With its almost 20,000
global chains. Burger King has been a
major force in the fast food industry for nearly 70
years. BK represents a dominant
$25.5 billion of its parent company, RBI's nearly $40
billion in total sales in 2022. Since going public in
2014, share prices for RBI jumped from nearly $40 a
share to over $76 a share in June 2023. But as of late, Burger King
has dropped in its standings against rivals. Slumping
sales come from complex menu items, outdated restaurants
and slow operations. While still the third
largest burger chain, BK ranked seventh in the fast
food category behind McDonald's, Chick fil A,
Taco Bell and Wendy's in 2022. Wendy's most recently
overtook Burger King in 2020 after it launched
breakfast. Earnings for Burger King
have seen sales growth flatten, franchises filing
for bankruptcies and a new leadership overhaul. Like any business that's
been around for seven decades, you'll have some
ups and downs. That's that's part of the
normal course of business. And we did have a few of
those over the last few years. But in 2022, the company
announced its biggest shake up yet. Burger King announcing a
$400 million investment in revitalizing stores,
advertising and digital in an effort to try and
accelerate growth. It's really a 360 degree
plan that they're pursuing here with the management
team, prioritizing operations, prioritizing
brand management, things that are just broadly
neglected between 2018 and 2021. So the question now, can
$400 million in a couple of Domino's executives bring
back Burger King to its former heights, or is it
too late? In September 2022, one of
the biggest quick service restaurant brands in the
world. Restaurant Brands International announced its
Reclaim the Flame plan to revamp the North American
Burger King chains. Investors started getting
concerned about sales slipping. Around late 2020
or early 2021. You are also hearing the
restaurant brands executives talk about it openly on the
analyst calls. Fresh leadership is at the
top of BC's new initiative. Patrick Doyle and Tom
Curtis, two former Domino's executives that launched
the pizza Chains turnaround to take the number one
pizza spot in the world. Some of the great things
that happened at Domino's were in recent history from
2010 to 2020. The brand engineered an
amazing turnaround, and we always had an objective
there of something great. But what was really great
was the journey, not actually the destination. And that's part of the
reason why I came to Burger King. Curtis's colleague, Patrick
Doyle, invested about $30 million of his own money
into the plan. Patrick is very much like a
franchisee now. He has his own capital
invested in RBI, and he absolutely wants to make it
successful and make sure it's successful, not only
just so he's been recognized as done a good job, but
also because he's heavily invested in it and his
livelihoods there, too. The $400 million will be
dedicated to all North American businesses in
three categories $250 million to remodel about
800 locations and about $150 million into advertising
and digital investments. Another part of that plan
closing about 400 underperforming stores. This is a seminal moment in
time for us to figure out which restaurants have long
term viability. There's a few out there
that don't, and we need to take those off of our
owners backs so that they don't have to bear the
losses and can put that money back into growing
their asset base and their restaurants that they do
own. We are seeing a heightened
amount of closures this year that's going to really help
set the foundation for net restaurant growth to get
better, you know, fewer closures in 2024. In 2022, profits at Burger
King stores were down nearly 20% from 2018. Their store level cash flow
was about $140,000 in 2022. That compares to 2018,
$175,000. So 20. 20% below the 2018
levels. We'll take a we'll take we
think in 2024. They will get there, if not
by the end of this year, just given the success that
they're seeing. And longer term, you know,
that's obviously a level they need to improve to
remain competitive with brands like Taco Bell and
McDonald's, that's see higher store level cash
flow. Two of the largest
franchisees filed for bankruptcy in 2023 Meridian
Restaurants Unlimited with 118 locations and Tom King
with about 90 locations. The rising cost of labor and
food, I think, hit a lot of those franchisors at the
worst possible time. So maybe they're down 10%
in traffic, but the cost of food and labor has gone up
15%. So that sort of really, I
think, pinched a lot of those franchisors. When you think about the
investment that RBI has made, it gives franchisees
the opportunity to invest in their facilities, invest in
new equipment, invest in their people. The 400 million investment
looks to combat slipping balance sheets. But how did
the mothership of the iconic Whopper even get here in
the first place? Burger King got its start
in 1954 as insta Burger King, a nod to the short
wait times. By 1957, the chain launched
its signature 37 cent whopper. Burger and
franchises began popping up everywhere. Insta-burger
King was renamed to simply Burger King. They've been pushing the
Whopper since it came out, and for good reason. It is there like a main
driver of their sales. And in terms of consumer
sentiment scores usually ranks near the top of fast
food burgers competition. Monk's burger chains was
heating up by the late 1960s. Mcdonald's Jack in
the Box, White Castle and Wendy's were all expanding
and improving their business models at this time. Mcdonald's introduced the
Forever Whopper rival, the Big Mac. So Burger King was sort of
taken that second spot for years and almost throughout
a lot of its history with Wendy's usually right
below. So McDonald's, a huge gap. And then Burger King and
Wendy's. In 1967, Pillsbury acquired
Burger King, sending the company in its brand from a
relatively small operation to a subsidiary of a larger
food conglomerate. It launched about 100
stores a year starting in 1968. That takeover
catapulted the company into a chain reaction of
ownership, mergers and acquisitions from Pillsbury
to Grand Metropolitan PLC to Guinness PLC. And by 2002, it was
acquired by TPG Capital. During that era of changing
hands, competition was slowly taking over Burger
King. At the time, it was still
the number two burger chain behind McDonald's. As more and more chains have
been offered and consumer habits have changed a
little bit, McDonald's has far and away maintained
that top spot. But a lot of the other
brands below Burger King have started to compete a
lot more closely. In 2003, just one year after
being acquired by TPG, Capital, revenues hit $1.7
billion, but a net loss of $868 million the subsequent
years. Before going public in
2006, Burger King saw incremental revenue gains. But from 2006 to 2010, same
store sales growth were uneven. Demand for Burger
King significantly dropped as investor sentiment was
wavering on Wall Street. Tpg And during those times,
that was kind of a dark time for the brand. And when the
3G people came on to the scene, it was definitely a
breath of fresh air. After years of turbulent
same store sales, the burger chain was spun off again. This time it was taken
private by 3G capital for roughly $3.26 billion,
approximately $24 a share. Burger King has been
challenged a lot in the last decade or so. It's had a couple of
moments where menu items have done well or marketing
promotions have really taken off, but that hasn't helped
the overall business keep growing. And, you know, at
a certain point, then those gains fade away and it's
just, you know, back to being Burger King. In 2014, there would be
another transaction hoping to revitalize the brand. A merger between Burger
King and Tim Hortons worth an estimated $11.5 billion. The merger between Burger
King and Tim Hortons formed a restaurant Brands
International in 2014. It made RBI the third
largest quick service company in the world, with
combined same store sales of $23 billion. Going back to 2014 and we
started to think about what other brands or what other
segments of the quick service restaurant industry
we might want to be involved in. And one of the really
exciting segments is certainly Breakfast and
Coffee. That's a really exciting
segment as great growth characteristics all around
the world. And we came upon Tim
Hortons and as we learned more about it, we
discovered it was an incredible business, an
incredible brand, something that I really haven't seen
almost anywhere else around the world. Under the RBI umbrella,
Burger King saw rapid expansion. In the first
five years, over 3400 stores were opened during that
time, and revenue and shares were also rising. Revenues took a hit in
2017, then bounced back the following year. Initially,
RBI's portfolio consisted of Burger King and Tim
Hortons. Today, the company has expanded to a diverse
lineup of quick service restaurants. I think one of the greatest
things that we've been able to do with the brands that
we've acquired is to make them more global brands. So we took Burger King,
which was more focused in the US and we grew it all
around the world and it's it's now much, much larger
than it was when we acquired it. But also we've started
to do that with some of the new brands. So Tim Hortons,
which only had one international market, is
now in dozens of countries around the world and
Popeyes is the same. So we've really been able
to take a lot of these brands and make them truly
global brands. Rbi's portfolio straddles a
couple of different segments. You have burgers,
coffee, fried chicken and now sub sandwiches. And then Burger King is
like the most well established brand, I would
say, in terms of the US and internationally. Right before the pandemic,
Burger King accounted for nearly 70% of RBI's
worldwide restaurants. But as the pandemic issued
stay at home orders, Bq's domestic chains took a
significant hit. In fiscal year 2020, Burger
King saw same store sales drop nearly 8%. The company also saw a 28%
uptick in drive thru attendance. But wait times
and menu options became a blind spot as some food
offerings were complex to assemble and single lane
drive thrus caused congestion and longer wait
times. Burger King coming off of a
number of years of record sales and record profits. I think we lost our way a
little bit. And when we came together
as a team last year, recognizing what had been
lost, I feel that it was a loss of focus, a loss of
focus on who we are, what we do exceptionally well. That makes us unique. This is Chris Johnson. He's the founder and
president of Raxon Restaurants. I founded Raxon back in
2013. We started in Connecticut
with six restaurants, and since we've grown to 65
restaurants operating in seven states for
franchisees. The effects of the pandemic
wore on, signaling tighter margins for franchisees and
lower profitability at chains. We've seen a couple of
franchisee bankruptcies already this year, which is
obviously not great for either the brand or its
footprint. The bankruptcy situations
are just the process of getting restaurants into
the right hands of the right franchisees with the right
resources that can do what's necessary to turn the brand
around. And so in the short term,
it's necessary just to go through the process to get
those restaurants in the hands of one person into
the hands of another person. While Burger King is closing
down some 400 chains across the US, RBI plans to
continue its expansion abroad. They're also looking to
continue to expand internationally. But again,
that's mostly through the opening of outlets versus
in the US. They're having the opposite
approach. If you go back to two 2010,
we had about 5000 restaurants outside of the
US and now we have more than 10,000. So we have really
been able to grow tremendously around the
world. Generally in the international business, we
work with a master franchise model where we'll have one
partner that runs each of the countries. So we'll
have a partner for Burger King in India or Spain or
Mexico or Brazil. And a lot of those
businesses have been really successful, relatively
flat. Same store sales caused a
concern and spark a needed revamp for the US chains,
even though international chains continued to perform
well for RBI. Overall Burger King's
numbers look great. It would just be when you
looked at the domestic numbers versus the
international numbers, there was a very clear, stark
difference, especially as, you know, lockdowns were
easing and stores were reopening. You started to
see Burger King fall behind other US burger
competitors, and its international stores
weren't having the same problem. You know, the
international restaurants were bouncing back much
faster. So it was kind of like, well, what's going on
here? In September 2022, Burger
King, in collaboration with the majority of its
franchisees, announced the Reclaim the Flame
Initiative. I think what makes the
Reclaim the Flame plan special and have an
outsized chance of success is that it wasn't built by
corporate. It was built by a corporate
team with franchisees, new. Marketing, reinvestment into
the restaurants, retraining our restaurant, general
managers who are the most important people in our
businesses, our leaders. And it took a lot of time. It was a lot of dialog. It was month after month of
folks like me flying down to Miami to sit in a room with
the leadership team at Burger King for days at a
time to work through the plan, develop the plan. The $400 million investment
was split into three categories of remodeling,
advertising and digital investments. To date, even though we've
already had a ton of progress, we've only
deployed a small portion of that capital. So on the
marketing front, we've put in $20 million so far. And on the royal reset,
short term, which is an investment back in
technology for the restaurants, their day to
day business. We've only done a portion
of that as well. And the remodels are really
just starting. Campaigns like the Whopper
song that went viral on TikTok and streamed nearly
5 million times on Spotify, was one of the biggest
successes of the investment spending. Tom Curtis, the US president
of Burger King, told me that they are they sold more
whoppers than they ever had previously in the last
quarter, and he credited a lot of that to the viral ad
campaign they had with the Whopper song. I think
there's also just been a lot more focus on the Whopper
generally as a part of Burger King's menu, less so
limited time menu items, all these other things that can
kind of crowd up its menu, even if, you know, the
Burger King customer is just coming by for a whopper. The Whopper presents
substantial opportunity as a as a canvas for future menu
innovation that they're going to be pursuing. And then in 2024, I think
you're going to see some more some more things
coming. As for franchisees, Burger
King chains are looking for a facelift as remodeling
efforts are soon on the way. Rbi's first quarter
earnings in May 2023 revealed more than 120
stores were shut down and revenue growth and same
store sales increased by about 1% since it's
positive signs during Q1 earnings. Shares for RBI
has continued to climb, reaching nearly its all
time high set in September 2019 of over $78 a share to
over $76 a share in June 2023. Investors appreciate the
fact that RBI is coming to the table to invest money
into the brand to see its resurgence. And I think
ultimately the proof will be in the pudding. The fourth
quarter was good. The first quarter of 2023
was even better. Those two quarters, I think
are going to be great indicators that they've
that we're investing in the right way and in the right
place and having our franchisees alongside us
also investing their hard earned funds as having as
amplifying that RBI investment. Consumers are shifting away
from the discounted offerings to more full
price, full margin offerings in combination with some
menu price as well. But that's really helping
them to really improve profitability at a very
earnest clip. The biggest thing that
investors are looking at is Burger King, same store
sales. That's going to be the key
top line metric here around how the sales performance
is performing at mature stores, given the work
they're doing behind the curtain, really around
improving franchisee profitability, We think
that we're going to see a much better trajectory with
with fewer and fewer franchisee bankruptcies
going forward, less store closures in 2024 versus
2023. Investors are eager to see
if the Reclaim the Flame initiative can help Burger
King make its much needed comeback and regain its
position as one of the top fast food chains in the US. I come away with a sense
that there's so many opportunities for us to
grow. We have opportunities to do much better with the
Burger King business in the US and we're putting a lot
of money behind it and it's starting to work. But we
have opportunities all around the world as well. Analysts are kind of holding
out to see what the turnaround actually looks
like if this is just a temporary blip that they've
seen an uplift in sales or if this is something that
they're going to long term be able to hold on to.
Because I think there's just generally a little bit of
skepticism about the Burger King US brand.
