Financing

Burger King keeps closing weaker restaurants

The burger chain is intent on “cleaning” its asset base, closing weaker stores and remodeling others in a key part of its comeback plan.
Burger King
Closing weaker locations can give Burger King a stronger foundation on which to build its comeback. | Photo: Shutterstock.

Burger King has touted early results in its U.S. comeback plan this year, including same-store sales of 6.6% in the third quarter and flat traffic that outperformed its rivals starting in mid-August. Franchisee profitability is up in the “double digits.”

Yet it continues to close stores. Unit count at the burger chain in the has declined 2.8% over the past year, a reduction of nearly 200 restaurants that give the brand 6,864 location in its home market. And executives warned of further closures and bad debt expense this year.

Matt Dunnigan, CFO of parent company Restaurant Brands International (RBI), said that he expects $10 million in bad debt expense this quarter, mostly from Burger King U.S. He said the company has been working with operators “to transition restaurant portfolios into the hands of strong local operators.”

The company has also focused on the “most distressed situations, closing unviable restaurants and cleaning up a number of portfolios,” Dunnigan said. “We expect to largely finalize the remainder of those workouts and closures by the end of the year, resulting in elevated bad debt for Q4.”

But company executives, which have been warning about elevated closures all year, believe this is a necessary step in the chain’s comeback. By closing bad locations, the chain and its operators can focus on improving the stores that have more profit potential.

Burger King has been undergoing a massive overhaul for the past year, since the company announced plans to invest $400 million into marketing and remodels, called the “Reclaim the Flame” plan, and then lured former Domino’s CEO Patrick Doyle out of retirement to become RBI’s executive chairman.

While the brand has improved over the course of the year, and now has six straight quarters of same-store sales growth, it has still encountered a skeptical investor and analyst community concerned about the performance of its biggest brand in its largest market. Indeed, Burger King’s sales underperformed based on expectations and couldn’t match rival McDonald’s 8.1% comp gain, even with better traffic. RBI’s stock finished Friday flat for the day.

Yet executives touted the early performance of its comeback effort. “We’re one year into the Reclaim the Flame plan and have, frankly, made more progress improving franchisee profitability and traffic in this one year than originally expected,” Doyle said.

The effort has involved a number of elements, including spending on technology and marketing. The company has only spent $33 million of $150 million planned for additional marketing slated to be spent by the end of next year—leaving the company with nearly $120 million left to spend in just over a year.

Burger King has also focused on improved operations.  “It usually gets less attention, but I think it’s perhaps one of the most important [components],” RBI CEO Josh Kobza said. Burger King North America President Tom Curtis “has brought an incredible focus on the quality of operations and guest experience, everything from product quality and temperature to hours of operations and speed of service.”

While operations are important, store base is, too. One of the more underrated elements of a brand’s overall performance is the location of its restaurants. Brands with too many locations in weaker trade areas or with weaker franchisees will do worse than those that do not have those issues. And revitalization plans often begin by closing large swaths of those locations.

Burger King has traditionally had a lot of restaurants in weaker areas and it has had an asset base in need of revitalization for well over a decade, if not longer. By closing underperforming stores, executives believe they will have a better foundation on which to build their comeback, “to support a more modern system increasingly run by better operators,” Kobza said.

But remodels are also important. “We definitely need to get to a more modern asset base,” he added. “Every Burger King you see across the U.S. needs to be modern, convenient and competitive across the country.”

Executives said much of the early remodels have been full remodels, which they say proves that operators are on board with the comeback plan. But it also drains more of the $200 million slated to be spent on those remodels, meaning they’ll go to fewer, more extensive projects that tend to have higher sales lifts.

“We’re seeing good results initially from the remodels,” Kobza said. “So those uplifts are above where we expected. And that means the returns are starting to work.”

Executives also mentioned the improved franchisee profitability, which they believe will spur more investment into the brand and therefore more overall performance.

“We aren’t taking a victory lap by any means,” Doyle said. “Getting the brand to where we know it can and should be will not happen overnight. This is a multi-year journey.”

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