McDonald’s Vs. Burger King: A Closer Look At Two Burger Giants

McDonald’s (NYSE:MCD) and Burger King (which is operated by Restaurant Brands International (RBI) (NYSE: QSR)) , compete closely with each other in the fast food segment. However with its much bigger size and larger market share (19% vs. 5% according to 2015 estimates), McDonald’s is clearly the leader. A couple of years ago, it appeared that Burger King was threatening McDonald’s after it was taken over by Restaurant Brands International (RBI) which pursued an aggressive expansion strategy and focused on cutting down costs. However, with its All Day Breakfast and focus on healthier food items along with a renewed focus on McCafe, it now appears that McDonald’s is better positioned to compete with Burger King (BK) and Tim Hortons – the coffee chain run by RBI. In the past two years, McDonald’s has been aggressively refranchising its restaurants and as both burger giants move towards a nearly 100% franchised model we expect a similar rate of growth in the franchised restaurants of both players.  However, since McDonald’s has a larger base, its restaurant growth in absolute terms would be higher in the next few years:

*Numbers from 2017 onward are Trefis estimates.

The average royalty revenue per McDonald’s franchisee restaurant is significantly higher compared to Burger King, since the former serves more customers per restaurant, given its higher market share.

*Numbers from 2017 onward are Trefis estimates.

While the royalty rate of the franchisee offered by both burger giants is similar (around 4.5%), Restaurant Brands International is offering remodel incentives to its Burger King U.S. franchisees in 2017. These limited period incentives are likely to negatively impact the company’s royalties until 2024.

We expect McDonald’s royalty revenues to increase at a faster rate compared to Burger King, as the company is driving higher traffic on the back of its menu innovation, technology initiatives, and better branding.  A comparison between the comparable sales growth numbers for the past six quarters of both burger giants indicates that McDonald’s is currently in the lead:

McDonald’s is also piloting its “Experience Of The Future” stores where orders can be placed via kiosks, saving time and making it easier for customers to personalize their orders. While both Burger King and McDonald’s are likely to launch their mobile ordering platforms this year, Restaurant Brands International faced several issues with its franchises to launch this platform for its Tim Hortons segment. Further, as Burger King is managed by RBI which also has Tim Hortons and Popeyes Louisiana Kitchen under its umbrella, it might not get complete management focus for growth, which is not an issue with McDonald’s. The latter is aggressively experimenting with several initiatives such as gourmet burgers, fresh patties, and technology initiatives which are key to attract the millennial population. The company also has an aggressive expansion plan in China which can be a key long term growth driver.

Restaurant Brands International, on the other hand, appears to be lagging behind in menu innovation, introduction of healthier menu options, and technology initiatives. Burger King is much smaller in size compared to McDonald’s (the latter has nearly double the number of restaurants compared to the former) and thus has a greater growth and expansion potential. However, it appears that the company is not able to keep pace with McDonald’s menu and technology innovations and hence is unlikely to gain market share and grow at a faster pace in the next few years.

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