a restaurant achieves the highest grade. Given the subjective nature of these ratings, I worry that this system could anger restaurants and their employees. After all, how many of us call the number on the receipt or fill out a comment card? I know I'm not one of them.
While marketing and improving weak operations are important, they can only take you so far, especially for a company so far behind the competition. Burger King's average restaurant sales (ARS) have increased to $1.17 million, from $960,000 back in December 2002. But according to the presentation, McDonald's ARS is $2.1 million. Burger King seeks to get its average sales up to $1.5 million, a figure its new restaurants are currently accomplishing. To spread that performance throughout the chain, the company must now make significant improvements, particularly at its underperforming restaurants.
Burger King's hoping to drive sales through new product innovations, particularly in premium products. A few years ago, management added higher-priced menu items such as the Chicken Tendercrisp and Chicken Fries. Its Angus Burger, made from a better cut of meat than that served at most fast-food places, is also the biggest on the market. It's so big, in fact, that Subway is now criticizing the fat and calorie content of the Angus Burger in its own ads, rather than picking on the Big Mac.
I'm not sure most of Burger King's premium offerings differ much from those at McDonald's. Premium salads have done well with adults seeking healthy options at the Golden Arches, while Pizza Hut has a salad bar, and Taco Bell also offer salads on its menu. At my local Burger King, I counted two salad items on the menu, while McDonald's has four or five, depending on the promotion.
Another point mentioned was Burger King's new Value Menu. The company has tried to institute a value menu three or four times over the past decade (by Chidsey's own admission), with the latest attempt in place about 16 months. The company plans to expand this menu, although it's only slightly neutral to slightly accretive to earnings at restaurants.
Burger King is also attempting to shave 10 seconds off its average time of service, currently 160 seconds. That figure's already been reduced from 200 seconds a few years ago. The company claims that each seven to eight fewer seconds create a one-percent gain in comps. Again, that's not a new concept, but the proof will be in the Whopper.
Lastly, Burger King is increasing its hours of operation at its restaurants. As of Memorial Day, the company mandated that all franchises had to be open until at least midnight. (I'm sure this decision thrilled sleep-deprived employees.) Management discovered that its competitors were open an average of 20 hours more per week, and each five-hour period equals a percentage point in comps. Of course, the longer hours may increase sales at the expense of profitability. I just can't help thinking that the local franchises would've lengthened hours already if doing so was more profitable. People still need a reason to eat at Burger King -- longer hours alone won't help the restaurant stand out from a plethora of competitors.
Discussing margins, Chidsey once again compared Burger King to McDonald's -- like a kid brother constantly chasing an older sibling, but never quite measuring up. Restaurant margins are 16%, while McDonald's, at similar sales levels of $1.3 to $1.5 million per store, are 18.7%. Chidsey went on to say that if Burger King continues to grow its top line, it will achieve the same margins. Of course, that's easier said than done.
Long live the King...
In my opinion, Burger King has a long way to go before it can compete with McDonald's, a company to which it constantly compared itself during the presentation. Rather than just copy the Golden Arches, the King should stop comparing and start differentiating itself more. In a head-to-head comparison, Burger King just comes up lacking. Even its kids' playgrounds, usually located outdoors, seem inferior to McDonald's indoor play gyms. That's just one example of many lagging areas.
As long as Burger King is chasing McDonald's, it's bound to lose, since Mickey D's is a moving target. To top it off, with Burger King shares trading at a trailing P/E of 34, the Angus is not the only hefty item on this chain's menu.
Further Foolishness, hold the mayo:
Fool contributor Larry Rothman is happy to receive feedback, and promises to read it when not being wrestled by his three children. He doesn't have any positions in the companies mentioned. When even a clown seems less disturbing than your corporate mascot, the Fool's disclosure policy thinks something has gone terribly wrong.