Burger King: Will Its Latest Double Cheeseburger Deal Pay Off?

by: John Gordon

The Burger King (BKC) $1 double cheeseburger offer is underway, generating all of the high risk that we noted in our September 28 article.

The BKC National Franchise Association launched its second legal action of the year, asserting on November 10 that BKC can't set maximum prices. Its earlier 2009 action noted that soda marketing funds will be retained by BKC to pay for more marketing contrary to agreements.

The analytics of the double cheeseburger issue, of course, is whether or not BKC can generate enough incremental sales and customers to offset the discount and product mix cannibalization occurring, in addition to paying for the incremental media. And can this lift the sales trend?

This BKC burger focus is underway while competing new burger introductions are present via McDonald's (NYSE:MCD), Wendy's (NYSE:WEN), Carl's (CKE), Hardees and even the casual dining operators such as Chili's (NYSE:EAT), Ruby Tuesday (NYSE:RT) and others

Promotions involving big discounts and big portions of the restaurant product mix often need a 5-10% traffic and sales increase just to get back to gross profit breakeven, let alone to offset incremental restaurant variable expense and incremental media.

The double cheeseburger is not a new menu item, but rather one that has some generic identity and value. As the Carrols (NASDAQ:TAST) CEO (publicly traded franchisee with BK units) noted on November 2, it's a price play.

But we note another issue: BKC's Dollar Double Cheeseburger is apparently the major focus until February 2010, when the new XT Burger rolls out. That implies BKC is essentially naked with just a price play until then.

Early notes from Carrols and other anecdotes point to improvement in the traffic and sales trend versus prior year. Carrols welcomed the change in marketing focus, and expected to make money from the offering. But is that enough to get true sales lift for the company, which is 90% franchised, until February? Franchisees generally have a weaker store level cash flow structure than the company (they pay royalties) and generally have a higher cost of capital.