MIAMI Burger King Holdings Inc.'s first-quarter results could presage a sustainable turnaround for the industry's second-largest quick-service chain as its latest management team presses ahead with new initiatives that could include a value-menu challenge to McDonald's QSR breakfast dominance.
John Chidsey, Burger King's chief executive, has unveiled several new programs aimed at keeping the newly public company on track and perhaps outdoing McDonald's and Wendy's on some key fronts. One of those, in particular, is the breakfast daypart, which has yielded substantial sales growth for quick-service competitors in the past year and stands to heat up more as Wendy's readies a morning-menu rollout.
But while Burger King is preparing to start testing a reduced-trans-fat frying oil in some of its 7,500 North American restaurants within the next three months, that would leave the chain some four years behind McDonald's in such testing and even farther behind Wendy's, which recently jettisoned most trans fats from its fried items.
Chidsey outlined new or pending initiatives by the operator or franchisor of 11,400 restaurants during a quarterly conference call to discuss BK's 81.8-percent jump in first-quarter net income and same-store sales growth of 2.4 percent worldwide and 2.6 percent in North America, compared with a year earlier.
He touted the success of Burger King's breakfast program, which has been bolstered by the rollout of upgraded coffee, called BK Joe, made with premium Arabica beans. Calling breakfast a low-cost, high-margin meal that has been a growing source of revenue, Chidsey said his chain is testing some breakfast value-meal combos in an effort to increase its share of the quick-service sector's morning market.
The introduction of a Burger King value breakfast could precede Wendy's pending chainwide introduction of breakfast, which the chain is testing in several markets.
Although McDonald's is known to be eyeing equipment upgrades that could enable all-day breakfast sales, Burger King has no plans currently to extend breakfast beyond traditional morning hours, although the company has persuaded some franchisees to open drive-thrus earlier in the morning, a spokesman said.
Breakfast makes up about 15 percent of sales at Burger King, according to an estimate by Wally Butkus, a principal with Restaurant Research in Redding, Conn.
Upgraded coffee, which McDonald's and several other quick-service chains have introduced recently, is a response to QSR market incursions by Starbucks and other high-end coffeehouse chains, said consultant Jerry McVety, president of McVety & Associates in Farmington Hills, Mich.
"It's an interesting circle about who's chasing whom," he said, noting that Starbucks also is expanding its breakfast sandwich menu to more markets nationwide.
Burger King's extension of late-night hours also has helped to boost same-store sales, Chidsey told investors. So have value meals, the heftier BK Stacker burger, new chicken products, and promotions with the National Football League and NASCAR, he added. The BK boss also credited franchisees with aiding the positive results by increasing their investments in the brand and cooperating with the extended-hours initiative.
"Obviously, Burger King is on the right track," said Dennis Lombardi, foodservice consultant with WD Partners in Columbus, Ohio. "As they extend store hours, that will help, which is something McDonald's did."
However, Lombardi noted that Burger King's average-unit sales of $1.14 million over the past year are behind McDonald's average of $1.9 million and Wendy's at $1.4 million. Burger King has been offering incentives to franchisees to extend drive-thru hours, either earlier in the morning or later at night, in the form of extra money for advertising and marketing the late-night daypart.
One franchisee, Strategic Restaurants Corp. of San Ramon, Calif., saw a major increase in business with that additional advertising, according to spokeswoman Myrna Schultz. Strategic's same-store sales rose 12.6 percent for the first quarter and traffic was up 7 percent, she said.
In addition to the success of extended hours, especially popular over the summer, business for Strategic's 240 units in the California, Gulf South and Missouri/Kansas markets also was boosted by the BK Stacker's rollout and a coupon drop in some markets in September. Breakfast sales also were strong.
"Breakfast is a good daypart, especially in the South," Schultz said. One of the franchisee's restaurants in California is testing some breakfast value-meal combos with sandwiches, BK Joe coffee and other beverages. "We feel very positive about it; it has increased sales at the restaurant and sales at breakfast," Schultz said, declining to reveal test product specifics.
John Owens, securities analyst with Chicago-based Morningstar, said a breakfast value menu would be an interesting move for Burger King. "If they can translate their lunch and dinner value menus to breakfast, it should bode well for them," he said.
Although the latest quarter's profits exceeded Owens's expectations, he said Burger King still has a long way to go. "Burger King still has a tremendous amount of debt, so it's still a risk for investors," he said. "They would be vulnerable in an industry downturn because of that."
Consultant Butkus said he thinks it's a good sign that Burger King has been paying down debt, but he found it curious that Chidsey did not say anything about remodeling plans. "The system has been old and neglected for a number of years," Butkus said.
New design plans for the chain that present more of a "cafe" appearance do exist, and some franchisees are opening new units and remodeling old ones in that contemporary style. Heartland Food Corp. of Downers Grove, Ill., for instance, previously disclosed plans to remodel most of the older units it acquired from the former AmeriKing.
Burger King's somewhat edgy advertising campaigns of late have won kudos from many observers. "Their niche-focused advertising that goes after customers in their late teens and early 20s gives them a boost," Lombardi said. The launch of Xbox games featuring Burger King content in mid-November also is expected to play well.
While continuing to close underperforming units, Burger King said it plans to open more than 400 restaurants worldwide during this fiscal year, amounting to a net gain of roughly 250 outlets. Plans call for the U.S. openings of 100 to 115 branches.
During the past year, Burger King opened 101 restaurants in its Europe, Asia Pacific and Middle East regions, and 90 in Latin America. The chain's U.S. system gained 42 restaurants after closing a number of older ones.
On another front, the company is discussing with manufacturers the possibility of licensing products under its BK Joe coffee brand in grocery stores, according to a published report. Brand recognition of such a retail line is seen as likely to boost restaurant sales, especially among coffee drinkers.