Burger King Holdings (BKC)

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Kryssia Uraguchi

Rashad Badr

Andrei Popovici

Burger King is the second largest fast food hamburger restaurant chain in the world, with over 11,000 company-operated and franchised restaurants in over 70 different countries.^[1] The company generated $2.5 billion in revenue in 2009^[2]. Like most players in the quick service restaurant market, Burger King faces several important challenges. The cost of doing business has increased due to rising foods prices while intense competition from McDonald's , Yum! Brands (YUM) and Wendy's limits Burger King's ability to pass costs on to consumers.^[3] However, with the 2008 economic downturn, consumers in the United States have turned to Burger King as a low-cost alternative to more expensive dining options.^[4]

Additionally, strong international sales (38% of operating income) are also a bright spot.^[5] Furthermore, since 2004, Burger King has implemented several cost cutting initiatives, including smaller restaurant sizes that take advantage customers' preference for the drive-thru, a real time scheduling system to improve employee efficiency, and the closure of poorly performing restaurants. These measures resulted in an increase in net income from just $5MM in 2004 to $190MM in 2008.^[6] Despite improvements, Burger King still trails its largest competitor, McDonald's (MCD) in terms of revenue per restaurant and growth. In 2009, McDonalds had a revenue of $22.7 billion and received nearly 6 times as much in franchise fees per franchised restaurant than Burger King.^[7]

In September of 2010, Burger King was acquired by private equity firm, 3G capital for $3.26 billion, or $4 billion with the assumption of the company’s debt. This acquisition represented a 46% premium over Burger King's share price before the offer was made.^[8]

Business Overview

Burger King operates within the fast food hamburger restaurant (FFHR) category of the $59 billion quick service restaurant (QSR) segment of the restaurant industry. Burger King offers hamburgers, chicken and specialty sandwiches, french fries, soft drinks, breakfast foods, and a variety of other fast food choices. Burger King Holdings, Inc. is now a private company and therefore is no longer a publicly traded stock.^[9]

In a response to the McDonald's McCafe coffee products, Burger King has announced that by September 2010 it would begin selling Starbucks' Seattle's Best Coffee in about 7,250 U.S. outlets. The new drinks will sell for $1 to $2.79 and will replace Burger King's BK Joe brew, which was introduced in 2005.^[10]

In 2008, roughly 90% of the company's restaurants were franchised and only 10% were company owned,^[1] althougHoldings_(BKC)/Overview#102 | Burger King Holdings 2007 Annual Report, "Business", p. 3-8]]</ref> Sales in the U.S. and Canada account for 44% of total revenue; however, Latin America is the fastest growing sector.^[11]h the latter produced approximately 73% of the company's revenue.^[11] Burger King also operates in three geographic regions: the U.S. and Canada, EMEA/APAC (Europe, the Middle East, and Africa/ Asia Pacific), and Latin America.

Business Segments

Burger King operates in three geographic regions: ^[12]

• U.S. and Canada: The U.S. and Canada is BKC's largest sector with 7,512 restaurants generating approximately $1.1 billion in revenue.^[13]
• EMEA (Europe, the Middle East, and Africa)/APAC (Asia Pacific): The EMEA/APAC sector is BKC's largest international sector. It has 3,051 restaurants in 42 countries and generated approximately $3 billion in sales (2008).^[13]
• Latin America: The Latin American sector has 1,002 restaurants in 25 countries. The Latin American sector contributed approximately $1 billion in sales (2008).^[13] BKC Latin America experienced a 8% sales growth from 2007 to 2008.^[6]

Quarterly Business Financials

FY2010 Q1 Earnings Summary

Jacob Starr Holdings reported revenues for Q1 of FY 2010 (ended September 30, 2009) of $636.9 million, a decline of 5.4% over the same quarter in 2008. Operating income fell by 7.7%, to $83.0 million, over the same period. Burger King attributed its slumping sales to the economic downturn.

FY2010 Q2 Earnings Summary

BKC increased its net restaurant count in Q2 FY2010 by 95 restaurants, with international segments accounting for over 90% of the net restaurant increase compared to Q2 FY2009. Worldwide comparable sales went negative at -2.0% compared to 2.9% same period FY2009, with US and Canada comparable sales worse at -3.3% compared to 1.9% Q2 FY2009.

Overall, BKC margins improved 20 bps to 13.8% from 13.6% same period last year, and EPS were $0.37 compared to $0.33 same period last year, an increase of 12%. BKC stated however that it still continues to face a difficult operating and consumer environment. Revenues for the second quarter FY2010 were up 2% at $645.4 million, compared to $634.1 million in same quarter FY2009, though currency translation helped quarterly revenues by $22.8 million. BKC attributes negative impact on continued weak labor market, lower discretionary spending and competitive discounting to lowered performance.^[14]

FY2010 Q3 Earnings Summary

BKC posted income before taxes at $67.0 million, an increase of 6% compared to $63.0 million in Q3 FY2009. BKC also reported comparable sales at -3.7% compared to 1.0% in same period last fiscal year. Moreover, US and Canadian comparable sales were -6.1% compared to 1.6% Q3 FY2009. Operating margins also shrunk 40 basis points from 11.7% to 11.3%.

BKC claims that it still operates in a challenging macroeconomic environment, as the company now shifts to acquiring new regions to invest for the long term. For example, it added 37 net new restaurants during the quarter. Still, worldwide revenues for Q3 FY2010 were down 1% at $596.9 million, compared to $599.9 million posted Q3 FY2009. This negative impact was partially offset by favorable currency translation of $19.5 million.^[15]

FY2010 Q4 Earnings Summary

Burger King posted fourth quarter revenues posted $623.0 million, a decline of 1% year over year due to decline in comparable sales. This figure also missed the consensus of $639 million.^[16] The decline was largely due to slowing economic recovery and continued high level of unemployment. In particular, Burger King's greatest revenue source is from young men, but that market is highly sensitive to jobless claims.

Comparable sales dipped 0.7% for the fourth reporting quarter, and was at a decline of 1.5% in US and Canada, but then offset by emerging markets, where Latin America experienced a 3.9% increase and EMEA/APAC experienced a 0.2% increase.^[17] BKC plans to open between 225 and 275 net new restaurants in FY2011, with 90% of this new growth taken place outside United States and Canada.

Trends and Forces

Burger King's International Presence Will Play A Large Role in Upcoming Days

BKC is growing its international presence with an emphasis on underpentrated markets in developing countries, while scaling back its number of domestic franchises by closing underperforming restaurants. Latin America is one of its fastest growing regions. It opened 45 new restaurants in Mexico in 2007^[18] and another 34 restaurants in Brazil from 2005-2007. franchisees)^[19], ^[20]. In total, the number of BKC company operated and franchised restaurants in Latin America increased by 49% and 76%, respectively, from 2003-2007, while the number of BKC franchises in the U.S. and Canada has actually dropped by nearly 10% over the same time period. pussy

The Rising Costs of Agricultural Commodities are Pressuring Margins

Burger King is heavily dependent on a wide array of agricultural commodities such as beef, corn, cheese and poultry. Over the past few years, the prices of these commodities have increased drastically; on the other hand, intense competition in the QSR industry limits the company's ability to pass these costs onto customers^[21].

Burger King Capitalizes on Economic Downturn by Providing Lower Cost Dining Options and Riding Out Innovative Advertising Campaigns

The 2008 economic downturn produced a class of consumer demanding a cheaper alternative dining option. Burger King's cheaply priced menu options satisfied those needs and shares rose by over 20% between February and April 2008. Also, BKC's management has reinvigorated its marketing strategy by pursuing partnerships with the NFL, Nascar and multiple product placements in movies such as Spiderman3. In July 2007, Burger King was ranked in the top position for the "most-liked" television advertisements for all national advertisers^[22]. Towards the end of the same year, the company launched a new ad campaign. The campaign which featured real customers and hidden cameras, was credited by management for leading to double digit sales growth during the December quarter. ^[23].

Burger King Streamlined Its Operations, Closing Gaps and Re-tailoring Service

Additionally, Burger King has reduced the average size of new restaurants. Since approximately 62% of sales can be attributed to drive-thru purchases^[27], management has announced that larger restaurants aren't necessary. Since adopting a smaller restaurant design, Burger King has reduced its building costs by 25% ^[28] and has begun using new appliances and systems to increase efficiency and further cut costs.

Competition

BKC operates in the FFHR category of the QSR segment of the restaurant industry. Its primary domestic competitors in the FFHR category are McDonald’s and Wendy’s. To a lesser degree, BKC also competes against other fast-food restaurants such as Subway, Yum! Brands, Inc.’s Taco Bell, Pizza Hut and Kentucky Fried Chicken, casual restaurant chains, such as Applebee’s, Chili’s, Ruby Tuesday’s and “fast casual” restaurant chains, such as Panera Bread, as well as convenience stores and grocery stores.

BKC’s largest U.S. competitor, McDonald’s, has significant international operations. Non-FFHR based chains, such as KFC and Pizza Hut, have many outlets in international markets that compete with Burger King and other FFHR chains. In addition, Burger King restaurants compete internationally against local FFHR chains, sandwich shops, bakeries and single-store locations.

The table below shows fiscal 2009 data for the largest publicly traded food service competitors. by revenues Subway, also a major player, is privately owned.

Data from company FY 2009 annual reports (CKE data from FY annual, ended January 31, 2010).

References

1. ↑ ^{1.0 1.1} Burger King Holdings 2008 10-K Report; Part 1: Business, p. 3
2. ↑ [10-K FY 2009]
3. ↑ McDonald's absorbs some costs to keep customers
4. ↑ Burger King Profiting in the Downturn
5. ↑ Burger King Holdings 2008 10-K Report; Part 1: Selected Financial Data, p. 39
6. ↑ ^{6.0 6.1} 2008 Burger King 10-K; Selected Financial Data, p. 39
7. ↑ McDonalds Google Finance Profile
8. ↑ Burger King (BKC) Acquired By 3G Capital for $24/Share
9. ↑ [1]
10. ↑ [2]
11. ↑ ^{11.0 11.1 11.2}
12. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 3-8
13. ↑ ^{13.0 13.1 13.2} 2008 Burger King 10-K Report; Selected Financial Data: p.42
14. ↑ [http://investor.bk.com/phoenix.zhtml?c=87140&p=irol-newsArticle&ID=1382979&highlight= Burger King Holdings Inc. Reports Second Quarter Fiscal 2010 Results]
15. ↑ [http://investor.bk.com/phoenix.zhtml?c=87140&p=irol-newsArticle&ID=1419820&highlight= Burger King Holdings, Inc. Reports Third Quarter Fiscal 2010 Results]
16. ↑ Earnings Scorecard: Burger King
17. ↑ Customers lose appetite for Burger King
18. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 8
19. ↑ Burger King Holdings 2007 Annual Report, "Management's Discussion and Analysis...", p. 4
20. ↑ Burger King Holdings 2007 Annual Report, "Management's Discussion and Analysis...", p. 4
21. ↑ McDonald's absorbs some costs to keep customers
22. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 2
23. ↑ Wall Street Journal, Media and Marketing, pg. B3, "Hey, No Whopper on the Menu?" February 08, 2008
24. ↑ Bruger King Company Report 10-05-2007
25. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 3
26. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 3
27. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 3
28. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 3