Late last week, Burger King announced a $400 million investment behind marketing, technology and remodels in a broad-based revitalization plan that’s among the most aggressive we’ve seen. As we noted earlier, there are plenty of reasons the brand needs to take this step.
Within this strategy, however, is a shift in the company’s remodel incentives. Rather than give royalty breaks to operators who agree to remodel their restaurants, the company is giving more up-front cash.
“Most of these incentive structures, when you remodel a restaurant, you give them a royalty discount over three, five, seven years,” Tom Curtis, president of Burger King North America, said in an interview. “We provide the up-front capital alongside them to make sure the remodel is done in the best way possible.”
And franchisees can choose to get more up-front cash in exchange for higher royalty payments. In effect, the company would help finance their remodels.
Burger King is also targeting better operators with more assistance. “It’s focused on higher incentives for franchisees who operate well and treat guests well,” Curtis said. The company uses various metrics to measure operations, including order accuracy, speed of service and friendliness.
Burger King is pumping $250 million of that $400 million into remodels. For the company, generating more sales growth is vital. The brand in the U.S. has fallen behind several other fast-food chains in recent years. Its sales did not grow through the pandemic, as McDonald's and Wendy’s both did. Wendy’s, Taco Bell and Chick-fil-A all surpassed the brand’s U.S. system sales in recent years.
Remodels are important parts of any restaurant chain’s revitalization plan. Consumers generally tend to prefer dining inside nice-looking restaurants, even if they’re not actually dining inside them. So they typically generate sales growth.
What’s more, changes and additions in technology have shifted how restaurants can, or should, operate. And brands that are slow to remodel can struggle to take full advantage of these changes when they might make the most difference.
This is a particular issue with Burger King, which has a number of locations in substandard markets and many that simply need sprucing up.
The problem in a franchise, however, is getting operators to remodel locations. Burger King’s weak sales in recent years have made it more difficult for franchisees to be able to fund remodels. That makes the up-front cash more important.
But the company also wants to improve the quality of remodels, which could result in stronger sales, particularly from its earliest projects. “We’re not necessarily focused on speed but quality,” said Jose Cil, CEO of Burger King parent company Restaurant Brands International.
Generally, remodeling a restaurant generates stronger sales. At Burger King, a remodeled restaurant generates 12% higher sales growth than an unremodeled restaurant, and 2% in additional same-store sales going forward.
But the brand believes it can improve those numbers with better remodels in the first place. The company can help the franchisee determine which projects could generate the highest sales lift, and whether they need a full scrape-and-rebuild or a smaller level of remodel.
“A lot of it is the way we’re going about the remodel strategy,” Cil said. “We help the franchisee pick the right scope and the right projects which have the highest” return on investment. That way, the company can select the higher-return projects first, he said.
It remains to be seen whether Burger King’s fix-it plan will work, but RBI’s history is generally good on this subject. It fixed Burger King after 3G Capital bought the brand in 2010. It then fixed Tim Hortons after its sales struggled in recent years.