Looking Beyond this Fast Food Chain’s Numbers

Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The fast food industry is becoming more interesting with each passing day. There has been a continuous shift in the way industry players used to operate. Fast food chains such as McDonald’s (NYSE: MCD) and Burger King (NYSE: BKW) provide much more than their traditional burgers and fries. However, a tough economic environment has been taking its toll on these chains, making survival quite difficult. Yet despite this, these chains continue to win customer's hearts. For example, Burger King Worldwide posted rocking results that beat Mr. Market’s expectations. Also, it announced a quarterly cash dividend, which quite pleased the investors.

What’s going on?

Revenue at Burger King plunged 26% to $451.1 million last year. The results look disheartening at first. However, the drop in revenue came in mainly because of the company’s efforts to make its cost structure lighter. Burger King is in the process of selling company-owned restaurants to franchisees, which will reduce its risk of volatile commodity costs. It is also a safer option, since it brings in fixed revenue despite economic problems.

However, it has its drawbacks too. Moving into a totally franchising-based model makes the company’s scope limited. Burger King will lose the opportunity to earn more during good times. Moreover, its peers McDonald’s and Yum! Brands (NYSE: YUM) have more  company owned restaurants, which gives them exposure to windfall gains. In fact, all the international branches of Yum! are company controlled, and Yum! Brands’ international operations have been growing at incredible rates.

Another problem with Burger King is the absence of value meals, an area where the chain loses customers to its competitors, such as McDonald’s.

The Efforts Paid Off…

But Burger King has managed its problems well. Its revenue improved slightly, and earnings grew 12.7% to $61.1 million. This is indeed a relief after what McDonald’s had posted few months back. McDonalds’ strategy of attracting customers through lower prices hit its margins hard, and led to an earnings drop of 3.3% to $1.46 billion.

Burger King’s new summer Bar BQ menu attracted customers galore. Influenced by Yum! Brands’ continuous drive for product innovation, such as the Cantina menu for health conscious people, Burger King worked on similar lines. It went beyond its same old burger offerings, and its new Bar BQ offering attracted huge customer traffic.

Things Will Get Even Better…

In fact, the burger giant is plans to introduce more new products, such as wraps, salads, and fruit smoothies, which will keep the existing customers hooked and help add more of them.

Additionally, the fast food retailer is also strengthening its marketing initiatives. It is promoting its products well and is expected to put more emphasis on advertising its new products. It has also hired celebrities such as David Beckham in order to promote its brand, which is expected to drive revenue north. Also, its promotional offers, such as “King of the Day,” and many others have been quite attractive to consumers.

Widening Horizons

Burger King is also expanding its customer base by shifting its focus from only young people to a wider audience. It now focuses on kids and older people as well. This will prove to be fruitful, since older people tend to have a higher bill with more premium items on their order.

The company is also trying to further expand internationally. With 43% of its total revenue already coming from international business, it wants more of it. It has recently entered into partnership with franchisees in China and Russia, leading to a larger position in those regions. However, it is expected to face stiff competition in China from Yum! Brands.

The Takeaway

The company seems to be heading in the right direction with perfect strategies in place. It has been growing in all directions possible. Its expanded product portfolio, larger customer base, and increasing geographical footprint make its growth prospects interesting. Moreover, its efforts to cut down costs and increase margins will also help the company perform better. Considering all these factors, I believe investing in Burger King looks like a lucrative idea, especially from a long term perspective.

justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend Burger King Worldwide and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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