Burger King Ribs Sales Success Lifts Margins – and Stock (BKC, MCD)

   

Burger King Holdings (BKC) launched a bit of an unexpected campaign this summer with offerings barbecue pork ribs. With a price tag north of $7 for eight pieces of the ribs, the product is an oddity in an era when most restaurants are racing to offer up bargains for cash-strapped consumers. Well it turns out Burger King’s rib deal may wind down sooner than expected – but perhaps not for the reason you think. Demand was so strong for the tasty barbecue items that BK has just sold its 10 millionth rib and expects to exhaust its supply.

This is great news for Burger King and its shareholders, and could be a further sign of a moment towards a “new upscale” in fast food where higher-priced, higher-margin items compliment traditional offerings of cheap burgers and fries.

According to John Schaufelberger, Burger King’s senior vice president of global product marketing and innovation, “This validates the fact that value can come in many forms.” Schaufelberger points to other premium items with a more reasonable price – such as Burger King’s burger value meals that cost over $6 – nearly on par with a burger from a full-service restaurant with waitstaff. Burger King brunch sales are also in the works, with test markets offering mimosas and cibata breakfast sandwiches.

The ribs success story may go a long way towards helping BKC stock. BK franchisees recently sued parent company Burger King Holdings because they thought demands of a $1 double cheeseburger squeezed them to the point of selling the sandwich at cost. Having a premium item with a fat margin to offset cheaper value menu items could be just the thing to keep store owners – and shareholders – happy. BKC stock is down about 9% in the last month in part to the May swoon but also due to slumping May same store sales and a lack of profits.

The move towards ribs and other premium items at BK a fascinating business strategy at a time when conventional wisdom says that consumers are spending less eating out and looking to pinch their pennies. The idea is simple – offer a premium product for a reasonable price. In other words, help consumers save some cash without making them feel like they are sacrificing quality.

Of course, the idea also has roots at competitors like McDonald’s (MCD) and its McCafe line of coffees. According to company estimates, the average Mickey D’s location saw about a 15% jump in revenue after adding a McCafe and its line of premium coffees. Though a less pricey then coffee from rivals like Starbucks (SBUX), McDonald’s drinks aren’t exactly a steal. Lattes, mochas and cappuccinos can still cost upwards of $3 a cup for a large size.

Still, the big sticker price wasn’t a deterrent and the upscale coffee line is widely credited for the recent sales surge at the Golden Arches.

While value offerings and the dollar menu may be the biggest draw for some folks, fast food restaurants will continue to offer upscale offerings like ribs and coffee for two reasons: First of all, consumers seem hungry for these items and it can help companies like BK and McDonald’s tap into new customers. Secondly, these premium items often come with a much bigger margin. If you’re only making a few pennies of profit on a $1 cheeseburger but a few dollars of profits on ribs, you only have to increase sales slightly on the premium side to see a big payoff in the bottom line.

As of this writing, Jeff Reeves did not own a position in any of the stocks mentioned here.


Article printed from InvestorPlace Media, http://investorplace.com/2010/06/burger-king-ribs-bkc-stock-mcdonalds-mcd-mccafe-sales-starbucks-sbux/.

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