High Stakes Burger King Remodel Still Work In Progress

Burger King (BKC) is releasing earnings on October 29^,, and needs some big news to reassure investors as well as ultimately drive sales. On October 17, it's featuring $1 double cheeseburgers via national advertising, while Wendy’s (WEN) just began rolling out their new burger, Carl’s and Hardee’s (CKR) introduced new burgers, and of course, in the face of McDonald’s (MCD) endless promotion of the Angus Burger. The burger universe is crowded.

QSR sales momentum has been slipping from late last year, as I noted on Seeking Alpha on September 11. Even YUM (YUM) reported negative US sales comps, along with Taco Bell and Pizza Hut.

Burger King highlighted its so-called 20/20 Design remodel on October 7 on the investor portion of its website. The unit looks great and does give them upside potential to change the brand. But the size of the capital investment — Ad Age reported $300K to $600K investment range— and the quoted sales increase range, 10-15%, will make it difficult to grind out a payback. (Ad Age noted a scrape and rebuild would generate 30%)

Restaurants should reimage and refurbish their stores. That, and new menu development, are very critical. But keep in mind in the QSR universe: About 70% of sales come via the drive-thru, and customer won’t see the interior, at least on that visit. The 20/20 new drive thru station will be enhanced, however, in Burger King's plans.

Burger King is 90% franchised, and franchisees don’t have the same access to credit and capital costs that the company has. (Even large franchisees have difficulty, see the story of large Burger King franchisee John Gantes, who is in Chapter 11.)

The profit math assumes midpoint estimates: a Burger King AUV of $1.2M, 13% sales gain, 50% profit flow through, and resulting pre-debt service variable profit / unit / year of about $78K. But if the franchisees borrow 100% (not likely in this credit environment), debt service would be about $105K year (assumes $450K investment, 10% interest rate and 7 year term). Therefore the variable profit isn’t covering the investment. Said another way, franchisees will have to inject cash and the debt service will be less, but it's still a long payback.

Perhaps the press reports aren’t right, or the project is still a work in progress, but it doesn’t seem to “pencil” at this point.

Disclosure: No stock positions

Comments

[davidbdc:]

Once again BK is a follower....McD's has gone upscale with the McCafe concept in Europe and its been a huge success and now they are rolling it out in the USA....and BK tries to follow.

The only advantage they really have is that their burgers are different - and they need to try to build on that - not try to follow McD's - that just re-inforces in people's mind that BK is #2 at best.

Oct 16 04:06 AM

[Jonathan Marek:]

Worse yet -- I can tell you from experience that a 13% attributable sales lift from a restaurant or retail remodel is extremely rare. At APT, we've rigorously analyzed over 50 major remodel programs, and I can think of only one that generated that level of lift. Often, however, there are components of the remodel that work better than others (and specific, predictable locations/markets that work much better than others). With great analytics, BK might be able to figure out how to pare this down into a $100-200k investment that really works well for franchisees.

Oct 16 01:44 PM

[Christa Hoy...:]

Burger King will be left behind if it does not reimage its stores. It's not so much following McDonald's but meeting consumer demands. Consumers are increasingly frequenting fast casuals, which have the model of better experience, better food to match their slightly higher price point than QSR -- but still lower than casual.

Burger King already recognizes that it is behind the curve with its in-store experience. If they want consumers to spend more, they need them to come inside. And plastic seats and stark interiors aren't a draw. As editor of QSRweb.com, I've written on this topic a number of times. BK isn't just behind McDonald's but many QSRs: Jack in the Box, Captain D's, Taco Bell, Wendy's, Carl's Jr., Hardee's and the list goes on.

It's about time Burger King updated its look. And it's money well spent.

Oct 19 09:56 AM