Stock of the Day
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Burger King (BKC)
Burger King Sticking to What It Knows Best
What do you do when your biggest competitor decides to enter a different and higher-end segment of the market? Do you follow suit figuring that you can't afford to miss the party or do you buckle down and focus even more on your core audience? Burger King, faced with this decision, chose the latter. After McDonalds (MCD: Charts, News, Offers), no doubt emboldened by its success in selling premium coffee, decided that it's going to after the Starbucks (SBUX: Charts, News, Offers) market share in an even more direct manner by setting up coffee bars in its restaurants and hiring baristas to work there, the King has decided that its better of focusing on its own kingdom instead of trying to conquer new land. And to further that objective Burger King announced today that its going to start building some locations which will be smaller and hipper versions of its flagship locations known as 'Whopper Bars'.
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| Stock Analysis |
Burger King has been executing very well over the last 2-3 years. During the 90's, the hamburger chain suffered in the wake of lackluster sales, weak brand identity and strong competition. Its status as the second largest hamburger chain in the world (after McDonalds) was being challenged by Dave Thomas' creation, Wendy's (WEN: Charts, News, Offers). But it benefited from the influence of private equity. TPG Capital, Bain Capital and Goldman Sachs' private equity arm took the firm private in 2002 and reorganized and focused its operations, away from the glare of the public markets before bringing Burger King back as a publicly traded company via a $425 million IPO in the summer of 2006 (the private equity firms still own about 75% of the company). It has posted a string of quarterly same-store sales increases though some analysts believe that by not disclosing sales numbers on a monthly basis, as is standard in the industry, it has been masking occasional declines in those figures.
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But overall, a renewed focus on marketing (including bringing back the mystical namesake 'King' character for a number of campaigns) and a wider variety of products (which now branch beyond hamburgers into salads, breakfast etc.) and better execution have helped put Burger King back on track. The stock has risen about 47% from its IPO level over the last 24 months to the $27.40 level that it is currently trading at. It has issued regular dividends too. The company's Whopper Bar concept announced today and covered in detail by the Wall Street Journal is a bet that the core hamburger chain consumer is still alive and kicking and wants more burgers as opposed to fine coffee, for instance. The concept of a burger bar where consumers can pick and choose ingredients to create a myriad of different versions of the legendary 'Whopper' sandwich is also fairly innovative. Another benefit of these bars is that they are watered down versions of the typical Burger King restaurant and hence require less space which means they can fit into smaller venues such as airports, a benefit which a restaurant like Subway has long enjoyed.
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Another key item that Burger King has going for itself is a slowing economy which is probably in a recession and a worsening consumer spending environment. As money becomes tight, people move away from the casual dining restaurants such as Olive Garden and Applebee's to cheaper fares such as Burger King and McDonalds. Having said all this, there are some roadblocks for Burger King. One of the risks associated with opening a mini-version of a restaurant such as the Whopper Bar is that consumers don't necessarily understand that it is a min-restaurant and still expect that the entire line of menu items be carried, which of course is impossible. Burger King is still on the wrong end of the spectrum when it comes to focusing on healthier food items and certainly has not made inroads into the lucrative breakfast market like McDonalds. BK also has more debt on its books when compared to rivals thus hampering its flexibility (after all it is a private equity product) and has had rocky relationships with its franchisees.
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