Burger King vs. Popeyes: Why the Difference in Sales Comps?

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Includes: BKC-OLD, QSR, YUM
by: John Gordon

Last week we got the Q4 and full year earnings of Burger King (BKC-OLD) (see conference call transcript here) and on August 20th the Q2 earnings of Popeyes (AFCE) (see conference call transcript here). Burger King reported disappointing sales comparables—US/Canada down 4.5%, while AFSC was one of the very rare chain restaurant universe gainers—up 4.3%.

We were intrigued as to why such a large sales performance difference.

Neither chain reported comparables components-traffic and average check, and check sub components, price and mix. AFCE said their gain was mainly traffic driven. Also, neither provided next year guidance.

AFCE noted in its August 20 2009 earnings call that it tracked 2 percentage points above the NPD chicken sub sector sales trend—which is an accomplishment, since Yum’s (NYSE:YUM) KFC rolled out their Kentucky Grilled Chicken product to great fanfare (and at least short term sales lift), in May.

Burger King’s sales weaknesses continued in 2H 2009, after many quarters of gains in 2005-2008 timeperiod. It’s like air escaping from a balloon. Burger King executives noted in their August 25 earnings call that the worst traffic decrease point had been realized in May, with down to flattish check and sequentially improved traffic trend, since.

While Burger King is considerably bigger and more international in scale versus the smaller, 1900 unit Popeyes chain, and has deeper unit penetration than Popeyes has in its markets, there is a significant divergence between their US trends.

Burger King promoted low-end items and some higher end items via barbell approaches, as did AFCE. Both utilized national television—we weren’t provided and no one asked the TV weights. AFCE made a point that the company had “invested” $3M in additional marketing costs—above and beyond what the almost 100% franchised company franchisees pay via their 3% fee into the ad fund. AFCE’s marketing price point focus seemed to change little from Q2 2008 to Q2 2009.

Perhaps for these two operators, in this market subset, it was the unit penetration that mattered this quarter—in a reverse fashion. Conventional restaurant theory is that higher unit penetration is good for building sales.

In today’s weak demand and still over-restaurant developed US marketplace environment, lower penetration might be the negative. It is interesting that AFCE is opening 90-100 and closing about 110 to 120 units/year (churn of about 11% of its unit base), while Burger King’s has grown US unit counts very slightly and 8% internationally. Burger King noted in its powerpoint the large number of units operating, world-wide.

So...less is more?

We’ll continue to watch for this factor.

Disclosure: no stock positions.