Burger King wants to add more locations in the U.S. and narrow its wide unit count gap with rival McDonald’s.
So it’s closing restaurants.
Specifically, the 7,300-unit fast-food chain plans to close more low-volume restaurants in the coming years as operators’ franchise agreements come due.
Speaking to analysts Wednesday, Burger King executives said the company plans to close 200 to 250 low-volume locations per year over the next couple of years— higher than the 100 to 130 restaurants per year the company had been closing.
The company hopes to replace those restaurants with tech-savvy, newer restaurants under the chain’s “Burger King of Tomorrow” image, which features outdoor digital menu boards, spaces for mobile orders and self-order kiosks.
To Burger King, such replacements are advantageous. Newer restaurants average $1.5 million in sales per year. The typical location getting closed generates only about $1 million, or about 29% lower than the chain’s overall unit volumes.
“There’s a $500,000 delta between a new, free-standing restaurant and the restaurants getting closed,” Chris Finazzo, president of Burger King in the Americas, said at parent company Restaurant Brands International’s Analysts Day event Wednesday. “Closing low-volume restaurants create a virtual cycle of improved profitability.”
Burger King has intensified its unit growth in recent years: It opened more than 100 net new restaurants last year.
And the brand has aggressive growth targets in the coming years. RBI on Wednesday committed to a goal of getting to 40,000 restaurants across all three of its brands, including Tim Hortons and Popeyes.
The 18,000-unit Burger King has been leading that unit count growth, adding about 1,000 restaurants systemwide every year. Most of those have been outside the U.S., where the company has found fruitful markets in places such as Russia, China, and Latin America.
But it wants additional locations in the U.S. and has set McDonald’s as the gold standard. While the Chicago-based rival has been shrinking in recent years, it still has nearly double Burger King’s unit count.
Burger King has been pushing its operators to add more units in recent years—the company has used McDonald’s unit count in specific markets as it has urged franchisees to develop.
Finazzo said executives still believe that it has room to develop in the U.S., and he noted that the 100-unit increase last year was the first time in more than 20 years that Burger King reached that development milestone.
It still expects to add units this year, even with the increased volume of closed restaurants, which would come as the locations’ franchise agreements expire.
Yet the higher-volume locations could also promote growth in the future by improving franchisee profitability. Finazzo said that operator profitability over the past few years has increased faster than any other brand.
Higher sales helps profitability, and operators with higher-profit stores build more units.
Matt Perelman, who along with business partner Alex Sloane helped form Cambridge Franchise Holdings—a large Burger King and Popeyes operator that recently merged with giant Burger King franchisee Carrols Restaurant Group—said that his company is able to pay off a new Burger King restaurant within five years.
But, he said, when the company can buy the real estate for that new restaurant, and then sell it to an investor and lease it back, the return on investment shrinks to one to three years.
“We had an opportunity to sell the business for cash,” Perelman said of the merger, which made his and Sloane’s investment firm, Garnett Station Partners, major investors in Carrols. “We opted to roll our equity in Carrols because we believe strongly in [Burger King’s] long-term value creation.”