Burger King is Set to Beef Up

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Burger King Set To Beef Up… Just Not Enough To Tempt Us

by Tony Daltorio, Investment U Research
Friday, January 29, 2010

Burger King Holdings (NYSE: BKC) just can’t hold up to the competition.

McDonald’s (NYSE: MCD) easily wins out on size alone, with its 31,000 restaurants raking in $23 billion in sales around the world, nearly ten times the amount that Burger King’s 12,000 locations bring in.

With revamped restaurants and healthier menus, McDonald’s has watched its sales climb and its market share rise to 47% over the last few years. Burger King, on the other hand, can only claim 14% market share, a limited menu and an unsurprising sales slide, not to mention some of the oldest restaurants in the U.S. fast food industry.

Naturally, the company’s shares have slipped about 17% to near $18 over the past 12 months, while McDonald’s has risen nearly 10% to around $64 and should continue higher on sharply higher fourth quarter earnings.

Since analysts predict slightly lower annual profits from Burger King, the home of the Whopper needs to cook up a very tempting offer for customers and investors alike if it wants to flip its fortune around.

The $1 Double Cheeseburger Debacle

In its defense, Burger King understands what’s at stake. And it knows what it needs to fix. That’s why it created a menu of cheaper items, like the $1 double cheeseburger launched in mid-October… after 18 months of development and testing.

All of that time and effort seemed to pay off at first and cheeseburger cravings helped stabilize same-store sales in November, after they dropped 2.9% from July through September. But Burger King franchises – which account for over 90% of its restaurants around the world – filed a class-action lawsuit based on that very deal, claiming that it cost more to produce the burger than they made selling it. So the $1 cheeseburger could disappear by April… something that the larger company can’t afford.

After all, other fast food chains have targeted low-cost food sales during the economic downturn. And McDonald’s “Dollar Menu” has proven especially successful. In fact, that company has already announced further plans to slash prices, this time on certain breakfast items like sausage sandwiches and hash browns starting early this year.

Burger King, on the other hand, just can’t seem to win, despite the $250,000 to $1 million it already spent per store on some 60 restaurants… or the same amount it will spend on another 75 this year, as it looks to revitalize business through a new red and black theme.

And while the company has high hopes to modernize its systems to provide real-time information on sales and profits, McDonalds and many other competitors already have similar technology in place.

Burger King… A Global Laggard

Burger King has a lot of catching up to do on a global scale as well. Currently, the company only has 5,000 of its 12,000 restaurants located outside the U.S., and it only draws one-third of its overall pre-tax profits from those stores.

Though it just debuted its first outlet in Moscow this past week and has plans to open another store there in a few days, McDonald’s beat it by a decade. And while the Chinese can buy a Big Mac at any one of 1,000 spots around the country – or chicken at 2,500 different KFC restaurants, for that matter – Burger King just opened its first location in Beijing and has a mere 25 other stores elsewhere in the giant nation.

In its defense, Burger King is actively trying to diversify its product range by opening “Whopper Bars,” which serve beer right alongside burgers and fries, and allow customers to pick and choose from 20 different toppings when ordering. Open only in a few cities around the world so far, including Miami, Singapore and Munich, the company has big plans to create another 200 – 300 of those stores in hotspots like airports, casinos, cruise ships and theme parks by 2016.

Considering that Burger King derives a full 90% of its growth from outside the U.S., the company is smart to aggressively expand that way. But even though it expects international stores to provide half of its pre-tax profits within the next six years, that might not be fast enough to really revitalize the company considering how far the competition has managed to pull ahead.

In the end, investors have a wide selection of tastier companies than Burger King to choose from. If the craving strikes, eat a whopper; just don’t buy into the company that makes them.

Good investing,

Tony Daltorio