Paul Ziobro of Dow Jones Newswires writes that Burger King Holdings Inc. (BKC) franchisees will get to hold onto their entire soda rebate funds for now, potentially crimping the burger chain’s plan to kick off 2010 with a beefier national ad presence.
Franchisees in the coming weeks will receive the full rebate, earned from buying soda syrup, from Coca-Cola Co. (KO) and Dr Pepper Snapple Group Inc. ( DPS) as Burger King has deferred diverting up to 20% of those funds to its national advertising pool due to pending litigation, a Burger King spokeswoman said late Thursday. The February payment is one of two franchisees receive annually from the soda companies.
Burger King was eyeing the extra funds to help boost its national advertising presence by as much as 25% in 2010 versus 2009, helping to promote its products, including a showcase of new items cooked on a new broiler, and help close the gap with competitor McDonald’s Corp. (MCD).
A group representing Burger King franchisees blocked the plan with a lawsuit filed last May, viewing the move as an illegal raid of funds, about $4,000 per store, they had counted on since 2000 to use on store repairs, equipment upgrades and local marketing. Burger King argues it has the right to reallocate the funds. The case is pending in U.S. District Court, Southern California.
Burger King says it will still increase its national media advertising as rates have fallen. “National media presence will still increase without the reallocation of a small portion of the [restaurant operating funds] due to the deflationary environment,” Burger King spokeswoman Susan Robison said. She said the company wouldn’t provide any update as to how much its presence will increase.
A spokesman for Burger King’s franchisee association declined comment Friday.
All restaurants are benefiting from lower media costs, helping them battle for a shrinking pool of customers who eat out less. Burger King was trying to change its system’s formula to divert additional dollars into its national advertising pool, eating ever so slightly into McDonald’s advantage.
Burger King’s plan could have added at least $25 million to a national advertising budget, which is currently dwarfed by McDonald’s. According to Ad Age’s DataCenter, Burger King spent $387.8 million on U.S. advertising in 2008, compared with a $1.2 billion budget for McDonald’s.
With those additional ad dollars in question, some analysts are becoming less bullish on the stock. Thursday, Janney Capital Markets analyst Mark Kalinowski downgraded Burger King shares to neutral from buy, in part because the extra money from the soda rebate “should no longer be counted on.”
Oppenheimer & Co. also downgraded Burger King on Friday, cutting it to market perform from outperform, in part from expectations from a smaller ad budget driven by weaker same-store sales.
Burger King shares were recently up 1.6% at $17.74 on Friday. Shares are down 21.2% over the past year. Burger King reports fiscal second-quarter earnings next Thursday when analysts, on average, expect the chain to post a 12.5% decline in per-share earnings.