October 16, 2013
by Hank Cardello
Burger King deserves a lot of credit for introducing a lower-calorie French fry last month, the "Satisfries." Given the American public's French fry fetish ever since the Miami-based fast-food chain and Ray Kroc's McDonald's opened their doors in the mid-1950s, offering a healthier fry is a good strategic move. It pulls in consumers aching for healthier versions of their favorite foods and is a welcome product for a nation waddling in obesity. But will Satisfries be enough to reverse Burger King's long-lackluster financial performance? By no means. BK must reinvent its core burger product line to reconquer its kingdom.
Targeting French fries is a frontal assault on McDonald's top-selling menu item, which outsells any other product under the Golden Arches by a factor of five. Most troublesome for Burger King, this action is guaranteed to instigate a massive response from the leading fast food chain, whose global systemwide sales ($88 billion) were nearly six times BK's last year. McDonald's response is likely to come in the form of heavy advertising and/or the introduction of its own new, improved French fries.
Taking on a sustained war of attrition against McDonald's over the claim to better fries is a losing proposition for several reasons:
—Lack of available cash. Burger King generated only $224 million in cash from operations in 2012, a paltry amount compared with McDonald's $7 billion. McDonald's reported annual U.S. advertising budget of approximately $1 billion represents one-sixth of all U.S. restaurant advertising expenditures, dwarfing Burger King's estimated $300 million budget. Globally, McDonald's estimated $2 billion marketing budget (according to Ad Age) is a big as Burger King Corp.'s total revenue (company sales excluding franchisees' revenue). Any kind of protracted skirmish over French fries is bound to empty the kingdom's advertising war chest.
—High debt burden. Burger King has a long history of ownership changes that have saddled the company with huge amounts of debt. Since 1967, it has been owned by Pillsbury, Diego, Texas Pacific Group, Bain Capital, Goldman Sachs, and now the private equity group 3G Capital. A big chunk of BK's debt will come due in the near term, including, according to the 2012 annual report, $794.5 million in senior notes due in 2018 and $401.5 million in senior discount notes (accruing interest at 11%!) due in 2019, or approximately $1.2 billion due in six years. This places a severe crimp on Burger King's ability not only to build its business but to adequately defend its new Satisfries offering against competitive retaliation.
—Constraining operational structure. Today 97% of Burger King's 12,997 outlets are owned by franchisees. (In contrast, McDonald's franchisees and licensees run 81% of the chain's 34,480 outlets.) That means it's extremely difficult for Burger King to make radical changes that force franchisees to shoulder a significant share of the cost. As Burger King's 2012 annual report stated, "Our highly franchised business model presents a number of drawbacks, such as our limited influence over franchisees and reliance on franchisees to implement major initiatives." In short, BK's operational structure horns it in.
—Name. Among the top 20 quick-service restaurant chains, only Burger King incorporates the word burger in its name. Burger King's very trademark is an immutable part of its brand. While BK has been trumpeting its new Satisfries by calling itself the "fries king," this is only making consumers more confused. Any name change to redefine itself would be prohibitively expensive; consider that it cost the Nissan Motor Company hundreds of millions in 1981 in marketing, signage changes and lost capital to change its nameplate from Datsun. The brand wound up losing ground with confused car buyers, helping to buoy Honda.
These four pressures would limit top management's thinking in any company. The all-too-likely result: ignoring marketplace trends and doubling down on past practices. And while Satisfries shows that Burger King's management recognizes the healthy-food movement, its new French Fry burger, a small patty with a few limp and forlorn fries under the hood, is just more of the tired burger-and-fries mentality. Unlike the creativity demonstrated with Satisfries, this offering quickly became a much-panned item.
So what should Burger King do to reclaim its throne? It should go back to its roots and focus on raising its equity in burgers through product innovation. The reason is that burgers remain a huge and popular food category. According to a study by Technomic, 91% of consumers eat a burger at least once a month, and 44% at least once a week. But consumers are divided in their burger tastes, and fall into three distinct categories. Burger King could do much to increase its share of them:
—Those desiring a higher quality "better burger." They represent 48% of U.S. consumers, according to a Natural Marketing Institute study. The Technomic study found that more restaurant customers preferred burgers made of Angus beef (27%, up 7 percentage points from 2007) and sirloin (19%, up 6 points). Dave Prokupek, Smashburger chairman and a seasoned market analyst, estimates that the "better burger" category will capture between 20% and 30% of the $100 billion annual burger market. Burger King should offer "craft" burgers for this segment. Just as beer companies helped turn around their sales slide with specialty craft brews, Burger King can market gourmet "crafted" versions under its iconic Whopper brand to meet this growing demand. This goes beyond the traditional approach of simply cranking up the size of the Whopper (e.g., the Triple Whopper). Rather, Burger King can learn from chains such as Ruby Tuesdays, Smashburger and Five Guys by offering right-price, right-size tasty burgers like Spicy Jalapeño Pretzel Burgers, Fresh Jalapeño Burgers, or the Guacamole Truffle Mushroom Swiss Burger.
—Those demanding healthier versions, which NMI says make up 35% of all consumers. These are a critical segment for Burger King to please. A Hudson Institute study of 21 large restaurant chains showed that those that increased their lower-calorie servings had same-store sales growth of 5.5% and customer traffic increases of 10.9% between 2006 and 2011, despite overall industry declines. Here, BK could offer "light and lean" burgers. In other words, consumers are primed for the burger version of Satisfries. The restaurant industry has an elephant's memory of product failures. McDonald's McLean Deluxe was one such episode. The product, introduced in 1991, was ahead of its time and did not deliver on expected taste. Now the time for a leaner, lighter burger has come. Light products rule in several important categories: Light beers now are four of the top five selling beers; Diet Coke is the No. 2 soda, surpassing Pepsi; and Yoplait Light outsells Yoplait Original.
—Those who insist on eating healthy foods all the time. NMI found that 17% of consumers fall into this category. Interestingly, 26% of these consumers also visit McDonald's on a regular basis, so it is important to cater to their needs to avoid losing them and their children. Here, BK could offer "Eco" burgers. These consumers are trend setters and, just as with energy and the environment, are looking for "cleaner" versions of products they purchase. Trends such as meatless Mondays are taking hold in this market segment. Burgers with fewer preservatives, grass-fed beef, and no hormones are no longer far-out mirages. Don't forget that one quarter of these consumers visit McDonald's regularly. They also are determined to give their children healthier foods and will shape the eating preferences of the next generation.
Burger King needs to "own" burgers and should offer the best burgers to satisfy the demands of these three consumer segments. The chain has always aspired to be the king of burgers. Now it has the opportunity to achieve that.
Concentrating on its namesake product and making it better may help BK lessen the impact of its other problems and circumvent the obstacles it can't control, such as its franchisees. BK needs to listen to its internal mavericks, the ones who came up with Satisfries, and think beyond the traditional Whopper. It needs new thinkers who can be more focused on marketing and less on operations. Only then does the chain have a chance to reclaim its rightful spot as the king of burgers.
Hank Cardello is a Hudson Institute Senior Fellow and Director of the Obesity Solutions Initiative.
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