This Franchise Chatter Guide on McDonald’s and Burger King was written by Brian Bixler.
By just about any business measure, they would be considered fast-food royalty: McDonald’s and Burger King, two of the world’s most iconic brands, have been locked in a burger battle for more than half a century with the Golden Arches, one of the largest franchise companies on the planet, reigning indisputably as the No. 1 titan in its category.
The two powerhouses are no longer the only franchise game in town as they might have been in the 1950s. They face competition not only from each other but also from other quick-service restaurants serving everything from chicken and sandwiches to Mexican and Asian fare; not to mention the onslaught from fast-growing, fast-casual eateries like Chipotle and Panera Bread, including a slew of “better burger” brands such as Five Guys Burgers and Fries and Smashburger.
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But when you boil down the burger category to just the two originals, which brand, McDonald’s or Burger King, is the best bet for potential investors? A lot of analysts would have a field day with that question with some backing the House of Ronald while others crown Burger King the better franchise opportunity. Still other analysts would say neither brand offers the same future opportunities as Wendy’s, which they see as the company to watch in the burger category.
This year is proving to be an eventful one in the burger business with McDonald’s continuing a steady sales decline domestically and Burger King announcing the purchase of Canadian coffee-and-doughnut chain Tim Hortons. BK, still considered the No. 2 brand by some industry watchers, is also steadily encroaching on McDonald’s territory by introducing menu items that seem to mimic Mickey D’s best sellers, such as the Big Mac.
In the midst of all the changes, Consumer Reports this summer came out with a reader survey about fast food that fails to favor either company when it comes to consumer preferences about taste and value.
Both McDonald’s and Burger King have been around as franchisors since the 1950s. Ray Kroc struck a deal with brothers Dick and Mac McDonald to spread the restaurateurs’ burger concept from one unit in San Bernardino, Calif., to hundreds of stores around the country, and founded McDonald’s Corp. in 1955. Kroc opened his first operation in Des Plaines, Ill., and, by 1960, bought exclusive rights to the McDonald’s name. By 1965, there were 700 McDonald’s eateries open across the United States, according to the company website.
Meanwhile, the Burger King brand was founded in 1953 and four years later, the flame-broiled Whopper made its debut, helping to capitalize on taste and customization as the brand’s main differentiators from McDonald’s. James McLamore and David Edgerton opened the first Burger King in Miami and dreamed of giving McDonald’s a run for its money, but the brand stayed perpetually in the No. 2 position in the category and in recent years has even ceded market share to Wendy’s.
Burger King has changed ownership several times over the years beginning with McLamore’s sale to Pillsbury in 1967. In 2010, private equity firm 3G Capital purchased Burger King for $4 billion, instituting some cost-cutting changes, selling the majority of company units to franchisees and infusing Burger King Worldwide Inc. with some fresh blood at the executive level. Burger King is again a publicly-traded company.
With more than 35,000 locations globally, McDonald’s is one of the largest franchise operations in the world, second only to Subway in number of units. It offers franchisees tremendous brand recognition and proven franchise systems. However, the sales picture has been bleak for the company in recent years.
In the latest of a string of poor quarterly earnings reports, the company’s same-store sales in the U.S. declined 1.5 percent and profit declined 1 percent during the second quarter of 2014. Globally, sales were flat during the quarter, according to reports. The company followed up that news in August by posting its worst sales decline in 10 years. McDonald’s global sales at stores open at least a year declined 3.7 percent for the month, the worst since March 2003, when global sales also fell 3.7 percent.
Still, with more than $35 billion in U.S. sales last year, McDonald’s is the world’s biggest restaurant chain by revenue, according to QSR magazine. It is also one of just a handful of the top quick-service burger restaurants included in the top 100 of Entrepreneur magazine’s Franchise 500 list—this year at No. 16, behind Hardee’s at No. 11, but above Sonic at No. 26 and Carl’s Jr. Restaurants at No. 46.
IBISWorld market research firm estimates that McDonald’s has an 18.6 percent market share of the entire fast-food industry (including pizza stores, sub shops, chicken restaurants and other limited-service restaurants) compared to Burger King’s 4.6 percent share.
Unlike consumers, however, investors are swayed primarily by the bottom line; and becoming a franchisee at either company is not cheap. According to McDonald’s Franchise Disclosure Document, initial investment for franchisees ranges between $437,000 and $2.3 million, including an initial franchise fee of between $500 and $45,000, depending on the type of unit it is.
Total initial investment in a Burger King franchise, depending on the facility type and including costs of acquiring and improving real estate, ranges from approximately $316,100 to $2.7 million, including a $50,000 initial franchise fee, according to that company’s FDD.
Burger King Gains
Burger King has been making strides in regaining its No. 2 status from Wendy’s in the burger space with some recent accomplishments attributed to its young, 33-year-old Chief Executive Officer Daniel Schwartz, who has overseen a number of new initiatives, including refranchising hundreds of company-owned units to create a steady influx of cash for the brand. In 2013, it refranchised 519 company-owned restaurants and ended the year with 13,259 restaurants, compared to 12,667 in the same quarter of the previous year.
“Burger King Worldwide has taken its royal crown back amid strategic moves aimed directly at dethroning its larger rival McDonald’s,” USA Today reported earlier this year.
While new McDonald’s menu items such as premium chicken wraps and Mighty Wings have been characterized as non-starters, Burger King has seen success with its Big King sandwich (a Big Mac rival) and the new BK BBQ rib sandwich, meant to challenge the popular McRib. It also introduced “healthier” french fries, so-called Satisfries, touted as having 40 percent less fat and 30 percent fewer calories than french fries from McDonald’s.
Response to Market Forces
Potential investors might look at a number of factors to determine which brand is most worthy of a franchise agreement, including how they react to current market conditions that might prepare them to face the future of the sector.
“For an investor, if you are looking at the chain’s overall sales performance and brand, McDonald’s is hands down the winner when it comes to ROI (return on investment),” writes MBA Peter Siegel, founder of BizBen.com. However, “Burger King has some positive changes occurring. The company has a smaller foot print so there is less competition from within the chain. On top of that, Burger King is working to position itself for growth.”
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Both companies have pursued similar strategies in face of new competition wrought by fast-casual restaurant concepts, generally described as a cut above fast food with slightly higher price points, more variety in menu offerings and a stylish decor that one might associate with a fine dining establishment. Both McDonald’s and Burger King’s corporate leadership have required franchisees to update their stores with more contemporary interior designs, the cost of which is paid for by the owner/operators.
Each company’s response to consumer demand for healthier menu choices might also indicate how prepared they are for continued growth in the current market. McDonald’s has perhaps seen the most drastic changes to its menu in recent years with the introduction of such items as McWraps, Mighty Wings, Fish McBites, Hot ’n Spicy McChicken and the veggie-laden Bacon Clubhouse sandwiches. In addition, McDonald’s has added new smoothies, perceived to be a healthy beverage option, as well as its McCafe line of coffee drinks.
Burger King’s addition of Satisfries was seen as that company’s concession to the healthy eating trend as it gave young parents a new option when ordering something wholesome for their children, but the company has since eighty-sixed the offering from its menu due to poor sales.
Burger King may still have an edge when it comes to marketing to Millennials: The addition of young talent in the upper echelon of management is generally seen by analysts as a step in the right direction when it comes to marketing its products to a younger demographic.
Having long lured customers to its doors with the promise of letting them “have it their way,” the Burger King brand has always stressed customization, which is becoming even more relevant to today’s consumer. McDonald’s, meanwhile, is only testing new ways to offer more customization to its patrons on some select items.
A Fruitful Merger
But the biggest news from Burger King this summer was its move to acquire Tim Hortons, the leading Canadian coffee and doughnut chain, and relocate its headquarters from the United States to that country. The move would keep Burger King from paying double taxation on profits earned abroad were it to remain in the United States. Stock prices for both companies soared in the wake of the news. Among other things, the merger with the coffee giant would also put Burger King in a better position to compete with McDonald’s popular line of McCafe drinks and even doughnut purveyors like Dunkin’ Donuts and Krispy Kreme.
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The deal struck in late August would allow Burger King to purchase Tim Hortons for about $11 billion, with $3 billion in financing from Warren Buffett, CEO of Berkshire Hathaway, according to reports. The result is a new company, the third-largest fast-food company in the world, valued at approximately $18 billion with more than 18,000 restaurants in 100 countries.
Darren Tristano, executive vice president of Technomic Inc. market research firm for the restaurant industry, has said the move by Burger King will allow it to compete even more effectively with McDonald’s while giving it a leg up in the fast-food industry race to capture more of the breakfast daypart, which has become increasingly important in recent years.
“With increased emphasis on global brand growth, a combined Burger King/Tim Hortons provides strong growth opportunity through co-branding,” Tristano blogged after the deal was announced. “Giving potential licensees the opportunity to offer a strong breakfast/lunch offering from Tim’s and lunch/dinner offering from Burger King maximizes rents and revenues.”
But augmenting its menu may not be Burger King’s secret ingredient in the burger wars if public perception of its food doesn’t change. In its August 2014 issue, Consumer Reports published results of a reader survey that rated America’s best and worst fast foods. The cover story did not paint such a rosy picture for either Burger King or McDonald’s. Both of them earned the worst overall marks in their category for customer satisfaction, which was assigned a numerical value based on reader responses. Both companies showed lower satisfaction than almost all of the other 63 brands mentioned in six different categories. The only two that scored lower were Sbarro in the pizza category and KFC in the chicken grouping.