Burger King failed under the weight debt and low profit margins

Friday, 29 May 2020

Burger King slumps into receivership after Covid-19 forces stores to close.

Burger King's fall in New Zealand was driven by debt and a lack of innovation, experts say.

Globally the American-owned giant has about 18,800 restaurants, earning US$1.78 billion (NZ$2.9b) in revenue in 2019, according to Stastica.com.

But in April, the company that owns the Burger King franchisor in New Zealand was placed in receivership by its financiers.

After negotiations with landlords, creditors and the franchise holder, a compromise was reached, allowing the restaurants to remain open while a buyer was found.

* Five Burger King restaurants set to close for good

The sudden stop of revenue during level 4 tipped Burger King over into receivership.

* Coronavirus: Burger King NZ owners in receivership, hopes of sale

* Burger King barred from hiring migrant workers for a year

Five Burger King restaurants, Lambton Quay, Courtenay Place in Wellington and Queen Street, Takapuna and West City in Auckland, will be closed as part of the deal.

Infometrics senior economist Brad Olsen says Burger King was operating very tight margins.

So where did it go so wrong for one of the most recognisable fast food brands in the world?

Burger King opened in New Zealand in 1993, and had 83 restaurants employing more than 2600 staff.

The chain held 14.9 per cent of the competitive fast food market in 2018, according to research company Roy Morgan.

Burger King sat just behind Domino's pizza chain which held 15 per cent of the market and KFC, with 17.7 per cent, but well behind McDonald's 33.3 per cent.

The franchise was owned by Antares Restaurant Group, which was bought by US private equity firm Blackstone Group in 2011.

Fast-food outlets are concentrated in areas of higher deprivation, according to health group Healthy Auckland Together.

But Infometrics senior economist Brad Olsen said Burger King in New Zealand struggled to be more than a cheap option with razor-thin margins.

'That low cost structure is very hard to maintain for many businesses and certainly for Burger King, those low margins have been quite difficult, particularly as we have higher minimum wage increases coming through in recent years,' Olsen said.

Other fast food restaurants, like McDonald's, have turned towards slightly more premium products to draw in customers, Olsen said.

McDonald's added premium burgers to its menu in 2003, including larger burgers, salads and barista coffee.

Burger King has remained, in many people's minds, as the more budget conscious option, with its $5 burgers and a menu that didn't change for a long time, Olsen said.

'That's hard with the minimum wage increase and a lot of the margins on Burger King's offerings are relatively low. All those things have coupled together to make it a very hard operating environment.'

The spread of the coronavirus and subsequent lockdown could well have been the thing to tip it over, Olsen said.

Antares Restaurant Group received $11.5 million of wage support for 1918 workers, according to the Ministry of Social Development's wage subsidy database.

Mike Treen, Unite Union national director, says 50 cent wage increases don't cause a business to go into receivership.

But Unite Union national director Mike Treen said businesses didn't go bust on the back of 50 cent an hour wage increases.

'Fast food has been an expanding industry, not a contracting one,' Treen said.

'Yes there's competition but overall purchases in that sector were steadily increasing and there was room for lots to play in.'

Treen said the company was one of the lowest wage payers in the industry.

In 2018, the company was barred from hiring migrant staff for a year after underpaying a worker.

But the financial structure of building a business on debt was risky in uncertain times, Treen said.

Retail expert Juanita Neville-Te Rito says Burger King's innovation came too late for the company.

'If you chose that as a mechanism for operation then the risk is that a cash flow interruption will make the debt unserviceable.'

Treen believed that Blackstone Group probably extracted what it could while running the business on a shoestring.

'I don't believe they held this thing for 10 years and never made any money,' he said.

'No, that didn't happen. They were rewarding themselves. What they missed out on was the ability to flick it on because of the sudden halt of trading with the coronavirus.'

In March 2019, Blackstone attempted to sell the business but was unable to find a suitable buyer.

'I think they will find a buyer this time. Burger King themselves will be keen to maintain their brand in New Zealand, so they will be open to a range of offers,' Treen said.

Customers have taken to Burger King's Facebook page to vent over their burgers, cold food, alleged misleading advertising and the lack of consistency.

One person wrote: 'Such a disappointment again. Our last trip to BK was terrible but after 6+ weeks we decided tonight to take the kids for their first takeaways and well, what a shame we picked you. App wouldn't work to start with. Sundaes missing, which as you can imagine didn't go down well with kids, chips were stale, no salad dressing. Will give up and go to McDonald's from now on. Such a shame as you used to be so good. It seems the food no service has been dropping consistently for months.'

Another wrote: 'I am so disappointed. Just got home and my chicken with cheese BLT is a standard chicken. Tried to call and phone rings out. Spent close to 100 as feeding 10 people and two miss out, plus the fries are cold. Come on guys. Answer your phone and pay attention to what you are doing.'

The complaints go on, interspersed with some positive feedback.

A happy customer said 'I tried the Rebel, and it was so good. Tasted like beef but was more smoky and a bigger pattie! You're winning BK! '

Retail expert Juanita Neville-Te Rito said the previous leadership team had let the business fall into disrepair.

There had been a lack investment in customer experience and new product lines, she said.

The new management that came on board about a year ago had been left scrambling to rebuild but it may have been too little, too late, Neville-Te Rito said.

Documents lodged at the Companies Office on May 6 show $50m was owed to a banking consortium of ANZ, ASB and Rabobank.

The banks supported the receiver's compromise deal, and had agreed to share half of any sale proceeds over $30m if the company was sold as a going concern.

They had also forgiven some interest payments and provided an overdraft to help restart of the business.

The company had other creditors of approximately $11.8m as at April 1, plus monthly rents of $1.7m it could not meet, according to the compromise agreement. .

Antares Restaurant Group declined to comment.