Burger King: $1 Double Cheeseburger May Change the Game

So-called “value” menus offering fast foodies a variety of options for a buck or less have proved popular for customers looking for a recession-friendly snack. But a new $1 menu play – a double cheeseburger – from Burger King (BKC) may change the game.

That’s right, two patties for one dollar. While the initiative has not yet been approved, this could be a major summer value introduction.

The impact would be a significant lift to Burger King traffic trends, according to UBS analyst David Palmer, but it would also be a hit to food costs. He told clients that the new double cheeseburger would present a more than 15% increase in food cost (as a percentage of sales) than the current $1 offering – the Whopper Jr.

“The introduction could hurt traffic trends at burger competitors, and encourage competitive response,” Mr. Palmer said.

Additional discounting at fast food, which represents 78% of industry traffic, could further limit a recovery in mid-scale and casual dining sales, he added.

UBS estimates that Burger King’s U.S. same store sales fell 3% to 4% in June, after 4% to 5% declines in May. Mr. Palmer trimmed his earnings per share estimates for the fourth quarter ($.36 to $.34) and fiscal 2010 ($1.53 to $1.48) to reflect “somewhat lower sales and less food cost relief as a result of discounting.”

He also cut his price target on the stock from $17.50 to $17.

Comments

[Mark Bern:]

I travel by car a lot in my business and have been spending more at McDonalds and Subway on my last few trips. Variety appeals to my partner and myself and we will probably stop at Burger King more often because of this offering. We will also buy a soda and probably fries to make a meal each time we stop. Everyone won't add the drink and fries, but perhaps enough will to help keep margins from dropping so dramatically. The burgers are just the enticement to get people in the door. The drinks and fries represent the profits. If traffic increases due to this offering, and I suspect it will, profits may very well follow.

McDonalds had a good thing going with the $1 double cheeseburger, but they increased the price. Burger King is making what I believe to be a wise move by filling that void.

Jul 08 11:05 AM

[Tony Petroski:]

I consider myself an expert on this sector having both invested in much of it, BKC, WEN, MCD, YUM and sampled the entire menus of these joints.

This doublecheeseburger is not a gamechanger. Wendy's sells one right now for a dollar. By the way, I think the dollar items are great values, greater than the stocks.

Jul 08 08:15 PM

[upgrayed:]

Great, like we Americans aren't already fat enough. Go long health care on this news.

Jul 09 12:26 AM

[cocomurph:]

$1 Cheesburger promo as a "gamechanger"?! Get some perspective, my friend!

Jul 09 09:54 AM

[John Gordon:]

Burger King will have to model it, test it, promote it, in a meaningful way, and get support from their franchisee marketing council, to do this right.

McDonald's has plowed this ground last year.

Franchisees don't have the same resources that the company does, and are much more margin oriented.

We doubt this is a game changer...but it could be a popular menu item. PS, the picture attached with the FT post is not at all representative of what the menu item could be.

John A. Gordon
pacificmanagementconsu...

Chain Restaurant Earnings and Economics Experts

Jul 09 10:46 AM

[jason_fund:]

Ever notice how Burger King's burgers are quite a bit larger than the tiny things McD or Wend sell ? Also noticed this includes bacon. I'll certainly be stopping at BK for this when I have a craving rather than McD.

Jul 09 10:53 AM

[Chancer:]

In N Out (the best burgers) is opening a new restaurant nearby close to a Burger King and MacDonalds. It will be interesting to see the competition.

Many in my area will pay more for a better burger and fries at In N Out.

I save by never buying drinks (sodas and coffee) when I eat out. The markup is too great. You can buy a 6-pak of soda or 1/2 can of coffee for what they charge in restaurants for one drink. You can drink water in restaurant, and then have you want for less at home.

Jul 09 02:01 PM

[TCK:]

The downside for BK is the potential to reduce their own sales through "trade downs" from current customers and reduced check average.

Consequently, I don't see this a great change in the grand scheme.

Jul 10 06:41 AM

[Paul Zimbardo:]

Consider the game unchanged. Franchisees voted against the proposed promotion.

online.wsj.com/article...

Jul 14 12:45 PM