Burger King’s sales have taken a hit in recent quarters, despite a consumer environment that should have provided a tailwind.
Unsurprisingly, this has taken a bite out of operator profits. “It will come as little surprise that inflationary pressures coupled with near-term sales headwinds have had an impact on franchisee profitability,” Tom Curtis, president of Burger King North America, told analysts earlier this month.
That will put the onus on Curtis, who took over his position last year, to reverse those trends. “Franchisee profitability is going to be a big key to our long-term success,” Curtis said.
Burger King has a long way to go. The company’s same-store sales have fallen well behind that of its competitors in recent quarters.
While the burger chain’s same-store sales rose 1.8% in the fourth quarter, they were still down 1.1% on a two-year stacked basis. By comparison, rival McDonald’s sales were up 13% on a two-year basis—a gap of 14.1%.
In the third quarter, Burger King’s two-year same-store sales were 16.7 percentage points lower than the average of its three biggest competitors, including both Jack in the Box and Wendy’s in addition to McDonald’s. That gap had been widening for the past couple of years.
“The brand has been a little sideways since late 2018,” Dan Accordino, the outgoing CEO of Burger King’s largest franchisee, Carrols Restaurant Group, told investors at the ICR Conference in January.
That kind of gap has consequences, especially when costs take off, as they did last year. Wage rates are up 10%. Restaurants’ overall food basket has also soared, particularly costs for proteins like beef and chicken. Weak sales and high costs are a recipe for profit disaster.
“As we came out of 2020, we had very strong profitability despite a difficult time, and that really speaks to the resilience of the business model,” Curtis said. “But that said, we worked through a lot of headwinds last year and saw an overall decline in profitability in 2021.”
Franchisee profitability is a foundational element in any franchise, whether it’s a brand-new protein bowl franchise or a legacy concept like Burger King. Simply put, no franchise can survive over the long term if operators can’t make profits.
That profitability is also key in any turnaround effort. For instance, only 30% of Burger King’s restaurants are remodeled under its “Burger King of Tomorrow” image. Remodels generally drive sales higher. But unprofitable operators have a tougher time borrowing the funds required to pay for such remodels.
Many of Burger King’s operational improvements can help profitability in the long run, notably cuts to the menu that will reduce waste and cut back on the number of products operators have to purchase.
The company has taken other steps, too, Curtis said that it lifted some price caps on some items late last year. It also removed the Whopper from its 2-for-$6 discount. “We’ll look for opportunity for some incremental discounting there in the future,” Curtis said, “but it won’t be every single day.”
The company has been sharing some best practices with the system, implementing many ideas at other stores. Burger King also hopes that technology and other strategies can help improve labor efficiency over time, which can help in the long term.
Curtis said the brand saw some progress on its profitability efforts, and that franchisee profits were flat in the fourth quarter when compared with the third.
Still, the best long-term strategy for the chain remains the top line. Burger King’s biggest problem remains that gap in sales with its primary competitors. Increase sales, reduce that gap, and profitability will soon follow.