Lessons Learned from 3G’s Historic Burger King Turnaround
Recent quarters have been a bloodbath for PE-backed restaurant chains. 3G’s stewardship of Burger King offers insights for operators.
In 2009, Burger King was a 55-year-old "fast food flameout” facing intense scrutiny from its shareholders. Traffic was declining despite competitors like McDonald’s seeing an uptick — it was the Great Recession, after all, and customers were looking for cheap eats. Meanwhile, volatile food prices pushed earnings down even more.
Enter: 3G Capital.
In 2010, 3G acquired Burger King for $3.3 billion ($4 billion inclusive of debt), or $24 per share, delisting it from the New York Stock Exchange. By 2012, Burger King’s earnings had increased 49 percent, bringing the company’s valuation to $8 billion. By 2017, it was reported that 3G Capital and Burger King’s other shareholders had made over $14 billion from the turnaround that began just seven years prior.
How did they do it?
Under new management
One of the first steps taken by 3G Capital post-acquisition was to install a new management team. Bernardo Hees, a partner at 3G, was named CEO of Burger King in September 2010, and another partner, Daniel Schwartz, was named CFO the same year. Schwartz, just 29 years old when he joined the company, took over from Hees as CEO of Burger King in 2013.
Hees and Schwartz’s first order of business was layoffs. By the end of 2010, they laid off about 413 employees or roughly 30 percent of the staff at the company's headquarters in Miami. These layoffs, combined with other cost-saving measures, contributed to reducing overhead costs by approximately $75 million annually.
Then, the pair pivoted Burger King away from a centralized ownership model and towards a franchise-based model. Between 2010 and 2012, Burger King sold more than 1,000 of its 1,400 company-owned restaurants to franchisees.
Decentralizing the management structure allowed Burger King to reduce operational costs and variability. Reports suggested that the company decreased its operating costs by more than $200 million in the initial years following the re-franchising strategy, and that adjusted EBITDA margins improved from 23 percent to 43 percent by 2012.
Ch-ch-ch-changes
The sales of restaurants likely generated over $600 million in income for the company — money which was immediately used to pay down debt and fund new endeavors including international expansion, menu revitalization, and store technology updates.
Burger King of the World: 3G saw immense potential for Burger King in high-growth markets in Asia, the Middle East, and Latin America. Between 2010 and 2012, Burger King added 400 new stores globally, with a significant portion in these markets. The international expansion allowed Burger King to diversify revenue streams outside and reduce the company's dependency on saturated markets like North America.
Menu Revamp: 3G also saw that food preferences were changing, and refreshed Burger King’s menu to reflect that. Healthier options were added to the menu, alongside more breakfast items and specialty/limited-time items that catered to local tastes in different geographies. Burger King also reinvested in the quality of its legacy menu options during this period, too. Industry analysts estimated that store traffic increased by approximately 3 to 4 percent in the months following the introduction of these new items and that overall sales increased nearly 5 percent in the following quarters.
Let’s Get Digital: 3G invested heavily in updating Burger King’s technology, both in customer-facing and back-end processes. This included modern point-of-sales systems, mobile app ordering, and enhanced data analytics.
Not-so-initial public offering
These quick improvements meant that Burger King was able to re-IPO in a relatively short timeframe.
With the franchise model, Burger King started earning a more predictable revenue stream through royalty fees based on a percentage of sales, in addition to rental income where the company owned the property being leased to franchisees. This approach allowed for more stable cash flows, a feature that was particularly appealing to investors.
And this was reflected in Burger King’s stock price — BKW re-debuted on the New York Stock Exchange at an asking price of $14.50, but rose 12 percent to close at about $15 per share.
Today, it trades at over $60 per share. That’s partially attributable to Burger King’s 2014 merger with Tim Hortons: an $11.4 billion deal that created Restaurant Brands International, the third-largest quick-service restaurant company in the world.
Key takeaways
TGI Fridays. Red Lobster. Hooter’s. All of them are going through well-publicized bankruptcies, and all of them are private equity-backed. It’s safe to say that fast casual dining might not be the hottest market for PE firms right now.
One major fast-casual chain with a PE history that has recently had a bankruptcy scandal is Burger King. Didn’t hear about it? That’s because it was only major franchisees that were impacted — Burger King corporate stayed afloat.
Of the major restaurant bankruptcies grabbing headlines right now, both Hooter’s and Red Lobster have hybrid franchise-corporate business models. Burger King, by contrast, is 99.7 percent franchisee-owned.
Maybe that’s what makes the difference.
3G Capital did not respond to request for comment.