Burger King Increases Market Share in First Quarter

By: Richard Hazell

Plans to Sell Company Stores to Franchisees

The latest market data suggests that McDonalds Corporation’s (MCD) business is being rapidly chased by the Burger King Holdings Group, as the BK brand rolls out its new weapons - a fresh menu, revitalised restaurant design and fresh advertising - in advance of a significant planned business turnaround ahead of its public offering this summer.

The world’s No.2 fast-food business, after McDonalds, Burger King has previously struggled to gain market share, with its declining sales last year blamed on a lack of innovative menu offerings, and a flawed pricing structure. Since then the brand has been working hard to expand its product offering beyond its traditional core market (males, 20+) which a re-vamped marketing strategy, and greater emphasis on fresh salads, smoothies and chicken based snack wraps.

The biggest operator in the Burger King network is the Carrol’s Restaurant Group (TAST), which has said that its sales grew at c. 9% in April. This compares with McDonalds posting a ‘less than expected’ growth in the same month of 3.3%.

The resurgence of the Burger King brand will also pose a mounting threat to rival company Wendy’s (WEN), which is following a similar strategy of brand reinvigoration, to win back its higher-end position in the massive fast-food industry.

But Burger King is still creeping ahead, with first quarter results rising to 4.6%, before even the bolstering effects of its new advertising and menu items. This compared to a rise of less than a single percent from Wendy’s. Burger King attributed this rise to its new coupons, french fries recipe and meal bundle structure -all helping to boost sales and result in a significant gain on last year’s downward trend.

In fact, the BK profits jumped to $25M in the first quarter, comparing most favourably with a $5.9M loss in the previous years. Revenue jumped to $565M, up 3.2%.

The brand’s CFO, Daniel Schwartz, pointed to a ‘great start’ for the year, noting the tangible results gained from Burger King’s turnaround strategies.

The company was made private in 2010, being bought by the NY based 3G Capital Management, a private equity firm. The deal was valued at $4BN. Only last month, Burger King reached a deal worth $1.4BN cash with Justice Holdings , a UK investment firm. The deal was aimed to bring the chain back into the public market, and 3G Capital is expected to remain the business’s primary shareholder, with an anticipated stake of 71% in the new public company.

The fast food chain is planning a sale of nearly its entire chain of company-owned restaurant outlets, to franchisees, with the sales expecting to complete by the close of 2012. This will form part of its strategy to shift to a lighter asset model. The shift to franchising will insulate the business from the impact of volatile commodity costs and other financial burdens, offering a steadier income stream from franchise royalty fees, and offering a more attractive model for investors.

However, growing pains are still expected. Steven Wiborg, the president of the North America wing of the business explains that a slower service speed is being seen as a result of the new fresher menu, with frappes and salads being made fresh for each customer. However, the hope is that customers will still perceive a quality service thanks to the improved nature of the product.

Burger King’s margins have also improved after its global restructure, which was aimed to cut operating costs. As a result, the company’s restaurant margins rose from 9.1% to 10.7% in the first annual quarter. By region, the sales figures also look good - up 4.2% in Canada and the USA, 9.9% up in Latin America, and up 6.6% in Africa, Europe and the Middle East. Same-store sale figures in Asia’s Pacific dropped by 2.8%.

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Category: Fast Food Franchises

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