Burger King's Battle for Market Share - A Zero Sum Game

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I was an expert for the BK franchisees in 2010 regarding the infamous $1 double cheese burger (DCB) legal action. For the record, the fully loaded cost then was about $1.17, and franchisees lost about 17 cents per DCB item then. The action settled, the court did not have the opportunity to rule on the main issues.

The BKW marketing approach is different now: not $1 double cheeseburger for months on end with no other new news, but only on selected weekends.

Based on confidential field operator commentary, I'd conclude that Burger King will be up in its December. But it's all a zero sum game: Competitor A temporarily takes share from Competitor B.

Burger King (BKW) is especially vulnerable to investor sentiment with its IPO this year, its rebuilding underway and new menu items introduced this summer that did generate some sales uplifts.

Concurrent with its 55th corporate anniversary, a "buy one get one (BOGO) Whopper deal for 55 cents is underway this weekend.

Franchisees just last week "voted" to extend it another weekend, December 13-16. Franchisees got the heavy sell and pressure to do it.

But, web reports are that some franchisees aren't honoring the BOGO offer.

This is an ultra low price point, the dream of marketing agencies everywhere who dream about low prices, and to take the cheap way out for their clients. This is a Burger King franchisee profit issue in that the additional Whopper has a backdoor cost of app. $.80, so the gross profit loss at first look is roughly about 25 cents per BOGO burger sold.

Will they make it up on volume? We'll see. This is classical economic price/supply/demand test. A big issue is product mix, whether tradeups can occur and how many additional customers that come in.

Loss leader tactics aren't "wrong" per se but the effectiveness depends. In store, we saw the new digital menu boards prominently featuring the $.55 offer, which doesn't seem quite right to maximize tradeups.

But there was considerable Burger King discussion in 2010 that the Whopper should be not be discounted, it was their legacy flagship product. Perhaps not now. What does the research say?

This is another reminder that publicly traded restaurants, particularly those with no or few company operated units (Burger King is selling stores worldwide and will soon be near zero company stores) will forever and ever be tempted to do low priced offers. The investment community rewards comparable sales; franchisee profits aren't reported or much often discussed.

These restaurants will be playing a zero sum game for some time.

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