Burger King’s Focus on Coffee Should Reward Shareholders

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Despite losing market share to Wendy’s and falling into the number three burger chain role for a brief moment, Burger King (NYSE: BKW) is not giving up. For the longest time, Burger King has played second fiddle to McDonald’s (NYSE: MCD), but held onto the number two spot. In fact, the recently public restaurant chain made an announcement that should get shareholders and future investors excited.

“Perk up and take your morning from good to great with the new, brewed and specialty coffee offerings at Burger King restaurants,” read an official statement from the company. Burger King will offer ten new beverages, including brewed smooth roast coffee, smooth roast iced coffee, and a series of lattes.

Burger King has 12,600 locations around the world. Since going public, the chain has focused on selling off its units to franchisors. In return, the company earns a steady stream of franchise royalties and rental income. The company’s main goal is its international expansion, which has been on a tear recently with several joint partnerships. The additional income generated from new products like coffees should help lure potential franchisors, and also increase same store sales.

Back in 1993, a McDonald’s in Australia launched McCafe. In fact, the first McCafe chains acted as full coffee shops and carried smoothie products as well. It wasn’t until 2001 that the United States saw McCafe-branded coffee. Since that time, the coffee has helped McDonald’s take market share in the huge consumer category. The coffee products have also helped McDonald’s increase its same store sales and overall revenue.  

McDonald’s has over 34,000 locations and has counted on the McCafe brand to extend its store sales. McDonald’s leading franchisor Arcos Dorados (NYSE: ARCO) has been a benefactor of the growth of the McCafe brand. With 1,800 locations in 20 countries, Arcos is the leader in its regional coverage of McDonald’s and the McCafe brand. Arcos even owns several McCafe-branded stores that operate on their own, independently of Big Macs and french fries.

Wendy’s (NASDAQ: WEN) trails Burger King and McDonald’s in terms of store count. The third place chain has over 6,500 locations, with a strong domestic presence. The chain is only in 27 countries, which is part of the reason it has remained number three. This burger chain will be the one that Burger King can do the most damage to. In January, Burger King reported that it ranked last of the three in average unit sales. The average Burger King brings in $1.18 million, while Wendy’s ($1.49 million) and McDonald’s ($2.52 million) earn more.

Wendy’s does not have coffee listed on their menu, other than normal brewed coffee. There are no lattes or iced coffees available at the chain. In the battle of the three, McDonald’s will be the winner for the long term. However, Burger King has a great opportunity with a product that is not offered at Wendy’s locations and a strong advertising campaign coming with it. Burger King will be able to compete against McDonald’s, while at the same time offering additional products to lure customers away from Wendy’s.

In the fourth quarter, Burger King announced that same store sales had increased 2.7%. For the full fiscal year, same store sales increased 3.2%. Burger King will continue to see these positive trends with strength in new products. The company introduced chicken nuggets in January in another move aimed at Wendy’s and McDonald’s.

Another benefactor of the increasing same store sales at Burger King is publicly traded Carrol’s Restaurant Group (NASDAQ: TAST). Carrol’s is the largest franchisee of Burger King in the world, with over 550 locations. The company saw third quarter sales increase 87% to $169.5 million, thanks in large part to the acquisition of 278 additional Burger King restaurants. Carrol’s is a key beneficiary of Burger King’s goal to be 100% franchised.

In Carrol’s third quarter earnings, the company reported a same store sales increase of 6.2% in its legacy restaurants. This marked the fifth consecutive quarter of positive same store sales for the company. It seems Carrol’s continues to believe in the long term growth of the Burger King chain and brand. Recently the company spun off two other restaurant concepts into a separate company, so it could focus on Burger King.

Ultimately the restaurants competing in the coffee business are attempting to take market share from Starbucks (NASDAQ: SBUX). While Burger King will try to sell more coffee to customers and get people to come enjoy its products rather than a trip to the local Starbucks, it will directly be helping the Seattle-based coffee chain. Back in 2003, Starbucks purchased Seattle’s Best, a small regional coffee chain, for $72 million. Since 2010, Burger King has had a partnership to offer Seattle’s Best branded coffee in all of its locations.

Exciting things are happening at Burger King and investors still have time to get in on this re-listed public restaurant company. Coffee sales will pick up and could help Burger King take away and regain market share from Wendy’s and McDonald’s respectively.

katje30 has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, McDonald's, and Starbucks. The Motley Fool owns shares of Arcos Dorados, McDonald's, and Starbucks. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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