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Revived and Remodelling Burger King Sees Long-Term Growth

Source: FLEXNEWS
10/07/2008

10 July 2008 - FY 2007 marked the recovery of fast food giant Burger King in the US. Indeed, the company had not grown domestically for the last six years and its last 16-17 financial quarters have been significant in putting its US sales back in the right direction.

In a presentation given at a conference in Boston on Tuesday, Burger King CEO, John Chidsey, told investors that he expects his company’s positive momentum to continue.

The restaurant operator’s efforts to launch new products - which has generated over USD 5 billion in sales in the last 3 years - and boost various marketing campaigns over the past four years are beginning to materialise in the company’s financial performance.

Besides the numerous new customer offerings and continued efforts to expand in the breakfast, beverage and dessert segments, Burger King also spotted the changing attitude of the American consumer. As the majority people order their burgers and fries via drive-ins (estimated by Burger King at 65% of total fast food consumers) and about 15% of consumers enter restaurants to take away, the company’s outlets were too large to accommodate the remaining 1 in 5 customers.

By reducing building size, and by carrying out a series of what Chidsey describes as “remodels” and “scrapes”, Burger King estimates that it now records about 25-30% less cost from its restaurants.

Burger King has tripled the number of its restaurants being built in the US in just 2 years and the CEO sees the number double again by FY 2010. However, as Burger King depends on its franchisees (which own about 90% of its restaurants) to rebuild, it is only now that the company can invest after recording profit growth.

According to Chidsey, a “scrape” costs about USD 1-1.2 million, whereas a “remodel” costs approximately USD 600,000. As a result the majority of franchisees are opting for the latter. Currently, Burger King remodels about 66% of its restaurants.

Remodelling and rebuilding is driving robust return on investment – especially since Burger King became a publicly traded company in May 2006 - and Chidley expects this to play a big part in driving Burger King’s business in the next 4 to 5 years.

Meanwhile, the scope for building new restaurants is huge. Chidsey estimates that rival fast food operator McDonalds has about 3,500 restaurants in the US, which do not have a Burger King within a 3-mile radius. Chidsey sees this as potential building “white space” for his company.

Of course Burger King will naturally grow by building more restaurants and the CEO, as an example, said that if 250 Burger Kings are built each year, it would still take 12 to 15 years to close the gap on McDonalds.

Although Burger King is outnumbered by McDonalds in restaurants, Chidsey sees this as an opportunity rather than dominance of its rival whom, he believes, has less scope to expand than his chain.

The CEO comments: “We are in the second inning of a nine inning game, unlike our competitors, who are closer to the end of the game”.

Internationally, Burger King opened 441 new restaurants in FY 2007, a 26% increase from the prior year. The company is now present in 72 countries and saw its revenues hit a record USD 2.2 billion, up 9% from FY 2006. These rose in every region and in every revenue category. At the same time, company and franchise restaurant sales around the world reached a landmark system-wide sales figure of USD 13.2 billion.

In Europe, the Middle East and Africa, Burger King is seeing consistent revenue growth. The company expects USD 568 million in this region for Q1-Q3 2008, a 14% increase on the year. The company entered Poland and Egypt in FY 2007.

The company is also growing strongly in Asia and Latin America. The fast food chain entered Japan and Indonesia, as well as Colombia in the last financial year. And recently, Burger King overtook McDonalds in Mexico in number of restaurants.

But keeping in mind that being outnumbered by McDonalds does not worry Chidsey, the CEO is enthusiastic about the possibilities of growth in Asia as he estimates that his rival has a 10 to 1 gap with his company, thus the white space potential is enormous.
 
Burger King also expects to see the international momentum to go on and Chidsey expects Burger King to enter Russia and India during the course of the next four years.

“There are some gaping holes out there where we really need to drive that growth”, says the CEO.

Overall, the company expects a 10% increase in worldwide revenues for FY 2008, including the US and Canada.



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