Delivery Won't Save Burger King
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Perhaps you saw the big news from Burger King (NYSE: BKW). The company has announced that they are going to expand their delivery service to New York City. And here you thought that delivery was only for pizza and mail. No more having to fight the mad rush in the over-crowded New York City streets to be able to sink your teeth into a juicy Whopper. Now that flame-broiled goodness is but a phone call away.
This is an expansion of the delivery service they currently offer. They have been testing this out for a bit now. They have tried this concept in Miami, Houston, and Washington DC. Burger King's senior vice president said "After seeing the success this program has experienced...we are excited to bring this convenience to New York."
Fast Food Delivery
We are so accustomed to thinking of delivery as just a pizza (or Chinese) affair. But this is a pretty American concept. Many places around the world get fast food delivered to their homes. It's nothing new. McDonald's (NYSE: MCD) runs delivery services around the world in places like Latin America through their McEntrega service, and they deliver in Malaysia too. Yum! Brands’ KFC (NYSE: YUM) delivers in places like Canada, the Philippines, and Dubai.
I think the question we need to ask as investors is: "If delivery is a smart move for a business in the United States, then why are the big boys sitting this one out?" Both McDonald's and Yum! Brands have established delivery services around the world. For them to offer this service in America would be very simple for them. But they aren't. This leaves us with two possible explanations:
- Burger King is the mover and the shaker in American fast food
- Burger King's competitors know it's not worth their time
Given what I know of all three companies, I'm inclined to think that option number 2 is the most likely explanation. It is quite a stretch, given Burger Kings' history, to call them a mover and a shaker. I'm even more inclined to take the second option when you consider Yum. Yum will attempt to gobble up any profit opportunity they see. Given the fact that they haven't jumped in to delivery services in big US cities is a pretty good indicator that it's not going to drive profits.
The Problem Unaddressed
The primary issue facing Burger King right now is that of revenue. Over the last 5 years, revenue has been holding steady just north of $2 billion during that stretch. That might seem ok, but consider that this chain has over 12,500 locations. When you do the math, things don't look good.
This company needs to figure out how to increase their revenue per location. Burger King does have growth plans in place. In June they announced a plan to open 1,000 new locations in China over the next 5-7 years. They have also talked about their plans in Brazil. But I don't think this is enough to solve their problem with profits. Let's assume that they do hit their very lofty goal of 1,000 new locations in China. With their current revenue per location, that would only add $187 million in revenue to their top line. Profits will be even lower.
I should mention that Burger King wants to franchise 100% of their locations. As of June they were 93% franchised. $187,200 isn't necessarily what each restaurant brings in, this is the revenue that Burger King actually sees. While franchising has its advantages, it is also capping their profits, so to speak.
Frankly, I see little upside here for investors. With a P/E ratio already at 61, and profits somewhat capped by their business model, I'm inclined to stay away for now. If I'm ever in the big apple, I might call out for a Whopper just for fun. But this isn't enough to make me believe in this stock as an investor.
thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Motley Fool newsletter services recommend Burger King Worldwide, Chipotle Mexican Grill, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!