A discounting mistake cost a big Burger King operator $8M last quarter

Carrols Restaurant Group accidentally gave customers a bigger discount than they expected, hurting the operator’s sales and profits.
Photograph by Jonathan Maze

Customers at hundreds of Burger King locations got a bigger discount than they expected over the summer.

Carrols Restaurant Group, Burger King’s largest operator with more than 1,000 locations, on Thursday said that it gave out too many discounts on Whoppers over the summer, costing the company $8.3 million in sales.

Specifically, Burger King combined two Whopper discounts. That mistake on its own reduced the chain’s same-store sales by 290 basis points, or nearly 3%, casting a shadow over what had been a strong quarter.

“It was not an accounting issue. It was not a systems issue. It was a mistake,” CEO Dan Accordino said on the company’s third quarter earnings call Thursday, according to a transcript on financial services site Sentieo. “We screwed up, and it cost us a fair amount of money.”

Carrols discovered the mistake in late August, during a quarter in which its same-store sales rose 4.5%, or 50 basis points lower than Burger King’s overall comps growth of 5%. That’s unusual for Carrols, which traditionally outperforms the broader brand, and it led the company to investigate.

In researching the issue, Carrols discovered what it called a “convoluted” mistake that gave customers an additional discount on value meal orders.

Burger King was offering a value meal discount over the summer, with Whopper Jr. or Whopper value meals available for $4, $5 or $6. The company then tried to get customers to trade up, but in so doing gave the customers additional discounts.

Without the impact of that mistake, the company’s same-store sales would have risen 7.4%, thanks largely to the success of the plant-based Impossible Whopper, introduced in late August. And the added discounts didn’t generate any additional traffic.

“We spent a lot of time dealing with this convoluted mistake,” Accordino said. “The fact of the matter is, it was a mistake. We screwed up. The underlying business is stronger than what our numbers reflect.” He called it a “one-time error.”

Still, investors punished the company. Carrols’ stock fell 8%.

The mistake was significant not just for Carrols but also for the Burger King brand as a whole. Carrols operates about 14% of Burger King’s more than 7,300 U.S. locations, meaning that the chain’s same-store sales likely would have been 40 basis points higher.

The mistake lasted from early June through late August, and cost Carrols profits.

Adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, were reduced $7.3 million. The company reported a net loss of $6.8 million, or 15 cents per share, down from net income of $3.6 million in the same period a year ago.

The discount wasn’t the only thing to hurt Carrols’ profits. The company said that its restaurant-level profitability was hurt by a 10.7% increase in the company’s beef costs, along with higher wage rates. Carrols also said its restaurant-level margins were hurt from the recent acquisition of new restaurants—the company has had to train staff as part of the integration.

Carrols acquired 221 restaurants in February from Cambridge Franchise Holdings, including 55 Popeyes Louisiana Kitchen locations and 166 Burger King units.

“I’m still very optimistic about Cambridge,” said Timothy LaLonde, Carrols’ interim CFO, on Thursday. “We knew that the operating metrics were not strong and that we had a real opportunity to improve the operations, and when you improve the operations, the sales also will be strong.”

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