BKC downplayed the potential traffic impact from removing the dollar double cheeseburger off the menu in mid-April at an investor conference today. Just last week, JACK’s CEO Linda Lang stated that she thinks the industry will see some immediate relief on the discounting front when BKC removes the dollar double cheeseburger from its menu. MCD raised the price on its dollar double cheeseburger in December 2008 in response to rising commodity costs. During the first full quarter after the change, MCD reported that over 50% of customers stayed with the double cheeseburger at about $0.20 more. During 1Q09, the Dollar Menu dropped to 10% of sales, from the typical 13%-14% range, which helped margins without hurting traffic.
BKC could experience the same margin benefit from raising the price on its double cheeseburger in April. One major difference between the MCD and BKC situations is that MCD had the dollar double cheeseburger on its menu for some time prior to raising the price whereas BKC had just gone national with its dollar double cheeseburger in October. On its last earnings call, BKC stated that the dollar double cheeseburger promotion largely drove the sequential quarterly improvement in same-store sales, leading to positive traffic growth and gross profit dollars in the U.S. YOY. It might be harder for BKC to maintain this positive traffic momentum when this promotion goes away.
Notes from today’s management presentation:
Strong global presence
- 90% franchised
- US and Canada is 2/3 in terms of sales and profitability
- Growing across the world
- Setting new highs in restaurants every month
- 80% of unit growth is coming from outside of US and Canada
- Stable base of new restaurant count in NA
- Business generates good cash flow
- Unit economics are sounds
Growing brand profitably
- Driving ARS growth
- Innovation around building business
- Menu mix
- Enhancing value
- Dollar double cheeseburger moved the needle
Running great restaurants
- Satisfaction scores are at record levels
- Leveraging assets, systems and analysis tools, to drive profitability
- P&L benchmarking
- Four corner pricing model
- Biggest opportunity is image, improving image
- Investment in system
- Franchisees and company have spent a lot on POS systems etc.
- Remodeled 140 restaurants with company money in the last three years and returns continue to impress
- Aligning people with the strategy
- Continuing to work with franchisees
- Consumer slowdown
- Cost containment
- Great time to get after quality sites
- Improving comparable sales and traffic
- Competing better with competitors
- Restaurant count growing – over 12k
- Comps down worldwide
- ARS are stable
- In US and Canada there has been significant improvement over last few years
US and Canada
- 24% increase in US and Canada system ARS to 1.24M from 1.0M in FY2004
- ARS goal is $1.5M
- Completed 2 years of net restaurant growth
- Reimaging program yielding solid ROI
- Portfolio management
- Operational efficiencies continue to be incorporated in company system
Robust product pipeline
- Flame broiled taste
- Size at affordable prices
- More competitive hours – 7 of top 10 franchisees operate 24 hour restaurants, company units adopting same policy
- CRM’s continue to be a focus
- Development and reimaging
- Reflags have posed interesting opportunities to expand into new markets
- Remodels can see 15% in sales uplift
- Analytics driving operational excellence
Long Term Financial Targets (unchanged)
- Comp sales up to 2% or 3%
- Average annual net restaurant growth of 3% or 4%
- Average annual revenue growth of 6% to 7%
- Average annual EBITDA growth of 10% to 12%
- Average annual EPS growth of 15%
Q: Relationships with franchisees, how did it impact your P&L?
A: Did not impact BKC’s P&L, affected momentum of getting things done. Have executed what was intended but not as quickly as was initially desired. The company has been on a campaign to be more effective communicating with franchisees.
Q: Impact of a jobless recovery on your business?
A: A jobless recovery makes it a longer term play for BKC, not a shorter term play. Unemployment rate is very important for BKC.
Come the fall, BKC will be leading with a lot of breakfast activity and coffee products. If the unemployment situation doesn’t continue to improve, it will be a tough 2010, but things seem stable enough right now to do it.
Q: Any indications of economic recovery? How concerned are you with replacing $1 double cheeseburger?
A: Haven’t seen change in industry negative traffic trend that was seen over the past four or five months. BKC not expecting an enormous amount of improved stability until negative trend changes.
In terms of dollar double cheeseburger, in April, the buck double will be a single slice of cheese with two patties, supported by advertising. The double cheeseburger will be available for more than $1. Media weight behind the buck double will hopefully add to the appeal. Customers like the product with less cheese better…that’s coming in mid to late April.
In testing the buck double for guest appeal, we believe that the traffic impact will not be negative. Not able to test that in the midst of a higher dollar double cheeseburger, of course, but we are confident that the product will do well.
Q: Accelerating remodel program?
A: Generally speaking, most of the estate is tired, you have to do exterior and interior. We’ve perfected the decision making process of which units to remodel when and at the pace currently being set it would take 10 years. Need to find more capital to accelerate. Franchisees are not required to do it but they are doing it, they see the returns.
Want to raise the minimal standard for the system also. The brand five or six years ago did a lot of shabby remodels and that has come home to roost.