Paul Ziobro of Dow Jones Newswires reports at CNN Money that Burger King Holdings Corp.’s (BKC) wants to beef up its national advertising budget, but franchisees are worried the plan will take a bite out of rebates they get based on soft drink syrup purchases.
Burger King, the number two burger chain in the world, is planning to increase its U.S. media presence up to 25% in 2010 compared to 2009 to communicate a stronger value message in the face of competition from McDonald’s Corp.’s (MCD) and Wendy’s (WEN) value menus and to showcase new products like ribs and a ” game-changing” extra-thick burger developed for the chain’s new batch broilers.
To foot the larger bill, Burger King will allocate a portion of “restaurant level” funds to the national ad budget. It’s something the chain hadn’t done in the past but acknowledges the need to do so since competing fast-food chains use between 20% and 80% of those funds for their ad budgets.
“It’s a matter of being competitive with very formidable competitors who have spent and continue to spend at least as much or more of these type of dollars in media,” said Russ Klein, president of Burger King’s global marketing. “Not only is it a long overdue move, but a timely move.”
Klein declined to comment on specifics, but said the amount diverted was modest compared to competitors and was confident the move would boost sales. Company-owned stores will also see money come out of their restaurant funds to go toward national advertising.
Several franchisees say the parent company wants to tap into at least 20% of money that had been distributed to the store operators based on how much syrup they buy from suppliers like the Coca-Cola Co. (KO) and Dr Pepper Snapple Group Inc. (DPS).
The increase would divert about $4,000 in money from the average Burger King store per year, two people familiar with the plan said, amounting to roughly $26 million from its U.S. franchisees.
Franchisees already pay 4% of gross sales into a pool for national advertising.
The proposed changes, first communicated to franchisees last week, will likely be a hot topic at the franchise convention in early May.
Franchisees had used the rebate money for store repairs, equipment upgrades, or local marketing like newspaper inserts, but operators say they the money also flowed through to the bottom line, which came in handy in 2008 as costs for beef, cheese and utilities spiked.
The supply contract, signed in fiscal 2000, obligated Burger King stores to purchase a given amount of gallons of syrup that one franchisee said was to last a decade. But as soda consumption declined in favor of bottled water and other healthier drinks, Burger King now estimates it will take 14 years to meet terms of the purchase agreement.
Burger King’s advertisements have been highly regarded among marketing circles, generating buzz on traditional mediums and beyond with creative spots that verge on controversial. For instance, a new ad promoting SpongeBob SquarePants kids meals last week debuted as the third-most popular viral-video campaign, according to Visible Measures Corp., though another spot showing a short wrestler wrapped in what seems to be a Mexican flag drew condemnation from a Mexican ambassador.
On Wednesday, Burger King reported disappointing preliminary third-quarter results that showed a surprise decline in March traffic despite what some analysts viewed as successful launches of premium- and value-focused products. Earnings were projected to be within analyst estimates, though primarily due to a lower tax rate.
Burger King shares were recently down 1 cent, or 0.1% at $18.19. They are down about 23.6% since the start of the year, among the worst performing restaurant stocks during that time.