News flash: Restaurants generate better profits when they don’t discount their products.
That is the lesson from Carrols Restaurant Group, the Syracuse, N.Y.-based company that operates more than 1,000 Burger King restaurants, or about one out of seven restaurants in the fast-food chain. Carrols on Tuesday said its adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, rose 80% in the fourth quarter.
The company also generated $14.5 million in free cash flow, the most Carrols has generated in a single quarter in two years. That’s an important consideration for the company, one of the largest restaurant franchisees in the nation but one that has struggled with profitability and cash flow since before the pandemic.
A huge reason? The percentage of sales Carrols is getting on discounts is down by more than a quarter over the last year. While Burger King remains focused on value, the franchisee’s discount percentage was 14% of sales in the fourth quarter, down 500 basis points from the same period a year earlier.
“They were clearly a huge discounter during COVID and before,” Interim CEO Anthony Hull told investors on Tuesday, according to a transcript on the financial services site Sentieo. “The fact they’ve gotten that down 500 basis points in the fourth quarter is tremendous for our bottom line.”
Hull was named interim CEO in early January after the unexpected death of former CEO Paulo Pena on New Year’s Eve. He took over the franchise working its way from a difficult 2022, in which soaring costs for food and labor, a heavy debt load and Burger King’s weak sales going back years threatened the company’s finances and forced it to shift focus from acquisitions to improving profit margins. Carrols was one of the Burger King operators whose bond ratings were downgraded last year amid those challenges.
Its size means it’s an important indicator of Burger King’s overall performance. Carrols’ improvement could be a sign of broader improvement in the Burger King system.
One of the challenges that beset Carrols and other franchisees in the brand was Burger King’s traditional reliance on discounting to get customers in the door. The brand had traditionally been among the most aggressive discounters in the fast-food space.
But the brand started moving away from that strategy early last year, taking items like the Whopper off its discount menu and reducing some of its reliance on coupons.
With fewer discounts and a 9.6% increase in prices, average check rose 13.3%. Traffic, meanwhile, declined 6.2%.
Fewer discounts also means that the company generates a higher profit on its sales. That’s an important consideration, given that commodity prices were up 12% in the quarter.
Hull told investors that the company is getting the same benefits into January and February. Sales are up so far this year, he said, suggesting that same-store sales could be up in the “high end” of the mid-single-digits during the period. “We’re still very focused on affordable value for our guests,” Hull said. “We’ve just taken away some of the pricing. We just increased our gross margin on some of the items.”
Hull also suggested that Burger King’s $400 million revitalization initiative, called “Reclaim the Flame,” is having an impact.
Hull suggested that Burger King’s marketing appears to be working. He said the company has seen a “great reception in our restaurants” to the company’s “You Rule” marketing campaign and noted that its “Whopper Whopper” jingle has gone viral.
And he noted that the strategy will also enable Carrols to upgrade digital technology at many of its locations for free, so long as it keeps up with regular maintenance. “We are optimistic about what we’ve seen and the positive impact of Reclaim the Flame on our traffic as we move through the year,” Hull said.
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