Meridian Restaurants, a Utah-based operator of 116 Burger King restaurants, filed for bankruptcy earlier this year, closed 23 locations and hinted it may have to close others. A group of creditors then warned the company was in danger of running out of cash and pushed for a quick sale. Its franchisor agreed and all but demanded that it be sold in pieces.
Then a funny thing happened. The restaurants’ performance began to improve. Sales have increased more than expected. Labor costs have come down. And EBITDA—or earnings before interest, taxes, depreciation and amortization—was up 18.4% through April when compared with the same period a year before, according to bankruptcy court filings. Far from running out of cash, it seems, the restaurants were generating more of it.
That performance may be indicative of the Burger King system this year. The brand struggled coming out of the pandemic, enough so that two major franchisees declared bankruptcy, others faced bond downgrades and many of them closed locations.
Yet, with new management and a $400 million injection from parent company Restaurant Brands International—along with easing inflation—it appears things are beginning to turn around. Sales are up. Profits, too. And operators themselves appear more confident.
“What we have now is a lot of cautious optimism,” Tom Curtis, president of Burger King U.S. and Canada, said on an episode of my podcast, “A Deeper Dive.” “There is a lot of enthusiasm.”
There’s a reason for the caution along with the optimism. Burger King has been here before. Many times. Few big brands have had the number of struggles, management changes and revitalization plans over the years as Burger King. And each time, it seems, it falls back into the same old trap and starts over.
The key, both for the brand and for Curtis, is to make this time different. Here’s how the company plans to do that.
A (very) brief history of Burger King
To understand just how much work Burger King must do, it’s important to understand how the brand got to this position.
Burger King was founded in 1953 in Jacksonville, Fla., and by the late 1990s, it would grow to become the world’s second-largest restaurant chain. But its history is loaded with reorganizations, sale processes and management changes. One CEO would come in, fix things and immediately leave because the brand was sold.
As a result, it had fallen behind larger rival McDonald’s on nearly every key metric and had long lost its status as the world’s second-largest brand.
Its modern era dates to 2010, when the company was sold to the Brazilian private-equity firm 3G Capital. At the time, some major franchisees of the chain were in bankruptcy. There were multiple lawsuits against the brand, notably one over a $1 Double Cheeseburger promotion. Burger King’s average-unit volume was about $1.2 million at the time, which was no different than it was a decade earlier. McDonald’s, by comparison, had AUVs of more than $2 million.
3G wasn’t interested in Burger King U.S. so much as it was interested in Burger King International, and in the years since then, the brand has thrived globally. But it also brought some stability to ownership and to management in the U.S. It dismissed the lawsuits, helped operators remodel units and focused on a marketing voice that took advantage of its “challenger” status in the burger battle with McDonald’s to gain attention.
And it worked for several years. Between 2012 and 2019, for instance, Burger King’s quarterly same-store sales averaged a 2.2% increase, compared with 1.9% for McDonald’s.
But that also hid some flaws. The same-store sales increases made Wall Street happy, but they barely kept pace with inflation, and Burger King started with lower unit volumes.
The brand also started relying on discounts as a marketing tactic heading into the pandemic. Discounting is a drug. Once a company latches onto that, it can be difficult to break away from because diners grow accustomed to getting their food cheaply. And Burger King was not just discounting items engineered for a lower price point. It was discounting its signature sandwich, the Whopper, offering it up as part of a 2-for-$5 promotion.
The result hit operator profits. In 2019, EBITDA margin at Carrols Restaurant Group, the 1,000-unit Burger King operator, declined 244 basis points, largely due to what executives said was an elevated rate of discounting.
What’s more, Burger King’s operators were often large and loaded with debt. They were spending money on new restaurants and remodels, which sapped a lot of profits. By the end of 2019, as a result, Carrols—which operates one out of every seven Burger King restaurants in the U.S.—ceased an endless string of acquisitions and slowed remodels in a bid to improve cash flow.
The Ch’King debacle
Burger King’s marketing challenges were accentuated with the now-infamous Ch’King. In 2019, its sister company Popeyes ignited the chicken sandwich craze. And in 2021, literally dozens of other fast-food chains were scrambling to get on board, most prominently McDonald’s, with its Crispy Chicken Sandwich, and then KFC, with its own version.
Burger King opted to join later with a version it promised would be even better. The Ch’King, its oddly-named entry, was arguably one of the best of the bunch. It performed well in tests and was introduced at the chain’s U.S. restaurants steadily over the spring and summer of 2021.
It was an abject disaster. While same-store sales earlier that year accelerated by 6% at McDonald’s following the introduction of its chicken sandwich, and 9% at KFC, they slowed by 3% at Burger King.
“They spent a fortune on the chicken sandwich, and it just didn’t do what it was supposed to do,” former Carrols CEO Dan Accordino told investors in early 2022. “The Ch’King didn’t generate the excitement that was hoped for.”
That’s a problem. Because the sandwich was more difficult to make and Burger King wasn’t fully prepared to make it.
“Oh my goodness, it was such a fantastic product when made right and done right,” Curtis said. “The trick was there was 21 steps in preparation.”
As such, restaurants would pre-make the hand-breaded chicken filets. “Somebody would pull up to the window and order a Ch’King,” Curtis said. “And you know, everybody would kind of look around and say, ‘Oof, we just kind of ran out, we’ve got to make one really quick.’ But really quick could be 19 minutes.”
The failure of the Ch’King would have a devastating impact on Burger King’s sales. Since the start of 2020, McDonald’s has averaged 7.3% same-store sales. At Burger King? Less than 1%. The sales weakness came at precisely the wrong time. Inflation would hammer the industry in late 2021 and through 2022.
And those unit volumes? The typical Burger King does less than $1.5 million a year, or more than $2 million less than an average McDonald’s.
Recriminations would come quickly. Fernando Machado, who had won marketing awards with RBI, left the company. By that July, former Burger King head Chris Finazzo was out.
He was replaced by Curtis, the brand’s chief operating officer, who only a few months earlier was lured to Burger King from Domino’s, where he had spent most of his career and most recently was EVP of U.S. operations.
Curtis’s hiring as COO, and then his elevation to the top job, was indicative of a belief at Burger King's parent company that operations needed fixing. “The overall experience in the restaurant needs to get better,” former RBI CEO Jose Cil told me shortly after Curtis’s hiring. But Cil himself would be out the following year.
The Ch'King proved difficult for operators to make, which hurt the product's sales. | Photo courtesy of Burger King.
Reclaim the Flame
Weak sales and rising costs of food and labor would take their toll on Burger King in 2022. Average store EBITDA that year was $140,000—a tiny amount for a fast-food restaurant with a drive-thru. One or two new pieces of equipment that year can wipe out all of that, one operator from a rival fast-food chain told me.
That EBITDA was also down from $170,000 in 2018. We know that because in 2019 parent company RBI vowed to publish store-level EBITDA for its chains as part of a broad effort to focus on franchisee profitability. The numbers were not published again until this year, when they were revealed by Patrick Doyle, the former Domino’s CEO lured with a nine-figure incentive to become RBI’s executive chairman.
Franchisees began having real problems. By the end of last year, several large Burger King franchisees had their bonds downgraded, including Carrols and GPS Hospitality, run by the former Arby’s CEO Tom Garrett. Earlier this year, Toms King, a large franchisee with restaurants in several states out East, filed for bankruptcy. Then Meridian declared its bankruptcy. And its operator in Michigan shut down 26 restaurants in that state.
The company itself was warning about further store closures and challenges. “It’s … clear that we have operators who are struggling, and we’re actively working to help them improve or transition their portfolios to more engaged, operationally strong franchisees,” RBI CEO Josh Kobza said in February.
But bankruptcies and bond downgrades are often lagging indicators of performance. And to Curtis, the turnaround had already begun.
“The awareness of these things lags,” Curtis said. The same is true for the brand’s recovery.
That, he said, started a year ago, when the brand and its franchisees got together to develop a plan to right the ship. “We knew that we needed to do something bold, something ambitious,” Curtis said. “We wanted to for the business’ sake, because we love Burger King and what it’s built on. But we also knew that the P&L needed to improve, not only if we wanted to see this brand grow, but if we wanted to see some of these franchisees survive.”
The result was what Curtis called “six to eight months of hand-to-hand, day-to-day work with our franchisees” that ultimately led to what is called “Reclaim the Flame,” a $400 million investment in marketing and remodels by Burger King and RBI.
The plan includes $150 million in digital and marketing, and $250 million in technology equipment, remodels, relocations and building enhancements. Among the most notable feature: Franchisees agreed to increase their ad fund contribution by 50 basis points so long as stores meet certain profitability thresholds.
There is also an operations element: Remodel assistance will be directed first to the best operators and the stores that could use the help the most. Rather than provide the assistance via breaks on royalties or other forms, the $200 million in remodel assistance includes up-front cash. That’s important given rising interest rates.
Operations and marketing improvement
Burger King has spent much of the past two years simplifying the menu, in part to improve operations. The Ch’King was replaced with a new line of Royal Crispy Chicken sandwiches that are easier to create. “I would challenge you … to go put it toe to toe with some of our competitors,” Curtis said. “It’s an amazing sandwich.”
With a simplified menu, the brand also focused on speed and operations inside the restaurants. And it shifted away from its focus on discounts. The Whopper was removed from its 2-for-$5 menu, for instance.
The improved operations was important, Curtis said, because if the company was going to get customers in the door, it needed improved speed and service to keep them there. By last year, Burger King began making that marketing investment.
In October, the company released an ad campaign designed to hearken back to its heyday of the 1970s and 1980s, when its customized, “Have It Your Way” slogan made it a solid competitor in the fast-food business. The brand introduced a new “You Rule” tagline and its “Whopper Whopper” jingle proved to be a hit on social media.
“It had to hit,” Curtis said. “The additional firepower that we brought to bear in marketing really helped lift us. I think it resonated well. It wasn’t a gimmick, and it wasn’t something that we did as a promotion for one quarter. It’s something that’s going to span years and years.”
The results have been there. Same-store sales have trended upward, from a decline of 0.5% in the first quarter of 2022 to an 8.7% increase in the first quarter this year. Profitability improved 40% in the fourth quarter of last year. Carrols in May said it had its most profitable first quarter in five years, driven by a combination of better sales and fewer discounts.
The company’s stock is up 260% so far in 2022, one of the best performing stocks in the industry. And then there’s Meridian, whose sales and profits have improved so far this year despite the company’s bankruptcy filing.
Franchise changes
But one quarter does not a turnaround make. It’s worth noting that the 8.7% same-store sales growth barely kept with menu price inflation in the first quarter. It was also nearly 400 basis points lower than McDonald’s—and 800 basis points lower on a two-year basis.
And that first quarter was still below average among major fast-food burger chains. Indeed, Burger King’s same-store sales have performed worse than average among the four largest quick-service restaurants for all but one of the past 17 quarters.
Burger King will need to erase that gap and then some to make ground on its competitors. And then it will need to maintain that momentum over time. The remodels, plus some relocations of restaurants in weaker areas, could help.
Maintaining franchisee profitability will also be important. The company is not only hoping franchisee profitability leads to greater marketing spend, it is tying executive incentives to that metric. “We’ve got clear plans to grow franchisee profitability,” Kobza said in an interview earlier this year.
Another key change is the structure of the franchisees themselves.
The company will only allow the strongest operators, those rated “A” or “B,” to expand. And it is favoring sales of restaurants to smaller operators with 50 or fewer units. Burger King wants those operators to be close to their stores, rather than operate across geographies. “In an ideal world, I’d like it if they can drive to all their restaurants,” Kobza said.
That might be an issue for the 1,000-unit Carrols or the Dhanani Group, the country’s second-largest franchisee, according to the publication Franchise Times. Burger King has long allowed franchisees to amass large numbers of locations. The shift in focus is a major change.
As if to confirm that, the company has told the bankrupt Meridian that it wants the company sold in pieces. Meridian operates restaurants in several western states, including Utah, Montana, Kansas, Nebraska, Minnesota, Arizona, Wyoming and North Dakota. That follows a sale of Toms King to three different operators, again based on geography.
“We now have the right aspiration,” Curtis said. “Operators who know their team members, operators who are ingrained in their communities, are the right aspiration.” But, he added, the company isn’t exactly dismissing large operators. “Some of our absolute best operators have 100 or 200 restaurants,” Curtis said. “And if they’re capable of producing the outcomes that we’re looking for, then we don’t need to mess with their portfolio size or where they operate because there’s not a problem to fix.”
It remains to be seen whether this turnaround takes. But the company and its management team are certainly making an effort, investing $400 million in marketing and remodels, plus at least $100 million more to bring a guy like Patrick Doyle into the fold. If this turnaround effort doesn’t work, perhaps none of them will.