Summary
Burger King (BKC) needs some big news to reverse recent same store sales declines. It has long been considered a class b operator, with substandard sites and buildings.
It has highlighted its so called 20/20 remodel template.
Since BKC is about 90% franchised, it must go forward carefully with required big investments since capital market access is difficult. In addition, the size of the investment--$300 to $600K, will be it difficult to grind out a payback quickly.
Analysis
Restaurants should reimage and refurbish their stores. However, keep in mind that in the QSR universe, that about 70% of the sales are drive thru transactions, and customers do not come inside on that visit.
$300K to $600K is a hefty reimaging investment. Perhaps the range will wind up closer to $300K. In 2007, the average QSR reimage investment was $242K.
Franchisees don’t have the same access to capital as does BKC and have worse store level economics, as franchisees must pay a royalty, off the top.
Using an assumed Burger King AUV of $1.2M and the midpoint of the sales gain range as first reported in the press (somehow it grew to 15 to 20% in the Ad Age article), that equates to a revenue/gain/store/year of about $156K and a variable profit flowthrough of about $78K (assumes 50% PV) BEFORE debt service.
Debt service then becomes the next tricky number. If you assume a $450K investment midpoint of the $300 to $600k range), debt service over a 7 year term and a 10% interest rate, debt service would be $109K year. Of course, all cash or more cash investment would lower the debt service.
Therefore, the profit flowthrough isn’t covering the debt service.
So, really, either the press reports are bad, the investment will be lower or the sales gain higher, for this to look right.
John A. Gordon
Chain Restaurant Earnings and Economics Expert
www.pacificmanagementconsultinggroup.com
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
