Burger King to Remodel Franchises

by Jeff Reeves | October 13, 2010 3:57 pm

Burger King to Remodel Franchises

Burger King’s (NYSE: BKC[1]) chefs have been busy. First came a move towards premium coffee, when the BK partnered with Starbucks[2]. Then came an overhaul of the Burger King breakfast menu[3].

Now, fresh off a buyout by private equity firm 3G capital, Burger King is ready to go beyond baby steps and look at the big picture: A wholesale overhaul of its image by redesigning the restaurants themselves.

When 3G made its move in September for a cool $3.3 billion, the investors probably had a number of ways to cut costs and boost revenue through better management and a better capital structure. But clearly they had aims on super-sizing sales via more attractive storefronts that reconnect with consumers and breathe new life into the burger chain.

The new look is called “20/20,” and despite the recent buyout isn’t a new concept. The redesign debuted two years ago – but so far, only a mere 30 U.S. restaurants have been outfitted with the chrome and brick, LCD menu screens, and flame-shaped light fixtures that are part of the scheme. 20/20 also dumps the purple from the color scheme to favor red and black.

Burger King’s CEO told Bloomberg last month[4] that 85% of the 7,200-plus franchise locations in the U.S. need a facelift. The price tag for such a move is about half a million bucks per store – not chump change for a restaurant that continues to see same-store sales erode, but a necessary expense in the eyes of management. Execs aren’t pulling any punches on the dated look of BK stores, with the president of Burger King’s North American business saying bluntly, “The image is 20 years old.”

But it’s going to be a hard sell to force the urgency of large scale renovations on individual store owners who haven’t had a very good run lately. Most recently, Burger King’s fiscal fourth quarter and full year earnings dropped -16% and -8% respectively from the prior periods.

The solution may be for 3G Capital to pony up some of the cash to spruce up the shops. For instance, according to Businessweek, McDonald’s (NYSE: MCD[5]) fuels renovations by matching 40% of funds put up by its franchisees, on average. Currently, Burger King franchisees are wholly responsible for renovation costs – and must remodel their stores every 10 years to Burger King’s specifications.

There are already tensions between franchisees and management over “unfunded mandates.” Earlier this year, Burger King owners sued corporate[6] over the promotion of a $1 double cheeseburger that squeezed margins so thin many restaurants said they were losing money selling the sandwich.

3G will have to tread lightly with its plans for a nationwide Burger King rebranding, even if the plan is good for the brand in the long run. The bottom line is always the bottom line, and many owners may not have the cash to update their stores no matter how badly a facelift is needed.

Jeff Reeves is editor of InvestorPlace.com. Follow him at https://twitter.com/JeffReevesIP.

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Endnotes:
  1. BKC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKC
  2. BK partnered with Starbucks: http://investorplace.com/5231/starbucks-corp-sbux-seattles-best-coffee-mcd-gmcr-peet-cbou-bkc/
  3. Burger King breakfast menu: http://investorplace.com/16698/burger-king-breakfast-menu-compete-mcdonalds/
  4. told Bloomberg last month: http://www.bloomberg.com/news/2010-09-23/burger-king-may-face-3-billion-tab-to-fix-up-blah-stores.html
  5. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  6. Burger King owners sued corporate: http://investorplace.com/5181/burger-king-holdings-bkc-double-cheeseburger-mcdonalds-mcd-wendys-arbys-wen-dennys-denn/
  7. Get their names here.: http://investorplace.com/order/?sid=DE4240

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