One of the best stories in the restaurant industry this year has been the improvement of Burger King.
The company’s same-store sales have outpaced its competitors by some 900 basis points. One of those competitors, McDonald’s, just overhauled its U.S. leadership. Another, Wendy’s, just changed CEOs. So did a third, Jack in the Box.
Burger King executives will tell you they’re not close to finished. The brand’s president, Tom Curtis, has said it’s around 20% complete. But the performance this year has been a long time coming.
The company started an operations improvement effort with the hiring of Curtis in 2021. That same year, Burger King introduced its $400 million “Reclaim the Flame” investment, which provided funds for remodels, typically tied to operations performance. Burger King went on to buy its biggest franchisee, Carrols Restaurant Group, for $1 billion. It also added more funds to its revitalization program, and spent funds to remodel Carrols locations, bringing the total investment to around $2 billion.
Parent company Restaurant Brands International, which also lured Patrick Doyle out of retirement to be the executive chairman, deserves a ton of credit. That’s because few companies would undertake the level of investment and patience.
Take, for instance, Yum Brands. The company just unloaded Pizza Hut, which like Burger King had struggled for years and fell behind competitors. Rather than invest in the brand’s comeback, Yum unloaded the pizza chain in two separate deals for $2.7 billion in total. That is a relative pittance for a brand with more than 19,000 global locations, a well-known brand name, and a delivery network.
“We do believe some bold moves need to be made,” Yum CEO Chris Turner said on a Yahoo Finance podcast earlier this year. “There’s likely going to need to be investment in the brand. There may need to be some ownership of stores. So there’s a lot of work to be done.
“Now, some of those things are things that Yum typically does not do.”
The hope, of course, is that Pizza Hut’s new owner, LongRange Capital, does have the kind of wherewithal that could turn the brand around. But it’s also worth noting that investment firms that make big acquisitions typically have limits on the amount they’re willing to spend to turn those investments around.
Their task is not easy. Fixing franchised brands is difficult, at best, and once companies start struggling it can be a monumental effort to turn them around.
When franchised brands start struggling, operators cut costs, which hurts service, which turns off customers, which forces cost cuts. If this keeps happening, and franchisees keep losing money and closing stores, it builds distrust in the franchisee base and just makes everything that much more difficult for franchisors.
Subway, which is in the midst of a long-term decline, recently noted that 30% of its franchisees did not comply with a springtime Moana Meal promotion, even though it was a full-price offer.
Investments into these brands, including some corporate store ownership, is crucial to help devise strategies for a turnaround, speeding necessary remodels, and earning some faith from the franchisee base.
But money is one thing. Patience is another. When brands make these kinds of investments, they typically prefer seeing a quick return. But long-term brand struggles require more long-term views. Most investors do not have the kind of financial wherewithal and patience to take the kinds of steps necessary to fix a franchise brand.