Burger King’s Earnings Preview: Increased Competition From Fast-Casual Segment To Affect Sales Growth [Part 1]

BKW: Burger King Worldwide logo
BKW
Burger King Worldwide

Burger King Worldwide (NYSE:BKW) is scheduled to release its Q2 2014 earnings on August 1. [1] The company delivered excellent results in the fiscal year 2013. Burger King has been reporting improved comparable store sales across all four regions for the last three quarters, with a 2% growth in comparable store sales in its first fiscal quarter. The introduction of new menu additions, including a burger revamp helped the company drive sales despite adverse weather conditions in North America, its biggest market. The reported net income increased by almost 70% to $60.4 million from last year’s figures of $35.8 million, whereas the total reported revenues declined 26.5% to reach $240.9 million due to the net re-franchising of 327 company-owned restaurants over the trailing 12-month period. [2]

In this article, we will concentrate on the impact of increasing competition from the fast-casual segment on the company’s top-line growth. The last six months have been a struggling period for all the major fast-food companies with rising competition from the fast-casual restaurants such as Chipotle Mexican Grill (NYSE:CMG) and Panera Bread. Moreover, Burger King has to fight top Quick Service Restaurants (QSR) brands such as McDonald’s(NYSE:MCD), Dunkin’ Brands (NASDAQ: DNKN) and Starbucks (NASDAQ: SBUX) for the breakfast market share.

In a subsequent article we will discuss the trends and factors that could have affected the company’s performance for the second quarter. Burger King’s initiative of changing its business to a 100% franchised model has its pros and cons. On the other hand, the rising commodity inflation has been posing a huge threat to every company in the restaurant industry. Moreover, the company is still focused on its expansion plans to enter into new and profitable markets.

Relevant Articles
  1. Will Johnson & Johnson Stock Rebound To Its Pre-Inflation Shock Highs of $185?
  2. Should You Pick Eli Lilly Stock After A 4x Rise In Three Years?
  3. Down 9% This Year, What’s Next For Lululemon’s Stock Past Q4 Results?
  4. Down 14% In The Last Trading Session, Where Is Adobe Stock Headed?
  5. Will Higher Federal Government Spending, Gen AI Drive Digital Security Stocks Like CrowdStrike Higher?
  6. Up 30% In A Year Is FedEx Stock A Better Pick Over UPS?

We have a price estimate of $28 for Burger King, which is about 5% above the current market price.

See full analysis for Burger King

Tough Competition Putting Pressure On Sales Growth

  • Fast-Food Breakfast Battle

In the Fast Food Hamburger Restaurant (FFHR) industry, Burger King competes against big brands such as McDonald’s and Wendy’s. In the fast food industry as a whole, Starbucks and Yum! Brands are the other two major rivals. [3] These companies have well capitalized and organized chains and franchises spread worldwide with more number of U.S. stores than Burger King. These companies believe that breakfast has been an underutilized segment with a lot of potential growth, thus making it a lucrative market. According to NPD report, in 2013, guest traffic during breakfast hours rose 3%, whereas traffic during lunch and dinner declined by 1%. [4]

McDonald’s dominates the breakfast segment with over 25% of the market share. However, the gradual entry of brands such as Taco Bell, Dunkin’ Donuts and Burger King has put McDonald’s on the defensive. Earlier this year, Burger King included burgers such as the Big King in addition to sausage biscuit, Cinnabon and its Seattle’s Best Coffee. [5] However, in the U.S., Burger King is not that a dominant player as are McDonald’s and Taco Bell. Moreover, new entrants pose a threat to all the QSR chains, as it decreases the possibility of price manipulation.

Burger King generated average daily sales of around $3,300 at a franchised restaurant in 2013, which is nearly the same as Starbucks’ average daily revenue of $3,200 per store but only half the revenues generated by a McDonald’s outlet (around $6,700 per outlet per day), indicating McDonald’s dominance in the industry. Most of the fast food chains have started selling coffee to drive revenues through their breakfast segment. Burger King started serving the Starbuck’s owned Seattle’s Best coffee to compete against McDonald’s McCafe. [6] With coffee being the core beverage in the breakfast menu, Burger King plans on expanding this segment to match the brand appeal of McDonald’s McCafe and Starbuck’s coffee.

  • Growth of Fast-Casual Restaurants Decreases Customer Traffic

Fast-casual restaurants such as Chipotle Mexican Grill have started gaining momentum and people are shifting towards healthier and hygienic food items. The fast casual segment has started eating into the market share of leading fast food restaurants for the last couple of years and has generated considerable industry attention. According to Technomic’s 2014 Top 500 chain restaurant report, sales for fast-casual chains rose 11% and store count rose 8% in 2013.

Even though fast-casual restaurants lag their fast food counterparts in overall revenues and value, they are closing the gap every quarter. However, when it comes to healthier options and quality of food, fast casual restaurants clearly have an edge over all other restaurant segments. Moreover, people with higher disposable income are inclined more towards high quality, fresh and good-tasting food, even if it is expensive by a few bucks. This has led to decrease in customer traffic gradually. Burger King took several measures like new innovative menu additions, which appeal to the health conscious customer base.

All the major fast-food and fast-casual chains have released their earnings result for the June ended quarter. It was noticeable in almost all the reports that fast-casual segment is still posing a threat to fast-food chains in terms of customer count. We can expect a similar impact on Burger King’s revenue growth in its Q2 earnings report.

See More at TrefisView Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology

Notes:
  1. Burger King Worldwide: Q2 earnings result []
  2. Burger King Worldwide: Q1 2014 earnings []
  3. Top 50 QSR brands []
  4. NPD: Breakfast restaurant visits grow []
  5. Burger King battles McDonald’s over breakfast with burgers []
  6. Burger King serves Seattle Best Coffee []