Premier Kings, operator of 172 Burger King restaurants, has declared bankruptcy according to The Street. This follows on the heels of Meridian Restaurants and Tom Kings which declared bankruptcy during the first quarter of the year.
These are three of Burger King’s largest franchised accounts for 377 quick-serve restaurants. But before the sky begins to fall, let’s keep in mind that this accounts for only 2% of the franchises. Burger King has more than 19,000 locations worldwide.
The Franchise Business Model
The biggest reason goes back to the heart of how Burger King has created its huge footprint – the franchising model. The franchising model is where the corporate office creates the brand and all its products, and a franchisee will purchase the rights to use that product for a fee and a cut of the sales.
It is the lowest cost way to expand for the franchisor as they don’t have to do the brick-and-mortar and human resources on a daily basis. The model also shields them from financial issues due to their limited exposure. For the Franchisee it creates an opportunity to be aligned with a national name for less cost than they could ever hope to do themselves. This is almost exclusively how Burger King does its business — a 2022 report had only 52 stores under corporate ownership.
The contrast would be McDonald’s Restaurants with 18% of its 40,000 locations being corporate-owned.
Why Should We Be Paying Attention?
Every restaurant operates on razor-thin margins. So, when we start seeing large-scale franchisees closing their doors it is a sign of how tight the market has become. I’m sure that no one is surprised to learn that margins are getting even tighter in the restaurant industry.
Why would the restaurant industry be squeezed?
- Cost of Employees. When Walmart and other mass retailers are now paying $15-$18 per hour the competition for quick-serve restaurant employees continues to be a battle. The “help wanted” signs have dwindled but it appears to be more a sign of companies learning to work with fewer employees or the addition of more technology to reduce the need for manual labor.
- Getting Employees. I originally had these two as one but realized that it was too broad a topic. As the worker shortage has continued you’ve seen businesses adapt by investing money into technology and adding ordering kiosks as an example. Regardless the ability to find employees continues to be a struggle that is driving some businesses to close.
- Inflation. We’ve all noticed how the cost of a trip grocery store has increased … sometimes a scary amount. So imagine having to buy hundreds of tomatoes or lettuce for sandwiches. And as negotiated contracts at the lower price starts to expire the cost pressure continues to push the bottom line upward for these restaurants.
- Cost of Money. When interest rates go up, the bottom line can get smaller. Especially, if these companies are working off terms from their vendors. I’ll carry a balance at a vendor that’s offering me a 2% charge to carry the money but push that up to 8% and I’m going to do everything I can to get it paid off.
What does the future hold?
The quick-service restaurant is not going anywhere, neither is a lot of the brand names. But could Burger King be heading the way of Burger Chef?
Honestly, it is hard to tell. Restaurant Brands llc, the company that owns Burger King in addition to Popeyes and Tim Hortons franchises, has been dumping money into the Burger King brand after it significantly lagged behind the competition.
“Back in the last few quarters, we had been behind the industry in terms of our same-store traffic, and that’s been progressively getting better every quarter since last year,” Restaurant Brands CEO Josh Kobza told CNBC. “So it was a big milestone for us now to get to flat traffic.”
“So it was a big milestone for us now to get to flat traffic.”Restaurant Brands CEO Josh Kobza
Restaurant Brands has dumped money into advertising with franchisees for the first time; additionally, they’ve been working to renovate local stores and building stronger affinity with the Whopper.
Possibly the biggest tell-tale that the franchise is not going anywhere. Restaurant Brands has increased its stake in corporate-owned stores and those ones that went bankrupt earlier this year. New franchisees are already in place.