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Coverage Initiation: Burger King Worldwide (BKW)
Value Line recently initiated coverage of Burger King Worldwide (BKW) in its flagship product, The Value Line Investment Survey. The company franchises and operates the Burger King chain of fast food hamburger restaurants. As of the end of 2011, Burger King was the second largest “burger joint” in the world by number of restaurants. At that time it owned or franchised over 12,500 restaurants in 81 countries and U.S. territories. Of that total, it owned and operated 1,295 restaurants, with the rest handled by franchisees.
The company’s restaurant concept was created in 1954 by James McLamore and David Edgerton when they opened the first Burger King restaurant in Miami, Florida. The company’s flagship hamburger, the Whopper sandwich, was introduced three years later in 1957. Today, Burger King sells “flame-grilled” hamburgers, chicken, and other specialty sandwiches, french fries, soft drinks and other food items typical of a fast food hamburger restaurant.
Although viewed as a U.S. concept, only 5,000 or so Burger King restaurants resided in the United States and Canada at the end of last year. These sites, which represent approximately 40% of the total, accounted for only about a third of the top line. Clearly, the company’s performance is tied to its foreign operations. This exposes the company to many issues, including country specific economic conditions, currency fluctuations, and the local dining habits in the areas in which it operates. Although North American operations are important to performance, investors should pay keen attention to the company’s international operations.
The company generates revenue via the sale of food at company owned restaurants and from franchise revenues. Franchise revenues are made up of royalties based on a percentage of sales reported by franchise restaurants and franchise fees. It also derives revenues from the leasing of property to franchisees. Approximately 90% of the company’s restaurants are franchised. This can provide financial benefits in that the cost of expanding and maintaining its restaurants is funded primarily by franchisees. However, this also creates problems in that the company does not control the operations of 90% of its business and virtually requires Burger King to find new franchisees to open new restaurants if it wishes to expand its store count.
As a restaurant, the company faces numerous rules and regulations. Furthermore, its global reach means that it must be on top of country, state or region, and local mandates everywhere it operates. Running afoul of any rules or not keeping up with rule changes could materially impact the top and bottom lines, as well as lead to a public relations issue.
Burger King has for many years played second fiddle to industry behemoth and Dow-30 component McDonald’s (MCD – Free McDonald’s Stock Report), though that company is far from the only competition it faces in the crowded fast food category. Indeed, taste, quality, convenience and speed are all important issues that impact Burger King and its competitors. Although many consumers have a preference for one concept over another, fast food burger shops are often viewed as interchangeable, complicating efforts to stand apart from the crowd.
One avenue that has been increasingly used to draw customers into the company’s restaurants is the introduction of a steady stream of new food and drink items. With this, however, the risk of a poorly received product increases—a notable mistake at Burger King was a hard to cook french fry that customers generally liked, but franchisees didn’t. Keeping restaurants looking up to date and modern is also an ongoing issue and expense, and one that had been an thorn in the company side for some time. Although it is making efforts to modernize, the franchise model can make this harder and cause it to take longer than Burger King Worldwide would like.
Advertising is also a critical component of supporting and increasing brand awareness. The company has, in fact, used a number of off-beat tactics over the years to attract attention, including a web site with a chicken that acted out user typed commands. Although many of its efforts elicited attention, the results were less clear cut when it came to the top and bottom lines. In fact, the company struggled for many years despite repeated efforts to turn its business around and was, in late 2010, acquired by 3G Capital Partners. Shares were once again sold to the public in the middle of 2012, coinciding with a renewed effort to revitalize the brand.
Subscribers interested in this world-wide food concept should consult the regular quarterly reports for Burger King Worldwide to keep tabs on how it is faring in its revitalization efforts. Note that supplemental reports highlighting important news as it occurs are also important to watch for.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.