Sunday, October 29, 2006

Dinosaur Burgers

For over 40 years I have been a fan of the Whopper from Burger King and since I worked for Burger King in 1981-1982 I have some special insight into the brand.

Despite the product superiority of the Whopper over the Big Mac, I have found it instructive that it takes more than just product superiority to achieve a competitive advantage. While burgers are still a key product category in all the Burger brands (McDonald's, Wendy, Jack In The Box, Hardee's, Carls Jr., etc) other product categories have also become important as the burger chains don't just compete with each other, but they also compete with the Subway's, Taco Bells, Paneras and hundreds of other options for share.

Burger King has consistently demonstrated that they don't understand why they are not the "King" of the burger business. They run dirty, dingy, tired restaurants and their revolving door management history and turbulent relationships with their franchisees have taken a toll by making Burger King the least relevent and necessary brand in the burger segment which is likely to contract over the coming years. Burger King has already closed quite a few restaurants and is likely to close more in the coming years as the brand continues to tarnish.

It's recent IPO only reinforces the destiny of the brand. Of the $399 million raised by selling stock to the public, $367 million was used to pay a "special dividend" to the private equity owners. It will be interesting to see if there are any dividends paid to the public shareholders in the future. Don't plan your retirement on it. The stock price is also likely to falter at the insiders look to liquate whatever of their holdings that they can over time. It's not like they felt that the brand was worth investing a significant amount of the IPO proceeds into. They did use $7.1 million to pay a bonus to the CEO which is sure to increase the competitiveness of the brand.

Survival of the fittest is the catchword here and Burger King is the least fit of the burger brands with McDonald's, Wendy's and Jack In The Box experiencing strong share appreciation recently. Look for an increasing number of Burger King locations to become some other stronger more competitive brand. Look for short sellers to come in as the insiders start to dump their shares before their value goes the way of the dinosaurs.