Burger King franchisees operated with too much risk, which when coupled with the “black swan” event in the pandemic proved to be too much to overcome.
That, at least, is according to Patrick Doyle, the chairman of the chain’s parent company Restaurant Brands International, speaking at the Restaurant Finance and Development Conference (RFDC).
The event came days after news was revealed that a third Burger King operator filed for bankruptcy this year, while many others have closed restaurants. “That’s a bad thing,” Doyle said, in an interview with John Hamburger, president of RFDC’s parent company Franchise Times Corp. “For those who lent money to those businesses, I’m sorry. That’s certainly not the outcome that we want.”
Burger King’s problems in the U.S., where the chain operates just less than 7,000 restaurants, helped lead to Doyle’s arrival at RBI. The former CEO of Domino’s was named executive chairman a year ago and invested $30 million of the company’s stock. But he has options worth much more than that if he can get the brand right.
A former banker, Doyle said he learned that “great businesses are built with risk, and if you have zero risks, then you’re not generating great returns, you’re buying bonds or buying treasuries.”
“You need risk,” he said. “That’s how you create value.”
But Burger King had too much risk, he said. “We had too many risks at one time,” Doyle said.
Doyle said there are three types of risks—fundamental business risks, financial risks and structural or external risks.
Before the pandemic, Doyle said, Burger King was “not operating at the level it needed to be operating at. A lot of people were going after it. There were operators who were doing well. Some were struggling more,” he said.
Many operators also had financial risk. Many franchisees had leverage of five to six times cash flow, Doyle said. “Probably too much,” he said.
The pandemic, then, proved to be a “black swan event” that added one more large structural risk on top of all that.
“We got in trouble,” Doyle said.
Burger King then invested $400 million into the brand, which Doyle said was one of the largest investments a brand made into its system in the industry’s history. The “Reclaim the Flame” program features investments in marketing and remodels.
That, coupled with improvements in operations, have helped lead to improvements in sales and profitability. Executives have indicated that franchisee profitability is up in the double digits this year. Margins at Carrols Restaurant Group, the chain’s largest franchisee, have soared this year, for instance.
“We are very much on the right path,” Doyle said. “What I will tell you as a franchisee, as a potential franchisee, as a lender, as a potential investor, there is not going to be any franchisor that is more focused on your success than we are. It doesn’t mean we’re all going to get it right. But we wake up in the morning and we want our franchisees to be successful.”
Doyle noted one problem the chain doesn’t have is with the food. “Our food quality is really great when we execute it really well,” he said.
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