Numbers tell a different story of whether a Burger King’s burger promotion helped boost profits. Franchisees say the promotion doesn’t drive enough sales to offset cost.
Elaine Walker in the Miami Herald writes the story of how well Burger King’s $1 double cheeseburger is performing depends on whose numbers are accurate.
Numbers given to franchisees by Burger King tell a dramatically different story than numbers presented by Restaurants Services Inc., the fast-food chain’s independent purchasing cooperative, according to data obtained by The Miami Herald. Burger King shows the promotion growing profits, while RSI says it took a bite out of the bottom line.
Whose perspective is correct is critical as this promotion was designed to boost Burger King’s declining sales and profits. The Miami-based fast-food chain mandated the promotion despite the objection of franchisees, who are suing the company over the issue in Miami federal court.
Burger King’s numbers show the promotion boosted sales 3.9 percent and gross profits 1.7 percent. This performance was for the 11-week period starting Oct. 19, 2009, and ending Jan. 3, as compared to the five weeks ended Oct. 11, 2009.
By comparison, numbers put out by RSI show that during the same period sales were only up 0.2 percent and gross profits were down 2.2 percent. While this performance was for the same 11-week period ending Jan. 3, the big difference is that it was compared to the 12 weeks ended Oct. 11, 2009. Plus, Burger King’s numbers were adjusted for seasonality and RSI’s numbers were not.
“We’re going to find out really quickly who is right,” said Steve West, restaurant industry analyst with Stifel Nicolaus who last fall lowered his rating on Burger King’s stock to a “hold.” “I think the promotion is losing its effectiveness. The consumer is getting tired of this.”
Burger King declined Tuesday to discuss the double cheeseburger’s performance, citing a quiet period prior to Thursday’s release of second quarter earnings.
The chain also declined to validate any of the performance information presented to The Miami Herald by franchisees, who had received the data from the company in preparation for a Marketing Excellence Advisory Committee meeting.
“Any internal documents are proprietary and confidential information meant for internal use only and can contain data that is non-public material information,” company spokeswoman Susan Robison said in an e-mail.
Burger King’s presentation to franchisees supports analysts and franchisees views that the double cheeseburger promotion has lost effectiveness. For the first seven weeks of the promotion ending Dec. 6, Burger King said sales grew 6.4 percent and profits grew 4.1 percent. That was driven by a 10.4 percent increase in customer traffic and a 3.6 percent decline in average check.
Several analysts in the past week have reported that Burger King’s sales continued to decline in January, as the double cheeseburger has failed to draw in new traffic and those who are coming in spend less.
Mark Kalinowski, restaurant industry analyst with Janney Capital Markets, last week downgraded the company’s stock from “buy” to “neutral” based on the earnings expectation. Kalinowski is expecting a 3 percent same-store sales decline in the U.S. and Canada for the quarter ending in December. But for the current quarter, Kalinowski changed his forecast last week to a 6 percent decline.
“It’s definitely not pretty,” Kalinowski said. “Our sources are saying things got worse in January. The trend is not headed in the right direction.”
Some franchisees paint an even more dramatic period of January same-store sales declines of 10 percent or more. They point the finger at the double cheeseburger, which they claim has dragged down the average check and restaurant profitability.
“This is the worst promotion I’ve ever seen,” said one franchisee with decades of experience, but who did not want to be named for fear of retribution by company management. “I’ve never had a promotion that had this kind of impact on gross profit and didn’t drive any increase in sales.”
The $1 double cheeseburger is one of several issues at the heart of an increasingly contentious relationship between Burger King and its franchisees. Burger King’s National Franchisee Association filed suit in November arguing that Burger King does not have the right under the franchisees agreement to “dictate maximum pricing.”
The pricing lawsuit is the second class-action lawsuit the NFA filed against Burger King in 2009. The association sued the chain in May to stop Burger King from getting its hands on a portion of the millions of dollars in annual rebates franchisees get from soda companies.
A group of Florida franchisees also filed suit against Burger King in July 2008 over the company’s right to force them to open as early as 6 a.m. and stay open as late as 2 a.m. Both of these lawsuits are pending.
Burger King last month turned the tables and filed lawsuits against more than a half dozen franchisees for failing to install new upgrades to its cash registers.
Analysts say Wall Street investors are becoming increasingly concerned about the unrest between Burger King and its franchisees.
Related reading at ddifo.org: Burger King Franchisees Keeping Rebate: Ad Budget May Be Hit