Burger King makeover: Fast food profits off franchisees' whopping costs

Following in the footsteps of its innovative Whopper Bar, Burger King (BKC) has announced it's launching an extensive interior renovation of its 12,000 restaurant locations. The new design, codenamed "20/20," draws design cues from both traditional diners and the Korova Milk Bar in Stanley Kubrick's A Clockwork Orange.

Sporting a white-and-red color scheme, it features large video menus, flame chandeliers, and corrugated menu walls. Sleekly futuristic, the new look is intended to convey a sanitary, forward-looking, cohesive style that will visually link all Burger Kings.

Edgy Burger King 20/20 Design
Burger King's new "20/20" restaurant design on view in the Houston suburb of Spring, Texas, on Oct. 5. 2009. The new design features industrial metal, brick walls and a flame chandelier.
Paul Sakuma, AP

The motivation for the style shift is, of course, profitability. Burger King has found that remodeled restaurants consistently see a 12 to 15 percent increase in sales. Also, the new design, which echoes the sleek, aggressive look of the Whopper Bar outlets, is intended to attract the young males who make up the majority of the chain's customers.

While Burger King contractually requires its franchisees to remodel regularly, this particular initiative goes hand-in-hand with a larger trend in fast food. As the recession pushes customers to trade down or go without fast food, chains are desperately fighting to maintain year-to-year sales levels. Burger King has had a 2.4 percent drop in same-store sales between 2008 and 2009 -- the first tumble since 2004.

Increasingly, fast-food companies have responded by instituting changes that increase customer traffic at the expense of franchise profitability. BK's 20/20 remodeling will cost franchisees between $300,000 and $600,000 at each location. But Burger King isn't alone in propelling sales by leaching from franchisee profits, as many chains have done in the past year with big price reductions. The McDonald's (MCD) dollar menu, the $5 Subway footlong sub, the Taco Bell 79-cent menu -- these cheaper items pull in bargain-hungry customers, but they take just as long for staffers to prepare as more expensive items. The labor cost remains constant. In fact, as franchisees sell ever-increasing quantities of reduced-price food items, they often have to hire extra workers, which cuts their profits.

Citing Subway's example, food service consultant Dean Dirks puts it this way: "Before the discounted menu, it took 1,000 units at $7 to produce $7,000 in sales. ... Now it takes 1,400 units to produce the same $7,000 in sales. Labor costs go up ... because at key times three people are needed to man the location instead of two. Basically, Subway is adding labor dollars to produce the extra amount in sales." These labor cost increases come out of franchisees' pockets, not from the corporate trough, and it's cost Taco Bell a 50 percent drop in profitability.

It's unclear how Burger King franchisees will respond to their mandatory mid-six-figure makeovers, but other franchisees have rebelled against the cheap-food trend. Many McDonald's restaurant owners have actively fought the dollar-menu trend, noting that corporate decisionmakers often push to increase transactions and same-store sales at the cost of profits.

It isn't surprising that transaction and same-store sales are such a priority at corporate headquarters: with stockholders clamoring for consistent recessionary profits, fast-food corporations need to keep stock price high. In the short term, expensive remodelings and cheap food may help drive these sales. But in the long run, many restaurant owners may find themselves having to choose between losing their franchise licenses and losing their businesses.
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