When Burger King unveiled its $400 million revitalization plan last year, it warned that not every franchisee would be able to remodel, suggesting that there would be ownership changes. It was an admission of what was to come: bankruptcy filings and large-scale closures.
The latest came in Michigan, where EYM King closed 26 restaurants, wiping out its entire presence in the state. That followed bankruptcy filings by Meridian Restaurants Unlimited and Toms King.
There are signs of problems with other franchisee groups. S&P Global Ratings, for instance, downgraded the bonds for GPS Hospitality in December, calling its capital structure “unsustainable.”
The issues seemingly are rooted in recent situations. Burger King’s sales didn’t recover from the pandemic, much like Wendy’s, McDonald's, Popeyes or others. The chain’s massive effort to jump aboard the upgraded chicken sandwich bandwagon didn’t work. And high costs doomed operators.
But Burger King’s sales have been weak for some time. Periodic efforts to lift those sales work for a while, but then they struggle again and problems emerge. Look at this graphic.
These are average unit volumes dating to 2006, before the Great Recession. Burger King’s average unit volumes are up just 15% over that time, less than half the growth of rival Wendy’s or Jack in the Box. In 2006, an average Sonic generated $2 million less than a typical Burger King. By 2021, that was reversed. McDonald’s went from generating $900,000 more than a typical Burger King to $2 million more.
Recent years have likewise not been kind to Burger King. Here’s a graphic on average annual system sales growth in the U.S.
Burger King has badly underperformed each of the other major fast-food burger chains.
Sales are a requirement to generate profits and when a restaurant’s sales are stagnant, which has largely been the case for the past two decades, it is more difficult to generate a profit.
Last year, Burger King restaurants generated $140,000 in EBITDA, or earnings before interest, taxes, depreciation and amortization, on average.
While $140,000 would be great for a Domino’s or a Subway, for a standalone burger brand with a drive-thru, it’s not great at all. A typical Burger King requires $1.8 million to $4.2 million just to get open. The cost of operating a Burger King, in other words, requires a lot more profit than that. As the franchisee of another burger brand told me, $140,000 can be wiped out by a couple of pieces of equipment. And that’s average.
That is down 20% since 2018, which we know because the Burger King parent company revealed the numbers in early 2019, saying that franchisee profitability would be a company focus.
Yet Burger King’s sales have been weak in the years since then. And the company turned to discounts to try and get people in the door. In the fourth quarter of 2021, for instance, 19% of big Burger King franchisee Carrols’ sales were discounted, even though U.S. consumers were flush with cash and not shopping for discounts.
The company has, to its credit, calmed its discounting down in the year-plus since then. But the franchisor did considerable damage with Burger King’s average-unit profitability, despite those earlier vows to focus on that all-important metric. In addition, it trained customers to use discounts, which is also problematic.
Burger King is taking steps in the right direction. It hired an operations-focused executive to lead the chain in Tom Curtis. The company and its executives have substantial incentives tied to franchisee profitability in the coming years.
But Burger King has made commitments and promises on profitability before. The company still has a lot of older locations in weaker markets that likely need to be closed or completely rebuilt. This is a comeback, in other words, that has a long way to go.