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Burger King’s Gem: Franchisees’ National Supply Co-Op

Reinhart is a supplier to Burger King's Restaurant Services Inc
Burger King's supply chain management firm is owned and directed by franchisees. photo/bmm

CORAL GABLES, Fla. – A Burger King insider, who is a franchisee and former director of the board of the chain's multi-billion dollar supply cooperative, speaks candidly with Blue MauMau. There's one catch. His name is not to be released.

This is the second of a two-part interview.

Restaurant Services Inc., which is owned by Burger King's franchise owners, manages the supply of food, packaging, promotional items, distribution and logistics for Burger King's 7,100 North American outlets. While Burger King Worldwide's revenues in 2012 were $1.97 billion, the restaurants under the brand purchased a whopping $3.5 billion in goods and services through Restaurant Services Inc. (RSI).

Franchisees consider the franchisee cooperative a hidden gem when it comes to keeping costs down and delivering supplies.

Sad story of sagging store margins
Chart: BMM. Data: Company 10-K & Pacific Management

Restaurant analyst John Gordon, principal of San Diego-based Pacific Management Consulting Group, shows that while the compound annual growth rate for McDonald's and Wendy's company-owned restaurant margins improved over 4 percent per year over a 15-year period, Burger King's company-owned store margins decreased 3.3 percent annually, according to company 10K reports (see chart).

Gordon points out that company store margins (EBITDA/Store Sales) are the quickest way available to estimate franchise profit performance. That work-around is necessary because income statements for the franchises in the system are not reported.

Explaining what he believes to be the root of the problem, Gordon states: "The turnover in Burger King's company ownership and senior management over the last 15 years has been disruptive."

"Burger King Corporation has had a difficult time driving profitable traffic," says the analyst. He faults Burger King for years of shortsightedly focusing its marketing efforts to attract lower income consumers and introducing a plethora of products that nudged consumers away from higher margined products. It has also been unable to improve store economics so that restaurants have enough in earnings to remodel. Gordon also points out that until recently Burger King was also abysmal in introducing new menu items to attract customers back. "Those are all franchisor responsibilities," he points out.

"I'm in awe of how franchisees through their purchasing cooperative have contained what could have been a much worse erosion of store margins from such bad legacy decisions by Burger King," says Gordon. "RSI  has been and will continue to be a great resource to the system going forward, as it provides purchasing efficiencies, coordination and visibility to the franchisee system."

Don Sniegowski (DS): Burger King went private, then public, three times since the new millennium started. Your franchisor has had considerable ownership and leadership turnover. Such turnover might have handicapped or even sunk other chains. Franchisees have complained they have received very little from the series of new owners.

Former RSI board director and Burger King franchise owner: First of all, I feel like a restroom.

Fortunately, there are three things that have helped our brand and franchisees during those difficult times.

  1. The menu. Flamed broiled hamburgers: the whopper is really a good sandwich and has done us well.
  2. The franchise community has been quite strong and resilient. They by far have made the biggest investment in the brand. They fight to push it eventually in the right direction when Burger King is hell-bent on going the wrong way.
  3. Our supply chain management cooperative, Restaurant Services Inc. It has certainly saved us a lot of money through the years, especially comparing it before RSI when we only had a franchisor-run purchasing system.

DS: I didn't realize the influence of Burger King's National Franchisee Association (NFA) until I read that your independent franchisee association wrote a letter in 2010 voicing disapproval over then-CEO John Chidsey. Within months, private equity firm 3G came in and Chidsey was soon out. Was that just coincidence? I went back through the history of Burger King and I see that in 2001 the franchisee association again not only helped change chief officers, but also brought in an investment bank to find equity buyers for Burger King Holdings. You guys are a very assertive lot.

Franchisee: The National Franchisee Association was very instrumental in getting investment groups together and hatching a plan to bring Burger King out from Diageo PLC [the British liquor giant that franchisees considered hostile to the brand].

Wendy's store sales outpace Burger King's
Average Unit Volume of company stores in burger chains
Chart: BMM. Data: Company 10-K & Pacific Management

It didn't work out quite the way that we thought it would.

We were at war with [then-CEO John] Chidsey and his group [of supporters]. We were at war because we could see that they were managing the stock and managing the entity for short term gain, to quickly pull money out of the chain at the franchisees' and the brand's expense.

Chidsey and his group were smart people. They received an offer for Burger King that was much more than our group [of buyers] thought the brand was worth. 3G bought it for basically $4.5 billion. The investment groups that originally bought Burger King – Texas Pacific and Goldman Sachs – had only paid like $1.4B. They received their money back, and then some. So these investors came out fine, doing what they do.

But what they left was a broken brand that we franchisees had to live with.

We could have once again formed our own investment co-operative of some sort to buy the brand. But gosh, 3G came in and was willing to pay a big premium, $25 a share for Burger King. We were shocked at that. But yes, we wanted the old guys [officers and board] out. 3G would help us do that.

DS: Burger King restaurants in 2012 and 2013 have rolled out more menu items, when in prior years they had few new items. What's your take on the new owners of the brand and their new menu rollout?

Franchisee: I like the franchisor's management. The new owners have the franchisor performing ten times better than the previous one, which in my opinion was killing our brand, for their own [private-equity] benefit. There was not much [new menu items] in the pipeline with ex-CEO [John] Chidsey and his executive gang. The interest was to get a return [from Burger King Holdings] and get out. Putting money into R&D wasn't something they wanted to do.  

3G [a private investment firm] took over.

3G didn't know our business so they asked franchisees to help them identify new products to get out fast. Most of these new products were things that franchisees wanted to try.

DS: I loved your limited-time offers of bacon sundae to get folks talking and then your sweet potato fries. Yum! Burger King's new products rolled out so fast and furious from a virtual standstill that it must have been a logistical nightmare to supply for RSI.

Franchisee: Burger King told RSI in some cases only two weeks ahead of time.

There it is. I've said it. The process is not perfect. But I can tell you that without RSI's skills in managing the supply chain, the system would have been in a heck of a lot worse situation.

DS: I believe McDonald's has a five-year testing period. But Burger King seems to have gone super short in its new product rollouts.

Franchisee: The product development pipeline was as short as two weeks to a month before, which is almost impossible to fill.

But now it is approaching the traditional testing and roll out methods that we franchisees and RSI are used to and can manage. We had a lot of products fast and furious with shorter lead times. Now we have fewer new products coming at us with better test information and lead times so we can do a better job at supplying the chain.

DS: Who decides the menu items?

Burger King's Satisfries rolls out
Burger King entry door with poster of new SatisFries. photo/bmm

Franchisee: Burger King decides the menu items and carries out focus groups to see if the new item is something customers are interested in buying. What they are doing now is an operational test in a few restaurants to see that we can reproduce it in a way that isn't too complex for our factory. Then Burger King conducts a marketing test through two or three designated market areas to sell the product through advertising.

That has not been the way they've rolled out new products in the last year and a half [2012 and the first half of 2013]. Burger King has taken new products straight to market without testing. It's been very difficult for RSI to figure out the volumes necessary to supply the chain with what was needed.

They are testing, so now it is a better process.

DS: Despite new products, same-store sales have sagged. Store count continues to be flat with 7,476 outlets in Canada and the United States at the end of 2012. Do you see any positive changes coming for Burger King franchisees?

Franchisee: I think an accurate number now is 7,100 franchises as of September 2013.

I am having more fun than I was a couple of years ago. I just hope it is a lot more profitable in the future, if that makes any sense.

I will say this, though. I think 2014 is going to turn out to be a good year for Burger King franchise owners as initiatives take hold.


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About Don Sniegowski

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email don@bluemaumau.org.