Facts About Burger King Holdings Marketing Essay

Facts About Burger great world causality Holdings Marketing EssayBurger King (BK) is the second largest riotous food hamburger consume house (FFHR) in the population with operations in 74 different countries. Its major competitors are McDonalds, Subway and Yum Brands. BK was ranked among Americas 1,000 largest corporations by Fortune Magazine in 2008. Further, Burger King is listed among single of the Top 100 Best Global Brands.HistoryThe history of the brand Burger King refers to 1959, when J, M and D.Edg purchased the upstanding from the original founders. Company was run as an fissiparous entity for eight classs, eventually expanding to over 250 locations in the United States, just in 1967 due to some reasons, baking giant Pillsbury repurchased Burger King. In 1978, when McDonalds executive Donald N. Smith came to speed the confederation BKC was prominantly modificated in terms of its franchise agreements, st grazegy, menu, and restraunt look out. But Poor operating p erformance and ineffective leadership weight down the come with during legion(predicate) years, even by and by Diageo, the global alcoholic beverages company baught Burger King in 1989. Eventually, Diageo damaged the company by neglecting the brand, and major franchises were driven out of lineage and its essence value was significantly decreased. In 2002 Diageo divested itself of the money-losing business and sold Burger King to a group of investment firms lead by TPG pileus. After this acquisition, many positive changes started to as genuine to Burger King. One of the major issues was offset printing public offering in 2006, which was gameyly succefful. But there were some gunpoints on Burger King reputation. The case of unsauccessful long horse Double campaign, which promoted $1 burgers, provoking the lawsuits from franchi ascertains, unhappy with selling at a price pocket-sizeer than production costs. Those events somehow were reflected on the BKC post behavior. By t he era the ordinary stock of Burger King was selling at $16 per share, another interesting and extremely unexpected thing shocked the global business community.On September 2, 2010, a Brazailian company 3G Capital Management LLC. Announced decision to acquire all the stocks of Burger King for $24.00 per share, or $3.26 billion in aggregate including Burger Kings prominent debt. As the purpose of this report is to analyse the current state of the company and give recommendation upon this recent transaction, further in this paper we will dress whether it was good or bad acquisition.Key People of Burger KingJohn Chidsey, Ex-CEO, currently is a Co-Chairman of the Board BK Inc. He joined Burger King bow window as an Executive Vice President and the Chief Administrative and Financial Officer in March 2004. In fact, his effective leadership and st valuategic panorama brought company to a quite successful level of performance. His wide range of responsibilities acknowledged monitorin g franchise and company operations, finance, corporate strategic planning, and oversight of the one-year budget, the information technology function, luck management, and corporate procurement, as well as the Franchise Financial Restructuring Program (FFRP). Mr. Chidsey obtained Doctor of Jurisprudence and MBA from Emory University. Therefore his academic land in law and business, overall professional skills and previous experience bring unprecedented value to the company. As from the recent news, John Chidsey is overtaking to resign from the dialog box and will be employed with BKC until the April 18, 2011.Ben Wells CFO and Treasurer of Burger King, who has more than 25 years of experience in financa. He repots directly to CEO and proves himself as a key member of the executive leadership team. Before joining BKC he held a position of vice president and corporate treasurer at Compaq Computer Corporation, when he successfully led the finance team in stabilizing finance and acco unting operations.He also was employed by such notable corporation as British Petroleum and Hewlett Packard. Possessing degree in frugals and business administration (University of Missouri, Texas AM University, Canisius College), he is capabable for building a world-class exchequer organization and developing capital structure and happen management programs for the global organization.Alexander Behring Co-Chairman of the Board BK Inc. and Managing Partner of 3G Capital Management LLC. Experienced organise and successful private fair play manager, he is the one, who was butt end the $4bn takeover of BKC. Becoming one of the inflluential investors of Brazil, he started and lead America Latina Logistica, the biggest railroad and logistics corporation in Latin America. Mr. Behring holds MBA from Harvard Business School and Bachelors Degree from Pontifcia Universidade Catlica do Rio de Janeiro.Bernardo Hees new CEO of Burger King Inc., since September 2010. Previously, he was Ch ief Executive Officer of America Latina Logistica (ALL), as a successor of Alexander Behring, since January 2005 and served on its Board of Directors. B. Hees is an experienced executive with an impressive track record of enhancing performance, managing a team that drove strong gains in both revenues and profitability. He obtained MBA from the University of Warwick and passed Owners-Presidents Management program at Harvard Business School. According to his sound resume and reputation, he can be fairly considered as an glorious steward of the Burger King brand, inspired by the intention to take company to the sideline level of competition in the U.S. and worldwide.Business Model of Burger KingA business model is a plan implemented by a company to generate revenues and make profits from the operations it performs. (Investopedia, n.d.). Burger King uses the franchise business model to generate profits. Under the franchise arrangement, the franchisees invest in the equipment, signage , seating, and decor of the restaurant, while the company owns or leases the land and building. The company generates revenues mainly from three sources gross sales at the company restaurants, royalties and franchise fees, and property income from certain franchise restaurants that lease or sub-lease property from the company (Datamonitor, 2010).Resources of the CompanyReagrding the resources available for sustainable comptitive advantage, those resources are sort out into tanbgible and intangible. As Burger King is a well-establiched global corporation, it has formulated very strong basis for its worldwide operations. In fact, despite of performing in the fast paced indutsry and veneering the fortune of once to become unclaimed due to un brawny food provision, as consumers may change their preferences, BKC definitely creates a unique line of products. For instance, renowned Whopper sandwich, CroissanWich, flame-broiled hamburgers and etc. Burger King proves itself as genuinly global company by localization of products versions by adding ingredients such as teriyaki or beetroot and fried ballock to the Whopper beer in Germany, Italy and Spain and halal or kosher products in the Middle East and Israel. They property counts for most 12 000 restaurants worldwide, of which 60% is concentrated in US and Canada, and 40% is world(prenominal)ly spread.Regards the intangible assets, highly quilified and experienced executive management team is a great value to Burger King, promising effective operations and high and stalls earnings fruit. While globally recognised brand Burger King is another powerful asset to corporation, as well as reputation and products assocated with it. And last, but not the list is the Knowledge, which mainly brought the Burger King fame for its products. They definitely possess unique production technology, which is uniformly updated and successfully implemented.Strategy psycho epitomeBusiness Strategy digestFrom pdfBusiness Strat egy Analysis helps us evaluate the sustainability of the firm. BK strives to implement the following elements into its business strategy in fix to get under ones skin.Further drive sales turn outth BK is attempting to increase sales growth by enhancing guest experience, expanding hours of operations and emphasizing on restaurant reimaging program. All this is expected to result in higher sales and traffic in these restaurants and yield strong cash on cash returns.Enhance restaurant profitability BK endeavours to enhance restaurant profitability by leveraging their fixed cost structure by introducing higher margin products and creating efficiencies through improved speed of service and equipment. Further, BK utilizes martplace based pricing model to achieve optimal pricing in the highly competitive food trade environment, thus making it a food market follower. engross innovative marketing strategies and offer superior value and quality BK employs innovative and creative market ing strategies to increase their restaurant traffic and comparable sales. BKs whooper has been one of the best known products in the fast food industry. In addition, BK has also launched AngryWooperTM sandwhich, BK Burger Shots and BK Breakfast ShotsTM in the U.S., the King DealsTM in Germany, the U.K. and Spain and the Come Como ReyTM (Eat Like a King) every day value menu in Mexico. Further, their advertisement campaigns dupe always created a buzz and improved their visibleness in the market.Expand our large international platform Presently, BK is concentrated in the US and Canadian markets only, therefore they have a significant growth potential in international arena. BK has realized this and has developed a detailed global development plan to accelerate growth over the next few years. However, entering into international markets is tough because McDonalds al coiffe has its presence in almost all countries of the world. Further, BK fails to mention the strategy with which the y plan to enter international markets. This maybe because they do not want to divulge their strategy to their competitors, or because they do not have a strategy which can provide them a competitive advantage over McDonalds.Use proactive portfolio management to drive growth BK intends to use proactive portfolio management to drive growth and perfect their Company restaurant portfolio and franchisee participation in new and alive markets, while maintaining our 90/10 franchise to Company restaurant ownership mix. Between April 2008 and may 2009, BK acquired 128 new restaurants in parts US and sold 39 Company restaurants to new and alert franchisee. In addition, they closed under-performing restaurants in UK and sold certain Company restaurants in Germany and Canada to their local franchisees.Thus, the business strategy tensiones on driving sales in existing markets and striving for presence in international market. However, almost all quick service restaurants that strive for gre ater profitability follow a similar strategy. If BK wishes to have a greater market presence, hence it has to keep coming up with new, innovative, and creative products and marketing campaigns as these are the only ways by which they can differentiate their brand.Further, we carried out the industry analysis (See Appendix X), and found that per se the industry has a good market potential. Moreover, as the global economic environment improves the industry would again be moneymaking as the consumers would again become price insensitive and companies coming up with new, innovative and affordable menus would have more power than the buyers and suppliers. In addition, the industry is fancy to increase by 19.2 % till 2014 and there is a growing demand of fast-food in the emerging markets like India, China, and Indonesia etc. Therefore, the industry has good future prospects if tapped in an appropriate manner.Based on the SWOT analysis (see Appendix X1), it can be discerned that the com pany understands that the only way to increase its profitability is through constant innovation and expansion into new international market and given the brand reputation, the franchise mix and robust pecuniary performance, we think the company has the capability to grow profitably in the future.5. VALUATIONThe value of any security is determined by its quality and profit potential. The economic environment and industry in which firm operates also have inevitable electrical shock. Hence, we valued of BKC by incorporating these factors into the analysis of BKCs stock value.It is well known that it is very subjective to valuate any company and its stock as the market is changing constantly and the market price heavily depends on peoples expectations and feelings. The good example might be Burger Kings market price that soared from $16.77 to $13.64 after the acquisition announcement http//www.wikinvest.com/stock/Burger_King_Holdings_(BKC)/WikiChart (Appendix H). Most analysts use va rious e paygrade models to calculate whether a stock is overvalued or undervalued. Those models are just generally accredited ways of assessing a companys stock and make a recommendation. Thus, analysts should not rely on the results of these models only but also take into consideration performance of existing competitors. Using comparables, i.e. ratios of identical companies and their financial performance indicators, as an addition to the valuation analysis should give a better understanding of company health and what it stands for in the market. For that reason, we have implemented several valuation models, including Dividend Discount Model (DDM), Market premium (MP) and difference Earnings Model (RE), and compared BKCs performance to its major competitor McDonalds victimisation financial ratios. It should be far-famed that for the sake of comparison, we have taken the financial data available at the end of fiscal years for BKC and McDonalds i.e. June 30th, 2010 and December 31st, 2010, respectively. Further, the spot stock prices are taken as of June 30th, 2010.5.1 PerformanceI THINK PERFORMANCE SHOULD GO IN HERE5.2 Dividend Discount ModelStarting from year 2006, when Burger King was first listed on the New-York Stock Exchange, the company has paid the fixed dividend of $0.251per share per year (Appendix A). Therefore, we do not expect any future dividend growth and assume slide fastener growth for DDM valuation model. For simplicity, we use DDM-perpetuity and take undeniable rate of return (k) as a discounting factor (r).Therefore, V = D/r (1)According to The Capital Asset Pricing Model (CAPM), required rate of return (k) is calculated as followsk = rf + B(rm rf) .. (2)where, rf = risk-free rate,B = beta,(rm rf) = market risk premiumWe have employ risk-free rate of 2.92% from company report (Burger King Holdings, 2010, p.87), company beta of 0.80 was taken from on-line source (ADVFN, 2011) and market risk premium 6.75% from Journal of Financial Economics, which is a bit outdated but we believe that this type of market is even riskier therefore it was 10 years ago (Fama, 1997, p.172).Substituting the values in comparison 2, we getk = 2.92% + 0.80*6.75% = 8.32%As mentioned before, since r = k, substituting the value of r in equation 1, we getV= 0.25/0.0832 = $3.00 (The value of BKCs share)However, as of June 30th, 2010 market share price of BKC was $16.84/share (Wikinvest, 2011).Further, in order to assess our valuation, we valued the share price of McDonalds share and got a valuation of $36.28 (for calculations, see Appendix G). However, as of June 30th, 2010 the share price is $65.87.As, McDonalds is more popular brand than BK, and its stock price is in two ways as high as the valuation figure, whereas BK King is way behind McDonalds but its price is five times higher than the calculated value. To investigate the reliability of this result we calculate the market premium of the BKs share.5.3 Market Premium ModelThe me asure of stockholders integrity on the balance sheet typically does not reflect the intrinsic value of what the equity is worth (Penman, 2003). There is a definition of intrinsic value which states that it is the actual value of a company or an asset based on an fundamental perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value (Investopedia, 2011). For that reason it is meaningful to see what extra price, or premium, the market pays for a particular security.In order to calculate market premium we use the formula (Penman, 2003)Market Premium = Market Value of Equity hand Value of Equity.. (3)Calculating the market value of BKC as of June 30, 2010,Market Value = Price per share*Shares Outstanding . (4)= $16.84*135.4m=$2,280.136mThe agree Value of BKC = Total Shareholders Equity = $1,128.4m (Appendix C).Therefore, Market Premium = $1,151.736m.With Shar es Outstanding = 135.4m, the Book Value per Share (BVPS) = $8.33 and Premium = $8.51. Indeed, the premium constitutes 102% over the book value. As compared to McDonalds, with 1,072m shares outstanding (Appendix D), McDonalds has a BVPS of $12.25 and the premium of $53.62, which is 438% higher than its book value.Thus, we may conclude that market is ready to pay quadruple premium for MCD, which indicates a great brand awareness and customer loyalty however, they are still ready to pay twice for BKCs shares, which is a good sign for the stock evaluation.5.4 Residual Earnings ModelThe residual earnings model relies on book value, which represents shareholders investments into the firm and measures value added to the investments. In other words, the book value of equity is taken and discounted back potential abnormal earnings are added to it. These earnings are returns to shareholders above their required rate of return. These earnings are important because otherwise the shareholders wo uld have no objective to invest into the company if it break-evens at the minimum rate of return (Penman, 2003).Value = Book value + Premium . (5)orValue of car park equity (VE0) = B0 + RE1/re (6)where, re = required rate of return,RE = Residual Earnings for EquityNow,Residual Earnings = Comprehensive Earnings (Required Return for Equity * Beginning-of-Period Book Value) .. (7)BK reported $165.8 million of comprehensive income on June 30, 2010 (Appendix B) on book value of $974.8 million. If BKs shareholders required a return of 8.32% in June, 2010 then its 2010 residual earnings wereResidual Earnings = $165.8 (8.32%*$974.8) = $84.70 millionThe very existence of the residual earnings gives us a sign that Burger King is a good investment to get extra return on invested funds.Further, substitutiting the values in equation 7, we getValue of common equity (VE0) = $974.8 + $84.70/.0832 = $1,992.83 millionVE0/share = $1,992.83/135.4 = $14.72Assuming that RE remain unchanged (g=0%), th en the calculated the intrinsic value of BKs share of $14.72 is close to market price of $16.84. Obviously, market was aware of the existing premium and recognized it by setting market price at that level.5.5 SummaryThe three valuation models have revealed Burger Kings financial performance from different angles. For the reason that todays market is different from yesterdays, the DDM model is not really appropriate for security valuation, because contemporary market is mature and, as we have observed, dividends do not grow along with growing earnings as used to be in the past. However, this model was implemented just to see the consistency and get a better understanding of the value of the stock. The market premium model gave us a good sense of what market is ready to pay for the BKs share and McDonalds share. Further, the residual earnings model is said to be more reliable as compared to the other two models because it uses book value of the equity as well as market premium model. Overall, it can be seen that BK per se has performed well in the market however it has been far behind its main competitor McDonalds.6. RISKSBurger King is exposed to a variety of risks (3G Capital, 2011). The most prominent and important risks come from internal characteristics of the firm and market-determined factors.Internal characteristics of the firm includeBusiness risk This risk might renegade as a result of decreasing demand due to changes in consumer preferences, possible suppliers delays or unseemly economic conditions. Also, the business model is based on franchising contracts, so franchisees financial strengths and ability to manage increasing costs is also subject of risk.Financial risk BK has long-term and short-term debt outstanding, so it should have enough operating cash to meet these obligations. According to the notes to companys financial statements, BK uses derivative instruments, such as interest rate swaps and foreign currency forward contracts, which imply a higher risk exposure.Legal risk As every food company, BK is in charge of risk related to food safety and toys as promotional instruments in their restaurants, as well as any legal judgments and pressures from competitors. artless risk / Exchange rate risk BK is an international company, therefore fluctuations in foreign currencies and adverse government regulations create substantial risk exposure. personality risk Customers in FFHR industry are very sensitive to the reputation and brand awareness of the company.Market-determined factors includeSystematic risk This is an unmanageable risk, which can arise as a result of recessions and wars.Analyzing the risk associated with the functioning of the company, it can be discerned that BK acknowledges that there are some risks associated with the business. And therefore, has some measures such as following a market based pricing model, development trusted suppliers, etc. for overcoming these risks (Annual report, 2010). Further, BK is still vulnerable to the unknown risks such as exchange rate risks and systemic risks. However, these risks are faced by all companies. It is just a matter of the way in which they respond to these risks that determines how they fair in the market. As for BK, the impact of the systemic risk is has been high as compared to its competitor McDonalds (Datamonitor, 2010). However, they have realized this and have tried to overcome these setbacks by implementing promotional, other price discounting actions, and closing non-profitable company restaurants. (Annual report, 2010)7. CONCLUSIONBased on our analysis of companys background, strategy and people, as well as industry analysis and financial performance valuation we discern that the financial performance of BK was stable and improving during last five year, and the valuation revealed that the market believes that Burger Kings stock is worth investing. Therefore, we can conclude that the company is financially healthy and hence the acq uirer, 3G Capital, made a good decision. However, because the new management does not have any experience in the food industry and adding to this the current economic situation, Burger King might be in a vulnerable position right now. Further, in the industry analysis, on one hand, there was a scourge of customers switching to the healthier options, which might imply a risky acquisition decision by 3G Capital. And on the other hand, there was a positive vista towards the quick service restaurant industry, which is expected to grow at a rate of 3% per year. Analyzing the annual report of BK, we realized that BK is aware of these issues and has been nerve-wracking to improve them by introducing healthier meals and innovative marketing campaigns. Moreover, the strategy of the company is very ambiguous. The strategies and goals of BK are very generalist and unclear how the management is going to achieve these. However, the new management might set a new and a sound strategy and provi de necessary resources for achieving it. In conclusion, in frail of the business strategy and the comparison of the performance of the company with its competitiors , we think that the BKs acquisition was hugely overvalued. However, because of the stable financial performance and positive industry outlook it was a good acquisition and if the new management is able to tap the potential in the existing and new markets in a appropriate manner then the companys growth potential is huge.PLEASE FEEL FREE TO ADD/AMEND SOMETHING IN CONCLUSIONAPPENDIX AConsolidated Statement of Income Burger King bug Burger King Holding, Inc. organise 10-K, 2010APPENDIX BConsolidated Statement of Stockholders Equity Burger KingSource Burger King Holding, Inc. Form 10-K, 2010APPENDIX CConsolidated Balance Sheet Burger KingSource Burger King Holding, Inc. Form 10-K, 2010APPENDIX DConsolidated Statement of Income -McDonaldsSource McDonalds Corporation, Form 10-K, 2010APPENDIX EConsolidated Statement of Sto ckholders Equity -McDonaldsSource McDonalds Corporation, Form 10-K, 2010APPENDIX FConsolidated Balance Sheet -McDonaldsSource McDonalds Corporation, Form 10-K, 2010APPENDIX GDividend Discount Model McDonaldsFor valuation of McDonalds share, we have used the same risk-free rate of 2.92% and market risk premium of 6.75%, company beta of 0.49 was taken from the same on-line source (ADVFN, 2011).Substituting the values in equation 2, we getk = 2.92%+ 0.49*6.75% = 6.23%.The dividend per share was virtually stable therefore we took the figure of $2.26 per share, as of 2010.As, r = k, substituting the value of r in equation 1, we getV = 2.26/0.0623 = $36.28Therefore, as of June 30th, 2010 market share price of MCD was valued using the DDM model as $36.28, whereas the spot share price was $65.87 per share.It should be noted that for the valuations using the DDM model, we take the same risk-free rate and market risk premium, because companies are competing in the same industry, however beta is different because MCD is more stable than BKC which is why the risk of volatility is lower.McDonalds price historySource Morningstar investment research, 2011APPENDIX HPrice History -Burger KingSource Wikinvest, 2011Industry Analysis Using the Porters Five Forces Model (Datamonitor, Industry analysis)Porters five forces model helps in analysing the profit potential of an industry which would eventually help in determining a firms chances of generating long-term profits. (book)Bargaining power of buyers The economic recession has strengthened the buyer power as the industry players try to secure price sensitive consumers using competitive pricing strategies. However, due to the sheer convenience of having fast-food makes fast-food more important to the consumer than a simple source of food. Therefore, the buyer power is assessed to be moderate.Bargaining power of suppliers For a fast food company to make profits, it is vital that the company has reliable suppliers that offer food of marketable quality and at a low margin. However, a large number of these suppliers serve other kinds of foodservice and cost service customers, thereby decreasing their dependence on fast food players. Therefore, the supplier power is considered to be moderate.Threat of new entrants As large capital reserves are not required for setting up a single, independent fast food outlet, the entry into the global fast food market is easy. However, to build a global brand requires precise market knowledge, an excellent management team, and an estimable brand reputation, therefore the threat from new entrants is assessed to be moderate.Threat of substitute products The substitutes for fast-food include other forms of profit foodservice and also food retail (ready meals or ingredients for property cooking). However, these are considered to be unhealthy and take time in preparing, whereas convenience and availability are considered to be the main drivers for choosing fast-food. Therefore, the threat of substitutes is assessed to be moderate.Rivalry among existing firms Rivalry in the fast-food industry is considered to be intense as the fast food markets can be very concentrated. The burger segment is close to being a Burger-King/ McDonalds duopoly. Further, prices especially of value meals and brand power form the greatest sources of competition in the fast-food market.SWOT AnalysisThe SWOT analysis helps us determine a companys strengths and weaknesses, and then helps us evaluate whether the company has the ability to effectively exploit its opportunities and overcome its threats.Adapted from (Datamonitor, 2010)Strong market position and brand equityBK enjoys a strong market position and possesses an established brand reputation. This has enabled it to gain economies of scale, increase its bargaining power, and enter international markets. (Datamonitor, 2010)High franchise mixThe company has franchise stores and company restaurants in the ratio of 90-10. This resta urant ownership mix provides BK with a strategic advantage as the capital required to grow and maintain the BK system is funded primarily by franchisees, while the Company restaurants give it a sizeable base to demonstrate credibility. (pdf)Innovative marketing campaigns and advert to provide greater visibilityBK uses innovative marketing, advertising and sponsorships to drive sales and generate restaurant traffic. The main target market of BK is the 18-35 year old male with a love of fast food. (Datamotiner, BKcase study). Therefore, its advertisements are made to appeal to this segment. Further, BKs advertisements campaigns such as Whopper Sacrifice campaign and Cheat on beef campaign help the company gain better visibility which helps it to have an impact on the revenue generating capacity.WeaknessesDeclining comparable sales growthBK saw a decline in its comparable sales growth in 2009. This was mainly because of continued adverse macroeconomic conditions, higher unemployment, more customers eating at home, and heavy discounting by other restaurant chains. This only means that the management has to focus on various product offerings that cater to the value conscious(p) customers during times of poor economic conditions.Concentrated operations-in terms of geographic presence and dependence on selected distributors increases business risksAlthough BKC operates in 74 countries, its operations are heavily concentrated in the US. Approximately 61% of its restaurants are located in the US. US and Canada account for about 68.7% of the total revenues, whereas BKCs competitor McDonalds generates only 35% of its total revenues from US. Concentrated operations increase the business risk of the company and impact its results of operations and thus its financial condition.OpportunitiesExpansion in existing and new marketsBKC should focus on expanding into existing and new markets and the company has taken steps to expand into international markets. 2009 saw a 28% ris e in new restaurants in international markets. The company also entered two new in