Why Burger King Could Be Fast Food's Sleeping Giant

  • Industry News January 23, 2018
    flickr: Mike Mozart
    Burger King is doing well but there is plenty of runway to grow.

    Restaurant Brands International understands the importance of digital in the quick-service space. Chief executive officer Daniel Schwartz called it “perhaps the most critical area of any consumer business today,” Monday as the company announced the creation of a new role—chief technology and development officer. The fact RBI isn’t quite there yet—and is now diverting serious resources to the sector—could be an intriguing storyline in 2018 and beyond.

    RBI is filling the spot with a familiar executive. Josh Kobza, the company’s chief financial officer for the past five years, will take the spot, with Matt Dunnigan replacing him as CFO. Dunnigan led all of RBI’s capital markets activities over the past five years and served as treasurer of RBI since October 2014.

    “Josh’s track record of success in his most recent role includes not only building a strong finance team but also leading the ambitious expansion of our brands globally,” Schwartz said in a statement. “This new challenge will allow him to continue to have a big impact on our success, in perhaps the most critical area of any consumer business today, by leading our digital and technology efforts globally for all three brands [Popeyes, Tim Hortons, and Burger King].”

    Kobza “will be tasked with enhancing our brands’ guest experience through technology and innovation,” the company added.

    RBI has some work to do with digital, especially compared to its competitors in the space. Burger King has an app, but customers can’t pay through it. Tim Hortons unveiled a mobile ordering app last year. Popeyes, RBI’s most recent acquisition, which the company purchased for $1.8 billion last winter, doesn’t have a uniform payment system at its nearly 3,000 locations.

    Additionally, Burger King, while initially an innovator in the space, is lagging behind in delivery. Schwartz told The Associated Press in December that “it’s something that we are focused on now,” and that RBI is “working on it.”  

    “We actually explored delivery several years ago in the U.S. prematurely,” he said. “… We're doing delivery in some of our Popeyes restaurants in the U.S. and Canada already.”

    Burger King was ahead of the curve when it began testing BK Delivers in late 2011. It grew into large cities, including San Francisco, Washington, D.C., Los Angeles, Chicago, Oakland and San Jose, California, Miami, Brooklyn, New York, Las Vegas, and Houston. There was an online option as well as a toll-free number, and proprietary thermal packaging technology to ensure food arrived hot and to separate cold from warm items. But the service flamed out.

    If six years ago was premature, 2018 is undeniably the sweet spot. McDonald’s is offering the service via UberEats to thousands of U.S. restaurants (8,000 or so globally). Wendy’s is working to accomplish this nationally through DoorDash. Taco Bell also recently unveiled its goal to step up digitally with self-serve kiosks and expanded delivery. The Mexican chain currently offers the service to more than 1,000 restaurants in 50 markets with DoorDash as well. Panera Bread said in April it expects to hire 10,000 news employees just committed to delivery.

    “I’m personally very excited for this new challenge and the opportunity to focus more intensely on our restaurants and guests,” Kobza said in a statement. “In this rapidly-changing market with many innovative new technologies becoming available to our industry, I’m looking forward to finding new ways technology can help us enhance the experience millions of guests have when they interact with our brands every day.”

    RBI was created in late 2014 when Burger King, backed by Berkshire Hathaway Inc., purchased Tim Hortons and combined the two companies. Private equity firm 3G Capital has about a 43 percent stake in the company’s voting shares, and Pershing Square Capital Management is RBI’s largest shareholder.

    The company operates more than $29 billion in system-wide sales and over 23,000 restaurants in more than 100 countries and U.S. territories.

    In addition to delivery, mobile ordering, and streamlined operations, Burger King is also testing kiosks in some U.S. locations. McDonald’s “Experience of the Future” design, which includes kiosks and table service, is a key part of the company’s recent surge. McDonald’s planned to reimage about 650 restaurants in 2017 to the design and said it intends to update most of its free-standing U.S. locations by the end of 2020.

    McDonald’s, driven in large part by technology upgrades as well as menu ones, has turned around its customer traffic issues. Guest counts dropped in each of the last three fiscal years before they started to climb in 2017. The chain welcomed 0.6 percent more customers in the first quarter. That improved to 1.8 percent in the second quarter—a period that saw same-store sales grow 6.6 percent—the brand’s best comps growth in five years. In the third quarter, guest counts rose 2.1 percent.

    Burger King has reported strong financials lately as well. 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.

    RBI’s two other brands haven’t been performing quite to the same level. In the third quarter, Tim Hortons 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.

    Comparable same-store sales dropped 1.8 percent at Popeyes 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.

    This all bears the question: What happens if Burger King and RBI catch up digitally? It appears the company has been deliberate in making sure it joins the digital arena ready to roll, meaning 2018 could be an exciting one for the company’s investors.