Owner of Burger King to Buy One of the Largest Franchises for $1 Billion

This strategic acquisition is a hefty investment aimed at expediting Burger King’s modernization plan, a critical step in keeping pace with its formidable rival, McDonald’s, which embarked on a $6 billion modernization spree for over 8,700 restaurants in 2018.

Analysts, such as Siye Desta from CFRA, have pointed out that the fast-food giant has been trailing behind its competitors in these aspects. Executives at Burger King U.S. have openly acknowledged their struggle during the pandemic, leading to a decline in customer numbers. Additionally, a complicated ordering experience only added to their challenges.

They have a headquarters in Ontario, Canada and were founded in 2014. the company was created when Burger King merged with Tim Hortons in a $11 billion acquisition deal.

However, it’s worth noting that a substantial portion of this sales uptick in the U.S. was driven by existing customers spending more during their Burger King transactions rather than an influx of new patrons. While this has been a positive trend, there’s a potential snag on the horizon—namely, if U.S. consumers decide to tighten their purse strings and cut back on spending, it could pose a challenge for sustaining this growth.

Customers are increasingly reliant on these services which puts restaurants on notice to either change with the times or lose out on potential business.

Now through the Burger King app, customers can place orders with the restaurant directly instead of going through DoorDash or UberEats. This gives Burger King greater control over what customers see and their menu pricing. The app includes an automatic surcharge for delivery that customers cannot avoid.

CNET reported in January that fast-food menu prices jumped nearly 13% in 2022. Burger King managed to beat the average, only raising prices by 2% in that same period.

A combination of wage and commodity costs has made the skyrocketing menu prices across the industry inevitable. Unfortunately, many people are starting to feel that the value of what they are getting at the drive-through is not matching up to the increase in price.

Because of the increased cost of eating out, many Americans feel like it is no longer affordable. Fast Food was seen as a cheap and easy option in the past, but the affordability of these restaurants has taken a major hit in recent years.

For example, California passed a minimum wage law that will affect an estimated 500,000 fast-food workers. These workers will see their wages jump from a minimum of $16 an hour to $20 an hour on April 1.

The acquisition of Carrols, its largest franchisee, appears to be a strategic move to accelerate this plan. Carrols has consistently outperformed its parent company in terms of foot traffic. Even during the most recent quarter, while RBI’s foot traffic remained flat, Carrols experienced an uptick.

The Associated Press reported Kobza said in a conference call that “We need pretty much every Burger King all across the country to be modern, convenient, and competitive with all of the other concepts out there that have new and modern buildings.”

The plan is to revamp more than half of Carrols’ locations, providing a modern image to Burger King restaurants. After the acquisition is completed, RBI plans to remodel 600 of Carrols’ 1,022 Burger King locations across 23 states.

It will also improve the perception of the brand in customer’s minds. These improvements improve the efficiency of the space and will drive sales, making them a helpful investment.

However, there’s an interesting twist—RBI plans to hold onto the acquired locations for a limited time. After remodeling Carrols’ restaurants over the next five years, the plan is to refranchise them, putting them back into the hands of motivated local franchisees.

Typically a franchisee will have to pay upfront costs to start the business and some form of royalty when the business is in operation.

The company will retain a portfolio of a couple of hundred restaurants for strategic innovation, training, and operator development purposes.

This slogan romanticizes the ability for customers to order off the Burger King menu in whatever way they see fit. In the same way that customers are having it their way, the parent company of Burger King RBI is hoping to take more direct control over its market share.

Analysts believe that the acquisition of Carrols could be a positive long-term driver for Burger King’s earnings, potentially paying dividends for the brand. UBS analysts, in particular, see the acquisition as a means for Burger King to further improve sales growth and store profitability, especially as the modernized stores transition to well-motivated franchisees.

Despite the flat pre-market performance, Restaurant Brands’ shares had already seen a robust 21% increase in 2023, outpacing the New York Stock Exchange’s Composite Index, which saw an 11% increase during the same period.

This price represents a substantial 23% premium to Carrols’ 30-day volume-weighted average price as of the preceding Friday, underscoring the value attributed to the acquisition.

Its lowest valley was in March 2020 when RBI stock was selling for $40.03 a share. Today the stock price has almost reclaimed its pre-pandemic peak, reaching $75.88 on January 1 2024.

The outlook is optimistic, with analysts assigning a buy rating and a $90 price target to Restaurant Brands International, indicating a potential 18% return over the next 12 months.

The infusion of capital and the extensive remodeling plan underscore the company’s dedication to transforming the customer experience, with a long-term vision aimed at reshaping the trajectory of one of the world’s most iconic fast-food chains.