Burger King on Friday said it plans to spend $400 million over the next two years on advertising and renovating its restaurants as part of a broader strategy to revive lagging U.S. sales.
The Restaurant Brands International chain unveiled a turnaround plan for its U.S. business in Las Vegas at its annual franchisee convention. The investments are expected to weigh on its adjusted earnings per share for 2022 and 2023 by 10 to 12 cents annually. The company expects the investments to start paying off by 2025.
Wall Street analysts surveyed by Refinitiv expect earnings per share of $3.24 in 2023.
In the second quarter, Burger King reported flat U.S. same-store sales growth, trailing behind rivals McDonald’s and Wendy’s. The burger chain has been reporting lackluster U.S. sales over the last year, causing concern for Restaurant Brands CEO Jose Cil. In his tenure as chief executive, Cil has also spearheaded efforts to revive Canadian demand for Tim Hortons, Burger King’s sister chain.
A year ago, Cil also tapped former Domino’s Pizza executive Tom Curtis as the new president for Burger King’s U.S. and Canadian restaurants. Early changes to Burger King included slimming its menu to speed up drive-thru times and cutting down its paper coupons to push customers to use its mobile app.
Freshening up
Now Burger King is preparing to make even bolder changes. It’s planning to spend $200 million to fund remodels of roughly 800 locations. Another $50 million will go toward upgrading about 3,000 restaurants with technology, kitchen equipment and building enhancements. The company has more than 7,000 Burger King locations in the U.S.
Historically, remodeled restaurants see an average sales increase of 12% in their first year and outperform older locations over time, according to Burger King. The company is hoping that being more selective and strategic with its projects will produce even stronger sales growth, although it could take longer to see results.
“We might see remodels start to hit the market mid-2023 and going forward. It should really be a gradual ramp of the business over the course of the couple of years,” Cil told CNBC.
Burger King will also increase its U.S. advertising fund’s budget by 30% by investing $120 million over the next two years. Those investments will start in the fourth quarter.
“We expect that to start having an impact on sales over the next quarter,” Cil said.
An additional $30 million will be spent through 2024 on improving its mobile app, exceeding the digital fees that franchisees pay to the company for the technology.
Burger King’s menu will also get a facelift. The company said it’s built a multi-year blueprint for menu improvements, which include developing new Whopper flavors, betting on its Royal Chicken Crispy sandwich and investing in more employee training.
Franchisee impact
The strategy has received support from franchisees operating 93% of its U.S. restaurants, according to Burger King. Operators will be chipping in their own money alongside the company for remodels and advertising.
Curtis and his team put together a group of franchisees, representing a range of regions and experience, to come up with the strategy over the last three to six months.
“There were many long nights and plane rides,” Curtis said.
In addition to the money they get from Burger King, franchisees making upgrades to their restaurants are expected to make comparable investments to fund the projects.
The company is also changing its incentive structure to encourage operators to make more extensive remodels, which can be costly and typically require a location to be temporarily shuttered. In the past, Burger King operators who remodeled their restaurants received discounts on their advertising and royalty fees for up to seven years.
The new program will give franchisees cash once the project is completed, and let them choose how much of a discount they get on the royalties they pay to the company.
If profitability targets are met, however, Burger King franchisees will have to pay higher fees toward the advertising fund.