Analyzing Burger King’s shifting business model focus in 2Q14

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Nov. 20 2020, Updated 4:39 p.m. ET

Company-operated and franchise – Two business models

Burger King (BKW) generates revenues from three sources:

  1. Revenues from franchises
  2. Income from leased or subleased properties
  3. Sales at company-operated restaurants.

Click here to learn more. Franchise revenues include royalties and franchise fees. Royalties are calculated as a percentage of franchise restaurant revenues, which are driven by same-store sales.

Burger King reported $243 million revenues from franchises. This total grew 8% year-over-year from $225.6 million last year. Company-operated restaurant revenue declined to $18 million—down 65% from $53 million last year. This decline was due to a shift in strategy. Burger King is moving towards a 100% franchise model.

Shifting business model

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By moving to a 100% franchise model, Burger King should focus more on menu innovation, brand development, and franchisee operational support. It hopes to improve profitability by adopting this strategy, which has resulted in lower costs and improved operating margins, from 48% last year to 58% in the second quarter of 2014. This is a long way from 2Q11, when operating margins were 24%. Over the two-year period, company restaurants reduced from 1,258 to 52.

We’ll discuss costs in the next part of this series.

Wendy’s (WEN) is another restaurant chain that’s moving towards a franchise-heavy model. Click here learn more. Company-operated and franchise models both have their pros and cons.

To invest in restaurants that have a mix of business models, you can look into exchange-traded funds (or ETFs) like the Consumer Discretionary Select Sector SPDR Fund (XLY), which includes McDonald’s (MCD) and Yum! Brands (YUM).

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