Industry News | October 30, 2017 | By Danny Klein | QSR Exclusive Brief

Popeyes Turns to Value as Chicken Wars Heat Up

Popeyes Louisiana Kitchen
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Restaurant Brands International is finding the limited-service chicken industry to be a crowded one. The company, which owns Tim Hortons, Burger King, and, most recently, Popeyes, reported third-quarter results that topped Wall Street expectations. Most notably in revenue, where RBI’s bottom line boosted 12.4 percent to $1.21 billion year-over-year, beating the FactSet consensus of $1.19 billion. But Popeyes, a brand it agreed to purchase for $1.8 billion in March, lagged behind.

Comparable same-store sales dropped 1.8 percent at the 2,800-unit chicken chain in the quarter versus the prior-year period. Sales declined 2.6 percent in the U.S.

During a conference call, CEO Daniel Schwartz credited “continued competitive activity” as the culprit behind Popeyes reduced comps. Overall, systemwide sales increased 4.5 percent for the brand, which reported average restaurant sales increases each year since 2008 heading into the RBI sale, as well as average revenues around $1.4 million per U.S. restaurant. Same-store sales rose 2.7 percent in the second quarter.

“Our U.S. comparable sales for the quarter reflect the continuation of increased competitive activity that we saw last quarter,” Schwartz said in the call.

Popeyes is waging battle in a growing chicken category that features five of the QSR 50’s top 25 players; six in the top 30; and nine in the first 50. This group (Chick-fil-A, KFC, Popeyes, Zaxby’s, Bojangles’, Wingstop, Church’s Chicken, El Pollo Loco, and Boston Market) comprised 12,941 units in 2016. KFC, which generated $4.5 billion in U.S. systemwide sales, has gained steam in recent years thanks to unique marketing and a return to its value-based core, including $5 meals—a price point that is becoming widespread throughout quick service.

Popeyes debuted a $5 box in September, and recently unveiled a 10 for $10 chicken deal where guests can get 10 pieces of chicken or handcrafted tenders for just $10.

“As we continue to refine our marketing calendar for the balance of the year and into next year, we’ll be focused on finding ways to deliver our great products that our guests love at the right price points in a competitive landscape,” Schwartz said.

Schwartz added that Popeyes is seeing “notable strength” in Turkey, one of its largest markets outside of the U.S. The introduction of a family meal option drove growth. Some international markets struggled, however, including Korea.

“We realized further benefits of our integration efforts at Popeyes during the quarter and we believe we have the right strategies in place to accelerate top-line growth for the long run,” Schwartz said.

Josh Kobza, RBI’s chief financial officer, said the company is excited about Popeyes’ development opportunities, both in the U.S. and abroad. “We've already made some progress in the U.S. finding new development partners to help us to accelerate the pace of growth and we're talking to a number of potential partners to set up new projects in a number of countries and exciting markets in international markets around the world,” he said.

Schwartz said the deal is still fresh, and it’s probably too early to really gauge what the company learned from the purchase. He said they’re traveling and meeting with franchise owners, learning and “building our agenda for how to continue to drive great guest satisfaction and owner profitability for many years.”

Burger King, meanwhile, continues to fire up sales. The chain’s same-store sales grew 3.6 percent globally. Systemwide sales increased 11.2 percent and net restaurant growth came in at 6.6 percent. The adjusted EBITDA of $234 million for the third quarter was up 16 percent on an organic basis versus the prior year results. Sales are up 4 percent in the U.S.

Menu innovation has been the driving factor, Schwartz said. The new Crispy Chicken Sandwich, Chicken Parmesan Sandwich, and Crispy Buffalo Chicken Melt lifted sales. Burger King also launched Mushroom and Swiss King and The Rodeo King limited-time offers. Both burgers innovated around the popular Bacon King.

“Our strategy of maintaining a balanced approach to menu architecture continue to drive further sales growth in the quarter,” he said.

Sales were strong in Russia, Turkey, Germany, Spain, China, and Brazil, while Korea and Australia were a bit slower. The 100th Burger King in India also opened in the quarter. Burger King announced a new master franchise in Japan and sees plenty of runway to infiltrate the third largest economy in the world—a market Burger King has just begun to saturate, and has fewer than 100 restaurants in currently.

The results for Tim Hortons were more muted. The brand reported same-store sales growth of 0.3 percent—an improvement from the 0.8 percent drop in the second quarter. Tim Hortons reported a sales increase of 0.6 percent in Canada but a decline in the U.S.—a market it has struggled to find footing in.

“Some of our recent initiatives including our espresso-based beverage platform contributed to improved comparable sales in Canada, but was partially offset by softer comparable sales in the U.S.,” Scwartz said, adding that other launches, such as the Pumpkin Spice Latte and breakfast and baked goods like Canadian Bacon Breakfast Sandwiches, helped.

RBI grew Tim Hortons’ restaurant count by 4.2 percent year-over-year, driven, again, primarily by Canadian success. “In the U.S., net restaurant growth has been slow although we remain highly focused on supporting our U.S. partners in their expansion efforts and we continue to make progress with new partners,” he said. “As an example, we recently signed a new agreement to develop the Cleveland and Youngstown markets, which we believe are logical strategic markets for our growth given the proximity to our successful existing restaurant footprints in Columbus, Michigan, and in Western New York.”

The brand also opened its first stores in the Philippines and United Kingdom, where they’re performing “really well.” Mexico and Spain debuts are coming in the ensuing months. Schwartz said RBI is committed to growing Tim Hortons in the U.S. and that it also marched slow out of the gate in the western part of Canada.

“It took some time and now its one of our more profitable regions and faster growing regions,” he said. “It's going to take time, but we're committed and we have good partners with whom we’ll work collaboratively to make this work in the long run.”