The global chain of fast food hamburger restaurants, Burger King Worldwide, has been reporting improved comparable store sales across all four regions for the last few quarters, with a 2% growth in sales in its first fiscal quarter. The reported net income increased by almost 70% to $60.4 million from last year’s figures of $35.8 million, whereas the total reported revenues declined 26.5% to reach $240.9 million due to the net re-franchising of 327 company-owned restaurants over the trailing 12-month period. Neglecting the impact of the global re-franchising transactions and currency movements, the revenue increased 6.2% year-over-year due to net restaurant growth and global same-store sales growth.
In its effort to compete with the leading fast food brands such as McDonald’s, Yum! Brands and Starbucks, as well as fast casual chains such as Chipotle Mexican Grill and Panera Bread, the company has been experimenting with its menu mix. Among the several factors that pose threat to the company’s business, few of them have already started affecting its global sales.
We have a price estimate of $28 for Burger King, which is about 4% above the current market price.
The prominent factors and uncertainties that threaten the company’s top line growth in the near future include the rising competition from better resourced competitors and the risks associated with the fully franchised business model.
Rising Competition In The Fast Food Industry
The restaurant industry is highly competitive, especially in the developed markets. In the U.S. and other international markets in Europe and Asia-Pacific, quick service restaurants and fast-casual restaurants have gained popularity in the last decade. Well-established brand chains compete against each other on the basis of products, quality, service, menu price and location.
In the Fast Food Hamburger Restaurant industry, Burger King has managed to maintain its brand appeal among customers, competing against big brands such as McDonald’s and Wendy’s. Burger King has been ranked third in this segment below the two burger chains, after Wendy’s overtook its second spot in 2011. In the fast food industry as a whole, Starbucks and Yum! Brands are the other two major rivals. These companies have well capitalized and organized chains and franchises spread worldwide with more number of U.S. stores than Burger King.
Burger King generated average daily sales of around $3,300 at a franchised restaurant in 2013, which is nearly the same as Starbucks’ average daily revenue of $3,200 per store but only half the revenues generated by a McDonald’s outlet (around $6,700 per outlet per day), indicating McDonald’s dominance in the industry.
Moreover, McDonald’s customer base is much wider than that of Burger King with 28,000 franchised stores spread worldwide ranging from developed markets to developing nations in comparison to Burger King’s 13,000 franchised restaurants in selective developed markets.
In the breakfast segment, there is a fiercer battle for the market share with companies revamping their menu and introducing new breakfast items. Most of the fast food chains have started selling coffee to drive revenues through their breakfast segment. Burger King started serving the Starbuck’s owned Seattle’s Best coffee to compete against McDonald’s McCafe. Moreover, the fast-casual restaurants are eating away market share and customer traffic from these fast food chains. Since the restaurant industry has few entry barriers, it is easy for new competitors to enter the race.
The company’s competitors have better financial resources, higher revenues and greater economies of scale than Burger King, allowing them to react better to price fluctuations, introduce new products easily, spend more on marketing and promotional activities, as well as accelerate restaurant remodeling and rebuilding efforts. Such competition may adversely affect the company’s top line growth by reducing royalty payments from franchise restaurants.
Pros & Cons Of Fully Franchised Business Model
Burger King re-franchised almost all of its company-operated restaurants during 2013, bringing its business model to nearly 99% franchised and by the end of 2013, the company was left with only 52 company-operated restaurants. The advantage of the franchised model is that the company does not have to incur operating costs and can enjoy the royalties paid by the franchises. The margins for this type of model are very high, but it comes with number of disadvantages and risks.
Burger King has limited influence over the operations, marketing and advertising decisions and ownership of the franchised restaurants. Moreover, the franchises are sometimes unable to participate in strategic initiatives such as investment initiatives in re-imaging and remodeling. Furthermore, a franchise’s bankruptcy could have a huge negative impact on the company’s revenue from that restaurant, as the franchisee agreement can be cancelled in case of bankruptcy with no further royalty payments. Lastly, in times of difficult economic conditions, franchises can reduce the royalty rates.
McDonald’s, Starbucks and Wendy’s have more company-operated stores, giving them an advantage in terms of independence in operational initiatives and marketing decisions.
