Thursday, May 01, 2008

Burger King Shrinking Margins

Burger King (BKC) reported strong Q3 results led by global business momentum and raised fiscal year guidance. Then as you read the press release and I mean read, for nine full paragraphs, until you realize that the margins are starting to shrink dramatically. Overall sales growth has been strong enough to overcome the problem and create a bottom line. But the problem persists.

Management points to two major factors. The rather large spend on rebranding stores which temporarily takes a large bite out of margins. As well the cost of food and paper has gone up. The rebranding can be understood. Stores are in need of a new image and the program will bear fruit when it is rolled out.

The shrinking margin attributable to food is of concern. As food becomes more expensive the entire fast food model may need to be re-validated. When Ray Kroc started serving hamburgers no one in the western world was worried about the cost of ground meat and the flour needed to make buns. Today we are.

Management comments in the press release focused almost exclusively on top line issues. And ignored the shrinking margin issues. This indicates a blindside tackle in the making.