Issue of the week: The Burger King buyout

last updated 8 January 2015

“Call it the greatest hamburger flip in history,” said Michael Corkery in WSJ.com. For the second time in 10 years, a private-equity firm has gobbled up Burger King. The first buyout was in 2002, when Goldman Sachs and private-equity firms Bain Capital and TGP paid $1.5 billion for the fast-food chain. They cleared a $2.5 billion profit after taking it public again, in 2006. This time around, it’s a Brazilian buyout specialist, 3G Capital, paying $3.3 billion, or $24 a share, for Burger King—far higher than the $19 to $21 a share that most analysts predicted. Good thing 3G is not “a typical buyout shop that will be looking to flip the company in a few years.” It’s going to take some time to earn a decent return from “such a pricey deal.”

At least Burger King’s new owner can ignore “the short-term pressures of the stock market” while it figures out a new strategy to compete with McDonald’s, said Economist.com. Mickey D’s has thrived during the recession, with its stock price hitting an all-time high in August. Burger King, meanwhile, has seen its share price halved “since the economy was flame-grilled in the summer of 2008,” and sales at BK outlets open a year or more have fallen for five consecutive quarters. Credit McDonald’s for “offering plenty of value options while also offering some high-margin, premium (but still affordable) items,” such as high-end coffee drinks and fruit smoothies, said Dan Mitchell in CNNmoney.com. Burger King tried something similar, but completely botched the job. It insisted on selling double cheeseburgers for 99 cents, prompting a lawsuit from franchisees who complained they couldn’t make a profit at that price. Making matters worse, premium items like ribs failed to sell, probably because an eight-piece combo with fries and a drink cost $8.99—“a ridiculous price for a ridiculous meal.”

Burger King compounded its troubles by wooing the wrong customers, said Julie Jargon and Gina Chon in The Wall Street Journal. It focused its menu and marketing on “superfans”—18- to 34-year-old males, especially minorities. This cohort may “account for half of all visits to Burger King,” but they have also “been disproportionately hurt by the economic slump.” McDonald’s, by contrast, has wooed women with salads, snack wraps, and cappuccinos, much to the envy of Burger King’s franchisees, who own and operate most of the company’s 12,000 outlets worldwide. Although Burger King eventually relented on the 99-cent cheeseburgers, allowing franchisees to hike the price to $1.29, relations with the folks who run the chain’s stores remain fraught. The new owner’s first task is to make peace with them—and then fire up a new strategy.