Burger sales are down at McDonald’s Corporation (NYSE:MCD) and The Wendy’s Co (NASDAQ:WEN). But Burger King Worldwide Inc (NYSE:BKW)’s first-quarter earnings more than doubled even though revenue fell. If sales were down at the two largest burger retailers, why were they up at the third largest? The answer may come as a surprise.
Burger King Worldwide Inc (NYSE:BKW) earned $35.8 million, or 10 cents per share, in the first quarter, up 150% from the $14.3 million net income from the same period the previous year.
At The Wendy’s Co (NASDAQ:WEN), the second-largest burger chain by restaurant sales volume in the United States, first-quarter overall revenue rose 1.8% to $603.7 million in the first quarter, but net income fell 83% from the year previous.
McDonald’s Corporation (NYSE:MCD) reported that sales were down 0.6% worldwide. There was a 0.7% increase in the U.S., but it was offset by falling sales in China and economic weakness across much of Europe.
How the King Beat the Golden Arches and a Little Girl with Pigtails
In the past few years, both McDonald’s Corporation (NYSE:MCD) and The Wendy’s Co (NASDAQ:WEN) have put an emphasis on more premium foods, such as “Premium McWraps,” or flatbread grilled sandwiches, while also spotlighting value or dollar-menu items. In fact, all fast food retailers have taken this same approach of balancing out the menu with both premium and value items, including Burger King. Which again, begs the question, if sales were down at the two largest burger retailers, why were they up at Burger King? Was there something better about Burger King burgers? No.
Burger King Worldwide Inc (NYSE:BKW)’s ownership has changed hands several times in the past few years. Last year, 3G Capital, a private investment firm, took the company public (again), but not without making some major business changes within the company first. The company now puts a higher emphasis on selling restaurants to franchisees. The franchise business model lowers costs to the parent company (Burger King). Restaurant revenue (food sales) for the first quarter were actually down 69% to $121.1 million, but franchise and property revenues rose 19% to $206.6 million.
Burger King’s same-store sales fell 3% in North America. McDonald’s U.S. same-store sales grew by only 0.7%. The Wendy’s Co (NASDAQ:WEN) North American same-store sales grew by only 1%.
Burger King Worldwide Inc (NYSE:BKW) saw an increase in booking sales from restaurants, not product/food sales. The company is not profiting off of burger sales at all.
For now the franchise model is paying off for Burger King Worldwide Inc (NYSE:BKW), but how long will it sustain that success before future franchise buyers notice that burger sales/restaurant revenue is down across the board? Will people buy franchises if store sales are decreasing?
What Happened to Fast Food?
For years it was believed that fast food restaurants were ‘recession proof.’ McDonald’s Corporation (NYSE:MCD) barely lost a cent throughout most of the recession, just to have slowing sales for the last several months, while most people believe the recession is over. While funds were tight many people choose cheaper fast food options over fast casual or traditional restaurant choices. But now the consumers just don’t go to fast food restaurants like before.
One main challenge to fast food restaurants is that the American consumer has become more health conscious, and is choosing to frequent “fast casual” restaurants, like Panera Bread Co (NASDAQ:PNRA) and Chipotle Mexican Grill, Inc. (NYSE:CMG), which offer more salads and healthier fare. Each of the major fast food brands has turned both to value menus and more premium products to meet these challenges, but as this quarter’s earnings reflect, thus far this approach has not paid off.
The Wendy’s Co (NASDAQ:WEN) has sought to position itself as competition to the fast casual option by remodeling restaurants to include fireplaces, flat screen TV’s, and fireplaces. (As of April 30, 2013, of the companies 6,500 franchises, 86 have been remodeled.) The company’s new goal is to be considered a fast casual and fast food restaurant.