Contents

• This report is based on the following cases study -
• Burger King
• Burger King, often abbreviated as BK, is a global chain of hamburger fast food restaurants headquartered in Miami, Florida, United States. Originally called Insta-Burger King, the company was founded in 1953 by Keith Kramer and Matthew Burns. Their Insta-Broiler oven was so successful at cookinghamburgers that they required all of their franchised restaurants to use the oven. After thechain ran into financial difficulties, it was purchased by its Miami-based franchisees,James McLamore and David Edgerton, in 1955. The new owners renamed the company as Burger King. The restaurant chain introduced the first Whopper sandwich in 1957.Expanding to over 250 locations in the United States, the company was sold in 1967 toPillsbury Corporation.The company successfully differentiated itself from McDonald’s, its primary rival, whenit launched the ‘Have It Your Way’ advertising campaign in 1974. Unlike McDonald’s, whichhad made it difficult and time-consuming for customers to special-order standard items (suchas a plain hamburger), Burger King restaurants allowed people to change the way a food itemwas prepared without a long wait.Pillsbury (including Burger King) was purchased in 1989 by Grand Metropolitan, whichin turn merged with Guinness to form Diageo, a British spirits company. Diageo’s managementneglected the Burger King business, leading to poor operating performance. Burger Kingwas damaged to the point that major franchises went out of business and the total value of the firm declined. Diageo’s management decided to divest the money-losing chain by selling it toa partnership private equity firm led by TPG Capital in 2002.The investment group hired a new advertising agency to create (1) a series of new adcampaigns, (2) a changed menu to focus on male consumers, (3) a series of programs designedto revamp individual stores, and (4) a new concept called the BK Whopper Bar. These changesled to profitable quarters and re-energized the chain. In May 2006, the investment group tookBurger King Public by issuing an Initial Public Offering (IPO). Yet, despite the successes of the new owners, the effects of the financial crisis of 2007–2010 weakened the company's financial outlooks which eventually led to TPG and its partners divesting their interest in the chain in a US$3.26 billion sale to 3G Capital of Brazil in 2010.
• Business Model
• Burger King is the second largest fast-food hamburger restaurant chain in the world asmeasured by the total number of restaurants and systemwide sales. At the end of fiscal year 2013, Burger King had over 13,000 outlets in 79 countries; of these, 66 percent are in the United States and 99 percent are privately owned and operated with its new owners moving to an entirely franchised model in 2013. The restaurants featuredflame-broiled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks,and other low-priced food items.
• According to management, the company generated revenues from three sources: (1) retailsales at company-owned restaurants; (2) royalty payments on sales and franchise fees paid byfranchisees; and (3) property income from restaurants leased to franchisees. Over 95% of Burger King Restaurants were franchised, a higher percentage than other competitorsin the fast-food hamburger category. Although such a high percentage of franchisees meantlower capital requirements compared to competitors, it also meant that management had limitedcontrol over franchisees. Franchisees in the United States and Canada paid an average of3.9% of sales to the company in 2013. In addition, these franchisees contributed 4% of grosssales per month to the advertising fund. Franchisees were required to purchase food, packaging,and equipment from company-approved suppliers.Restaurant Services Inc. (RSI) was a purchasing cooperative formed in 1992 to act aspurchasing agent for the Burger King system in the United States. As of June 30, 2013, RSIwas the distribution manager for 94% of the company’s U.S. restaurants, with four distributorsservicing approximately 85% of the U.S. system. Burger King had long-term exclusivecontracts with Coca Cola and with Dr. Pepper/Seven-Up to purchase soft drinks for itsrestaurants.
• Management touted its business strategy as growing the brand, running great restaurants,investing wisely, and focusing on its people. Specifically, management planned to accelerategrowth in 2014-15 so that international restaurants would comprise 50% of thetotal number. The focus in international expansion was to be in (1) countries with growthpotential where Burger King was already established, such as Spain, Brazil, and Turkey;(2) countries with potential where the firm had a small presence, such as Argentina,Colombia, China, Japan, Indonesia, and Italy; and (3) attractive new markets in the MiddleEast, Eastern Europe, and Asia.
• Management was also working to update the restaurants by implementing its new20/20 design and complementary Whopper Bar design introduced in 2008. By 2013, many of the Burger King Restaurants had adopted the new 20/20 design that evoked the industrial lookof corrugated metal, brick, wood, and concrete.
• Management was using a “barbell” menu strategy to introduce new products at both thepremium and low-priced ends of the product continuum. As part of this strategy, the companyintroduced in 2010 the premium Steakhouse XT burger line and BK Fire-Grilled Ribs, the firstbone-in pork ribs sold at a national fast-food hamburger restaurant chain. At the other end ofthe menu, the company introduced in 2010 the 1⁄4 pound Double Cheeseburger, the Buck Double,and the $1 BK Breakfast Muffin Sandwich. In 2012, it brought out few significant product changes which included new ice cream products, smoothies, frappes and chicken strips. The Whopper was the most prominently reformulated product in this round of introductions with a new type of cheese and packaging.
• Management continued to look for ways to reduce costs and boost efficiency. ByJune 30, 2013, point-of-sale cash register systems had been installed in all company-owned,and 57% of franchise-owned, restaurants. It had also installed a flexible batch broiler to maximizecooking flexibility and facilitate a broader menu selection while reducing energycosts. By June 30, 2013, the flexible broiler was in 89% of company-owned restaurants and68% of franchise restaurants.
• Industry
• The fast-food hamburger category operated within the quick service restaurant (QSR) segmentof the restaurant industry. QSR sales had grown at an annual rate of 3% over the past10 years and were projected to continue increasing at 3% till 2015. The fast-foodhamburger restaurant (FFHR) category represented 27% of total QSR sales. FFHR sales wereprojected to grow 5% annually during this same time period. Burger King accounted foraround 14% of total FFHR sales in the United States.The company competed against market-leading McDonald’s, Wendy’s, and Hardee’srestaurants in this category and against regional competitors, such as Carl’s Jr., Jack in the Box,and Sonic. It also competed indirectly against a multitude of competitors in the QSR restaurantsegment, including Taco Bell, Arby’s, and KFC, among others. As the North Americanmarket became saturated, mergers occurred. For example, Taco Bell, KFC, and Pizza Hut werenow part of Yum! Brands. Wendy’s and Arby’s merged in 2008. Although the restaurant industryas a whole had few barriers to entry, marketing and operating economies of scale madeit difficult for a new entrant to challenge established U.S. chains in the FFHR category.
• The quick service restaurant market segment appeared to be less vulnerable to a recessionthan other businesses. For example, during the quarter ended May 2013, both QSR and FFHRsales decreased compared to both casual dining chains and family diningchains. The U.S. restaurant category as a whole declined 1%.America’s increasing concern with health and fitness was putting pressure on restaurantsto offer healthier menu items. Given its emphasis on fried food and saturated fat, thequick service restaurant market segment was an obvious target for likely legislation. Forexample, Burger King’s Pizza Burger was a 2,530-calorie item thatincluded four hamburger patties, pepperoni, mozzarella, and Tuscan sauce on a sesame seedbun. Although the Pizza Burger may be the largest hamburger produced by a fast-food chain,the foot-long cheeseburgers of Hardee’s and Carl’s Jr. were similar entries. A health reformbill passed by the U.S. Congress in 2010 required restaurant chains with 20 or more outletsto list the calorie content of menu items. A study by the National Bureau of EconomicResearch found that a similar posting law in New York City caused the average calorie countper transaction to fall 6%, and revenue increased 3% at Starbucks stores where a DunkinDonuts outlet was nearby. One county in California attempted to ban McDonald’s fromincluding toys in its high-calorie “Happy Meal” because legislators believed that toysattracted children to unhealthy food.
• Issues
• Even though Burger King was the second largest hamburger chain in the world, it lagged farbehind McDonald’s, which had a total of over 33,000 restaurants worldwide. McDonald’s averagedabout twice the sales volume per U.S. restaurant and was more profitable than Burger King. McDonald’s was respected as a well-managed company. During fiscal year 2013 (endingDecember 31), McDonald’s earned $4.6 billion on revenues of $22.7 billion. Although itstotal revenues had dropped from $23.5 billion in 2012, net income had actually increased from$4.3 billion in 2013. During the 2008–2010 recession period, in contrast to most corporations, McDonald’s common stock price hadrisen reaching an all-time high in August 2010.In contrast, Burger King was perceived by industry analysts as having significant problems.As a result, Burger King’s share price had fallen by half from 2008 to 2010. Duringfiscal year 2013 (ending December 31), Burger King earned $186.8 million on revenues of$2.50 billion. Although its total revenues had dropped only slightly from $2.54 billion infiscal 2012 and increased from $2.45 billion in 2011, net income fell significantly. Even though same-store sales stayed positive forMcDonald’s during the recession, they dropped 2.3% for Burger King. In addition, some analysts were concerned that expenses were high at Burger King’scompany-owned restaurants. Expenses as a percentage of total company-owned restaurantrevenues were 87.8% in fiscal 2013 for Burger King.McDonald’s had always emphasized marketing to families. The company significantlyoutperformed Burger King in both “warmth” and “competence” in consumers’ minds. WhenMcDonald’s recently put more emphasis on women and older people by offering relativelyhealthy salads and upgraded its already good coffee, Burger King continued to market toyoung men by (according to one analyst) offering high-calorie burgers and ads featuring dancingchickens and a “creepy-looking” king. These young men were the very group who hadbeen hit especially hard by the recession. According to Steve Lewis, who operated 36 BurgerKing Franchises in the Philadelphia area, “overall menu development has been horrible. . . . Wedisregarded kids, we disregarded families, we disregarded moms.” For example, sales of new,premium-priced menu items like the Steakhouse XT burger declined once they were no longerbeing advertised. One analyst stated that the company had “put a lot of energy into gimmickyadvertising” at the expense of products and service. In addition, analysts commented that franchiseeshad also disregarded their aging restaurants.
• Some analysts felt that Burger King may have cannibalized its existing sales by puttingtoo much emphasis on value meals. For example, Burger King Franchisees sued the companyin 2009 over the firm’s double-cheeseburger promotion, claiming that it was unfair for themto be required to sell these cheeseburgers for only $1 when they cost $1.10. Even though theprice was subsequently raised to $1.29, the items on Burger King’s “value menu” accountedfor 30% of all sales in 2013, up from 12% in 2012.
• New Owners: Time for a Strategic Change?
• In August 2014, 3G announced that it planned to acquire the Canadian restaurant and coffee shop chain Tim Hortons and merge it with Burger King with backing from Warren Buffett's Berkshire Hathaway. The two chains will retain separate operations post-merger, with Burger King remaining in its Miami headquarters. A Tim Hortons representative stated that the proposed merger would allow Tim Hortons to leverage Burger King's resources for international growth. The combined company will be the third-largest international chain of fast food restaurants. New ownership should bring a new board of directors and a change in topmanagementto ensure the survival and long-termsuccess of Burger King.

Description

This paper answers the following questions on the case study -
Read the attached case and write a report that addresses the following tasks
• An evaluation ofBurger King’s macro environment in USA using PEST model.
• An evaluation of Burger King’ competitive environment using Porters Five forces model.
• A SWOT evaluation of Burger King.
• Using literature review, highlight the significance of external and internal analysis in strategy formulation