Should Domino’s and Papa John’s Fear Pizza Hut’s Big Menu Changes?

November 21, 2014

Until now the differences between Yum! Brands (NYSE: YUM) Pizza Hut, Domino’s (NYSE: DPZ), and Papa John’s (NASDAQ: PZZA) have been mostly a matter of personal preference. Aside from the occasional special offer or novelty pie, all three chains offer a basic take on pizza.

That has changed as Pizza Hut, the lagging member of this trio of mediocre national pizza purveyors, has radically overhauled its menu. The company, which in recent years has resorted to stuffing cheese into its crusts, has added a wealth of new choices built on the idea that customers want customization. It’s pizza on the Chipotle model with choices including 10 different crust flavors, six sauces, and a variety of new toppings.

Favorites like the Meat Lover’s Pizza will remain, but customers will now be able to order it with a variety of enhancements. So, for people who want their pepperoni and sausage with honey Sriracha sauce and “Ginger Boom Boom” or “Curried Away” crust, Pizza Hut will have it for them.

Why is Pizza Hut doing this?
Pizza Hut has reported sales declines for each of the last eight quarters and this new menu is an attempt to turn things around. “This is the biggest change we’ve ever made,” Chief Marketing Officer Carrie Walsh told USA TODAY. “We’re redefining the category.”

Pizza Hut needed to do something; as it has struggled, Domino’s and Papa John’s have been chugging along nicely. In the third quarter Domino’s posted 7.7% domestic same-store sales growth year over year and growth of 7.1% internationally, marking the 83rd consecutive quarter of international same-store sales growth. In its third quarter, Papa John’s posted a 7.4% gain in its North American stores while gaining 5.5% internationally.

Will it work?
One industry analyst told USA Today the chain might be trying to do too much too fast. “It would appear that the brand that has lost touch with the consumer is trying to change too much overnight,” Darren Tristano, executive vice president at Technomic, was quoted as saying.

Pizza Hut might be aiming to please customers with a shift to Chipotle-like customization, but it’s going to be a challenge for a Yum! Brands property to gain a similar reputation. Chipotle has succeeded not just because it offers customization, but because it has a well-known commitment to quality food. Neither Pizza Hut nor sister chains Taco Bell and KFC have reputations based on offering good food. Pizza Hut may find that simply adding trendy flavors like Sriracha may not be enough to win quality-conscious millennials.

On the plus side, the chain will be adding new toppings including banana peppers, cherry peppers, and spinach. On the negative, filed under “please don’t insult our intelligence,” the pizza purveyor will be renaming a number of its standard toppings, ostensibly to make them more appealing. The customer who cares where Chipotle sources its beef from may not be fooled by Pizza Hut renaming black olives as “Mediterranean black olives” or red onions being dubbed “fresh red onions,” even though nothing has changed.

Can Pizza Hut be reinvented?
While Domino’s rebuilt its brand by revamping its pizza a few years ago, the company just improved its recipe, it did not radically change its menu. What Pizza Hut is doing amounts to a massive change in direction, an attempt to differentiate itself from its two major competitors.

Pizza Hut’s moves might even send some of its customers running for its rivals. Though the chain will still be selling “normal” pizzas, it runs the risk of confusing people who just want a plain old pepperoni pie and do not want to have to wade through a wealth of options. Those customers may well switch to Domino’s or Papa Johns.

The potential gain however is not in stealing traditional, undiscerning pizza eaters from its rivals, it’s a bigger growth strategy of winning over fast-casual diners not necessarily looking for pizza. Domino’s and Papa John’s have largely penned themselves in to a specific audience — people who want familiar pizzas cheaply.
Pizza Hut is looking to break the mold and widen its potential customer base — a move that could push it ahead of its rivals. That is a huge risk because the company could scare away its existing customers while failing to win new ones. For this to work the brand has to win customers not just from its pizza rivals, but from fast-casual restaurants including Chipotle, which have a higher perceived quality.

To do that, Pizza Hut needs to up its game. It’s one thing to offer more choice, but a lousy salted caramel organic beet pizza with an artisanal cheese crust won’t be successful just because it has a lot of trendy words attached to it.

To make this new offering, which rolls out Nov. 19, work, the company is going to need to actually deliver quality pizza that people want to come back for. Fancily named olives and balsamic drizzles won’t be able to disguise a mediocre pie.


Pizza Hut Revamps Menu, Brand

November 19, 2014

pictureBruce Horovitz, USA TODAY

Pizza Hut is rebooting itself for a new generation of pizza eaters.

Following two years of disappointing sales as consumers sought even more exotic flavors and personalized options, the world’s largest pizza chain on Monday will announce plans to turn upside down almost every facet of its identity.

Pizza Hut will focus on dozens of new flavor options as it mounts the 56-year-old brand’s biggest-ever redo. It will add 11 new pizza recipes, 10 new crust flavors, six new sauces, five new toppings, four new flavor-pack drizzles, a new logo, new uniforms and, yes, even a new pizza box.

For those keeping count, the chain is more than doubling its available ingredients at all 6,300 U.S. locations beginning Nov. 19.

“This is the biggest change we’ve ever made,” Carrie Walsh, chief marketing officer, says in a telephone interview. “We’re redefining the category.”

The ongoing tailspin — eight consecutive quarters of same-store sales declines — recently resulted in a management reshuffle. David Gibbs, who has been U.S president, was named CEO last week. He was not available for this story.

Even the chain’s sister brands at Yum Brands — Taco Bell and KFC — generally have been growing, but Pizza Hut seems to have hit a wall. Will these changes be enough to heal an ailing brand? Or, perhaps, are they too many, too late?

“Pizza Hut may be doing too much too quickly,” says Darren Tristano, executive vice president at Technomic, the restaurant industry research specialist. “It would appear that the brand that has lost touch with the consumer is trying to change too much overnight.” He suggests a more gradual approach because, among other things, all of these changes could particularly confuse the chain’s traditional customers.

Not so, says Walsh. Pizza Hut researched “hundreds” of ingredients, she says. “These are the ones customers told us they want.”

It’s not the first time a major pizza chain tried to quickly reinvent itself. Back in 2009, Domino’s, which had taken plenty of public grief for the taste of its pizza, changed everything in the recipe of its core pizza. New sauce. New crust. New cheese. It turned out to be a hit.

In this case, however, Pizza Hut is not changing its core recipe. Instead, it’s adding many, many more choices.

How many? Who’s counting. But consider this: There will now be about 1,000 ways to customize something as basic as a pepperoni pizza at Pizza Hut, says Walsh.

Among Pizza Hut’s new offerings, it’s going from:
• One crust choice to 10, including salted pretzel and honey sriracha.
• One sauce choice to six, including garlic Parmesan and Buffalo.
• Zero “premium” toppings to five, including sliced banana peppers and Peruvian cherry peppers.
• Zero “drizzles” to five, which are basically sauces like Buffalo and balsamic that are lightly drizzled on the top of the pizza after it’s baked.
• Six special recipes to 22, including 7-Alarm Fire (loaded with peppers and jalapeno) to Giddy-Up Barbecue Chicken (with chicken and bacon and barbecue sauce.)

It also will nationally roll-out a so-called Skinny Slice pizza line — with five offerings at about 250 calories per slice.

To announce the change, the chain will launch its largest-ever advertising campaign dubbed “The Flavor of Now,” says Walsh, though she declines to provide details. There’s even a possibility that the chain, which hasn’t advertised during a Super Bowl in 15 years, is considering such a move for the upcoming big game on Feb. 1.

“We’re looking,” says Walsh. “This change deserves a big statement.”


What Pizza Hut’s Radical New Menu Actually Tastes Like

November 18, 2014

Depends how you feel about honey sriracha crust and balsamic drizzlesPizza Hut Menu Launch Press Event in NYC
The half-dozen servers were dressed in all black, down to the sleek leather gloves they wore as they doled out slices of Pretzel Piggy, Old Fashioned Meatbrawl and Cherry Pepper Bombshell. On the side: balsamic, buffalo, BBQ and honey sriracha sauces, or in Pizza Hut’s new parlance, “drizzles.” All of it was surrounded by a new logo, new delivery boxes, new casual-looking uniforms, and a new motto: “The Flavor of Now.”

This is the new, at times unrecognizable, Pizza Hut. Or, at least, it was the one shown to members of the media Monday afternoon to mark what David Gibbs, the company’s newly installed CEO, calls “one of the biggest moves we’ve ever made in our history.”

On Nov. 19, Pizza Hut will essentially relaunch its entire brand, changing the food it serves, the way its ordered and even the company logo. There are 11 new signature pizzas, six new sauces, 10 new crust flavors and four drizzles — enough options to allow for 2 billion unique pizza combinations. For the company known for trencherman staples like Stuffed Crust, Meat Lover’s and Supreme, the new menu is the fast-food equivalent of a Hail Mary pass.

“It’s a fear of irrelevance,” says Darren Tristano, a food industry analyst at Technomic. “But the potential to negatively influence their current customer base is certainly there.”

It’s a risk Pizza Hut is willing to take, though they’re hedging bets by keeping those old favorites on the menu. Sales at the nation’s largest pizza chain have been dropping for two years, as Domino’s, Little Caesars and Papa John’s—the No. 2, 3 and 4 chains, respectively—have cut into Pizza Hut’s business. Regional build-your-own pizza chains like Blaze and Pieology and customization-heavy fast-casual brands like Chipotle are also luring diners from the pan pizza depot.

“America’s tastes are changing,” Gibbs says. “People are interested in bold new flavors. It’s a pretty natural move to be the one to take the pizza category where nobody’s taken it before with all these new flavors and ingredients.”

Domino’s offered a template in 2009, when the company admitted that its sauce and crust weren’t that great and invited customers to taste the new version. They bolstered their campaign with an updated social media presence and smoother online ordering to cater to millennials. Sales have soared since, which is as much a reason for Pizza Hut drizzling hot sauce on garlic crusts as anything.

So what does the “flavor of now” taste like? Thankfully, better than it sounds (The Cock-a-Doodle Bacon. Why?).

We started with Pizza Hut’s new asiago breadsticks alongside four dipping sauces: balsamic, BBQ, buffalo and honey sriracha. They’re miles from your basic marinara or cheese sauce, but not necessarily for the better. Whether dipping in the sweet but mild balsamic, tangy, molasses-heavy BBQ, unmemorable buffalo or lightly spicy honey sriracha, my asiago sticks longed for a red sauce.

The newfangled pizzas tended to come together better. The Cock-a-Doodle Bacon pie is spread with a creamy garlic parmesan sauce topped with grilled chicken and bacon. The riff on Alfredo is rich enough that you don’t miss the marinara.

The Old Fashioned Meatbrawl is a reasonably restrained update on the classic topping: the meatballs are small enough not to dominate each bite, and a garlic crust adds an extra salty pop.

Cherry Pepper Bombshell is also better than it sounds. The cherry peppers and balsamic drizzle add a sweet punch that goes well with meaty salami. But the shower of fresh spinach on top didn’t add much. It felt similarly unnecessary on the Pretzel Piggy, which is one of the most convoluted combinations on the new signature menu. A salted pretzel crust with the creamy garlic parmesan sauce from the Cock-a-Doodle is topped with bacon, mushrooms and spinach and then finished with a balsamic drizzle. It worked, kind of, though you’d need to be in a particular kind of mood to take one down solo.

The custom crusts are Pizza Hut’s attempt to make choosing your dough as common as picking your toppings. Of the two new ones I tried, the Ginger Boom Boom crust—with regular cheese and marinara—was subtle, a bit garlicky, with only a mildly taste of ginger. The honey sriracha crust (with a pepperoni topping), meanwhile, was sticky and a bit too overpowering.

So is this really what millennials crave? Maybe. Pizza Hut will likely cast off a kicked-up drizzle, flavor-dusted crust or meatbrawl pie if it turns out it isn’t selling. Besides, it’s not as if Pizza Hut is a sauce and dough purist.

“We’ve always been the one taking the category to new places,” says Gibbs, Pizza Hut’s CEO. “Yes, the younger customers are more interested than the older demographics in experimenting with flavor. But I think across all demographics, there’s something on the menu for everybody.”


Riding the Wave

October 23, 2014

Rubios_Exterior_NEW_2014-08-06_08.50.55_web_r100x80Lou Hirsh
© 2014 San Diego Business Journal. Provided by ProQuest Information and Learning. All Rights Reserved.

Leaders of Rubio’s Restaurants Inc. are taking steps to ensure that the look and feel of its eateries carry elements of the Carlsbad-based company’s DNA.

That includes its 31-year history as a California coastal company that became best known for the Mexican-style fish tacos served at its first restaurant in Pacific Beach back in 1983.

The company recently announced plans for a redesign of 60 of its California restaurants – about a third of the nearly 200 it now operates in five states – with a rebranding of the remodeled locations under the name Rubio’s Coastal Grill.

The first wave of remodelings is underway and set for completion by the end of 2015, with more updates planned for 2016. The first remodel was recently completed at the Rubio’s in Carmel Mountain Ranch, with ocean-themed artwork on the walls and seating areas decorated in beach-oriented colors like cobalt, green and brown, designed to evoke the ocean, sand and coral.

Officials said the first redesign has boosted customer traffic, and those results will inform the upcoming remodelings. In a recent interview, CEO Marc Simon said Rubio’s will likely invest more than $20 million in the first 60 renovations, and depending on the feedback in California, the “Coastal Grill” label may also be applied to the company’s restaurants outside of Calfornia – in places like Nevada, Colorado and Arizona.

The remodelings align with Rubio’s recent ocean-themed marketing campaigns, as the company looks to set itself apart from numerous fresh-Mexican competitors that have arisen in recent years, including local, regional and national chains.

Simon said the company is looking to capitalize on the “health halo” of the seafood, salads and other lighter items that it has been adding to its menu over the past few years. For instance, it will be adding more selections with salmon to its existing offerings like the original fish taco, developed by company founder and Chairman Ralph Rubio.

The CEO said the company is also conscious of serving the large number of consumers who are still budget-conscious and strapped for time, seeking something better than fast food but priced lower than the offerings of fine-dining establishments.

“People don’t want to deal with making reservations, then standing in a line and then paying a 20 percent tip on top of all that,” said Simon, who joined Rubio’s in 2008 and became CEO in 2011.

Rubio’s also plans to open seven new locations by the end of 2015, which will push its total from its current 197 to 204 restaurants, employing more than 4,000. Simon said the growth strategy for the foreseeable future will remain slow and steady.

Right now, 99 percent of Rubio’s locations are company-owned, and while it is exploring future partnerships with already-successful franchisees in places like the Las Vegas market, Simon said the company is in no rush to turn itself into a national player.

“I don’t feel at this point that we need to become a national company in order to be successful,” said Simon, a restaurant industry veteran whose earlier work included executive stints at McDonald’s Corp. and Chipotle Mexican Grill Inc.

The privately held Rubio’s, owned since 2010 by Connecticut-based Mill Road Capital LP, does not disclose revenue or other financial performance figures.

Rubio’s ranked at No. 32, with an estimated $200.9 million in 2013 sales – up 4.1 percent from 2012 – on a recent list of the nation’s top 150 fast-casual chains, published by restaurant industry consulting firm Technomic Inc.

Technomic Executive Vice President Darren Tristano said Rubio’s has generally been careful and prudent about the pace of its location growth, adjusting when necessary to shifts in the economy. By keeping the majority of its restaurants company-owned rather than franchised, it has also been able to focus more attention on improving product and service quality at individual locations.

“They’ve done a pretty good job of differentiating themselves from some of the other fresh-Mexican restaurant chains,” Tristano said.

Technomic’s list shows that 22 of the largest fast-casual chains are in the Mexican-style category. Most are smaller than Rubio’s, though its competitors include several larger chains, including No. 2 Chipotle Mexican Grill, No. 8 Qdoba Mexican Grill, owned by San Diego-based Jack in the Box Inc., No. 9 El Polio Loco and No. 12 Moe’s Southwest Grill.

Fast-casual chains generally do not have drive-through or full table service, with meal tabs averaging around $10 per person. The nation’s top fast-casual chain in 2013 was St. Louis-based Panera Bread, with more than $4.1 billion in sales at 1,700 locations.

The U.S. restaurant industry registered $448.8 billion in sales during 2013, up 3.2 percent from the prior year, with the fast-casual segment accounting for $34.5 billion – an increase of 11.3 percent, Technomic reported.

Researchers at consulting firm NPD Group noted that sales at fast-food restaurants, with an average check size of $5, were flat for the year ending in June 2014, while visits to fine-dining establishments, with an average check size of $40, were up 3 percent from the prior year. Total industry traffic was generally flat over the past year.

Experts said the midpriced fast-casual restaurants may hold appeal to diners looking to trade up from fast food, but still unable to eat at the upscale fine-dining restaurants on a regular basis.

“Consumer attitudes and behaviors have changed since the Great Recession began and may well have changed for the good,” said Bonnie Riggs, NPD Group’s restaurant industry analyst, in a recent report. “However, offering a good product at a fair price is no longer good enough. To attract them will take a deeper understanding of what they want when dining out.”

RUBIO’S RESTAURANTS INC.

CEO: Marc Simon

Sales: $200.9 million in 2013, according to Technomic Inc.

No. of local employees: Approximately 1,300

Investor: Mill Road Capital LP

Headquarters: Carlsbad

Year Founded: 1983

Company description: Operates 197 Mexican-style restaurants in five states, with seven openings planned for 2015


After missteps, Dunkin’ Donuts Set for California Expansion

September 4, 2014

pictureChastened by early mistakes, company takes a 2d shot in the state Starbucks rules

By Taryn Luna

Globe Correspondent

Al Golub/AP for the Globe

Dunkin’ Donuts launches its campaign in Modesto, Calif.

Dunkin’ Donuts, the coffee chain so familiar in the Northeast, is nearing the end of an expansion march across the country to become a true national brand.

The retailer kicked off its California expansion on Tuesday, the first step in a strategy to challenge Starbucks’ stronghold on the West Coast.

The company once operated more than a dozen restaurants in the state but shuttered them by the early 2000s, citing logistical problems and poor relationships with franchisee partners.

Dunkin’ temporarily abandoned its California dreams as the international business grew to more than 3,000 restaurants. Today the chain serves its signature Munchkins and Coolattas at nearly 900 stores in South Korea, but has only three nontraditional stores in obscure California locations: on a Marine base, inside a hotel, and at a highway rest stop.

Now the coffee chain is preparing to take another shot in a market where its toughest competitor, Starbucks Corp., dominates with more than 2,500 stores.

Dunkin’ plans to open its first traditional restaurant in Modesto, Calif., on Tuesday and a second store in Santa Monica in the following weeks.

Three additional restaurants in Long Beach, Downey, and Whittier are expected before the end of the year. Franchisees have signed agreements to open nearly 200 stores by 2020 and the company intends to eventually grow to 1,000 stores in the state.

“We’ve learned a lot about operating out West,” said Nigel Travis, chief executive of Dunkin’ Brands. “We’ve been incredibly impressed with the quality of the franchisees.”

But Dunkin’ had to learn the hard way.

The chain was so eager to enter California in the 1990s that it “hopscotched a lot of the country,” said Grant Benson, vice president of global franchising and business development at Dunkin’ Brands.

The nearest distribution center was in Chicago, and truck drivers hauled products thousands of miles to the California stores. “It left a lot of gaps where we didn’t have a supply chain and any development,” Benson said.

Travis has also said that Dunkin’ was less selective with its franchisee partners and did not properly train them.

Dunkin’ vs. Starbucks in California

Locations of the first new traditional restaurants in California, compared to the current locations of Starbucks restaurants in the Golden State.

The company renewed its plans to move into California a few years ago and began building up its network of stores in the West, entering Denver and Salt Lake City in the past year.

The California stores will be supplied from a Phoenix distribution center, and the company intends to open a new warehouse in California as more restaurants get off the ground.

Benson said the chain has also upgraded its training program. It is working with a mix of existing franchisees that operate Dunkin’ restaurants in other states and new partners with experience in California.

Software programs that aggregate data on demographics, competition, and traffic will help the company select the best locations for restaurants, he said.

Darren Tristano, an executive vice president at the food industry research firm Technomic, said that California is a major growth opportunity for the Canton company.

Dunkin’ was the second-largest coffee chain in the United States last year, with $6.7 billion in annual sales and a 30.9 percent market share, according to Technomic. Starbucks posted $11.7 billion in sales and a 53.8 percent share last year. Technomic does not track sales by state.

And although Dunkin’ is entering a region dominated by Starbucks, it will appeal to a different customer, Tristano said.

Starbucks typically opens in middle- to upper-income neighborhoods and generally draws more affluent consumers, Tristano said. Dunkin’ prices are slightly lower, and the chain primarily draws middle- to lower-income consumers who represent a larger percentage of the workforce.

The stores tend to be smaller than at Starbucks, which means Dunkin’ pays less for real estate. They also can open more stores in nontraditional spaces, such as gas stations and convenience stores, he said.

Dunkin’ will serve its hot brews in paper cups in California — a move Tristano lauded and said environmentally conscious consumers will expect in the Golden State. The company will use the same polypropylene recyclable cup that was introduced in Somerville in May to comply with a citywide ban on disposable polystyrene, often referred to as styrofoam.

“When you look at how the brand has evolved over time, they should have a pretty good opportunity to grow there,” he said. “Today I think the California market is ready for Dunkin’.”


It’s Good to be King

September 3, 2014

burgerking-304xx3148-2112-482-0Emon Reiser

© 2014 American City Business Journals, Inc. All rights reserved.

Burger King responded to the public outrage it inspired this week by saying its deal to merge with Tim Hortons was about global growth, not tax evasion.

“We don’t expect there to be meaningful tax savings,” Daniel Schwartz, the 34-year-old CEO of Miami-based Burger King Worldwide, said during a conference call with media on Aug. 26.

The deal is more complicated than that. And the public isn’t buying Burger King’s characterizations. Sen. Sherrod Brown, D-Ohio, called for a Burger King boycott after the company announced the $11.4 billion deal to merge with the Canadian coffee and doughnut chain. So did MSNBC TV host Joe Scarborough.

Sen. Dick Durbin, D-Ill., emailed supporters, asking them to sign a petition to tell Burger King to stay put: “Burger King told us they were proud to be in America, but now we know that was a whopper.”

The deal will create a new holding company for Burger King and Tim Hortons that will be based in Oakville, Ontario. The move was immediately characterized as a tax-inversion acquisition that would allow Burger King to skirt millions of dollars in corporate income tax payments to the U.S. government.

Petitions cropped up on the Internet. Social media commenters flame-broiled Burger King on Twitter and the company’s own Facebook page.

Some of the less vulgar comments:

 

  • “Liars. Tax dodgers.”
  • “Kiss my business goodbye forever.”
  • “I’m not boycotting your product, I’m merely relocating my loyalties.”

 

 

 

Burger King issued a response on Facebook hours after the deal was confirmed, assuring angry customers that it will continue to pay its “federal, state and local U.S. taxes.” The deal, however, will most assuredly lower its tax burden, particularly on dollars it earns offshore.

“Our headquarters will remain in Miami, where we were founded more than 60 years ago, and business will continue as usual at our restaurants around the world,” the fast-food chain wrote. “It’s about global growth for both brands.”

Burger King and Tim Hortons executives reiterated that stance on their conference call. But Schwartz, Burger King Chairman Alex Behring and Tim Hortons CEO Mark Caira never denied that the deal was a tax inversion.

The company paid a 27.5 percent rate in the U.S. last year – about the same rate it will pay in Canada.

The real tax savings potential lies in the income Burger King has earned offshore. The company gets nearly half of its revenue from other countries, and currently has nearly $905 million in cash and cash equivalents on its balance sheet.

“Our consolidated cash and cash equivalents include balances held in foreign tax jurisdictions,” Burger King has disclosed in a regulatory filing.

Were the company to bring this cash to its headquarters to pay shareholder dividends or reinvest, it would have to pay perhaps one-third of it to the U.S. government in taxes.

In Canada, it would keep far more of this money – which could amount to hundreds of millions of dollars to help fund its “global growth.”

In addition to any tax savings, the merger of these two fast-food giants will lower the costs of goods for both companies, said Alex Macedo, Burger King’s president for North America.

“These two brands will have more purchasing power, which will reduce the costs for our franchisees,” he said. “The overall support has been very good.”

It also helps to have Warren Buffett on your team. America’s most popular billionaire is financing 25 percent of the deal. Buffett has crusaded for higher taxes on corporations and the wealthy, and has championed some of President Barack Obama’s ideas about tax policy. His involvement in this deal could be read as hypocritical, or as a sign that he doesn’t see it as driven by tax savings, either.

Local business leaders are pleased Burger King’s Miami headquarters would remain intact, along with its staff.

If anyone will feel the pain of this deal, it’s Burger King’s independent franchisees. Only 52 of its 13,667 restaurants are corporate-owned. In 2013, franchise restaurant revenues were four times that of company restaurant revenues, at $923.6 million and $222.7 million, respectively. So if customers stop eating Whoppers because they’re not American, it will hit the store sales of franchisees first. So far, they don’t seem concerned.

Guillermo Perales, who owns 191 Burger Kings in Florida and Texas, said that, if anything, sales are rising because of the backlash: “Besides the comeback of chicken fries, this is one of the best promotions we’ve had this year.”

Financiers, not franchisees, call the shots at Burger King. A global investment fund, 3G Capital, owns 70 percent of Burger King. It’s a Brazilian firm that has offices in New York and is used to crossing borders with its investments.

It’s betting Burger King customers will have short memories, or that the gains it achieves with its controversial move will overcome any losses in sales.

Some observers say it’s a safe bet.

“I don’t think Americans are concerned with where a brand is based,” said Darren Tristano, executive VP of Chicago-based food industry research firm Technomic.

Being labeled a corporate turncoat on social media hasn’t stopped companies from inversions. And ultimately, it’s problems with U.S. tax codes that are forcing some of America’s household names to leave, many tax experts have said.

Armando Hernandez, head of Hernandez and Co. CPAs in Coral Gables, said the advantages of tax inversion transactions can’t be ignored. After all, a company that doesn’t do an inversion faces steep taxes in the U.S. on earnings achieved abroad.

“If the tax adviser would recommend that their headquarters stay in the U.S., they would be committing malpractice,” he said.

Senior reporter Brian Bandell contributed to this report.

THE EVER-INCREASING MOVE TO TAX INVERSIONS

What is a tax inversion? A tax inversion describes when a U.S. company buys a foreign business and then shifts its headquarters outside the country – as Miami-based Burger King Worldwide (NYSE: BKW) plans to do with Canada’s Tim Hortons. Such a move carries many tax benefits for the companies, even though it largely stiffs U.S. tax collectors.

Why are tax inversions becoming more common? Companies are facing increasing costs, including modest ticks in inflation, higher health care tabs and even the potential for a higher minimum wage. At the same time, Canada and many European countries have cut their corporate tax rates.

What is the U.S. government doing about it? Almost nothing. While President Barack Obama has spoken out against the practice, tax reform is stalled in Congress.

What does the American public think? A wide swath of business-minded people believe anything a company can legally do to reduce its tax bill is a wise course. Others believe corporations should pay their share of income taxes. It’s an easily politicized issue. Walgreen Co. backed away from an inversion after too much of a backlash from its customers. Other companies have accomplished inversions without any backlash at all.

What are the benefits for a corporation? While they must still pay some taxes on their U.S. operations, companies achieve lower corporate income tax bills. Additionally, they can bring the cash they’ve earned overseas into their headquarters without paying taxes. This allows them to pay more dividends or invest in their operations. U.S. companies have accumulated about $2 trillion in cash overseas.

Does a company actually have to move its operational headquarters? No. Under current tax laws, companies don’t have to shift offices or executives overseas to be considered foreign. In the case of Burger King, the company will actually remain in Miami, but it’s corporate parent will be located in Canada.


5 Reasons Burger King Wins with Tim Hortons Beyond the Tax Inversion

August 25, 2014

Print

Yesterday Burger King announced plans to acquire Canadian coffee-café chain Tim Hortons, which would enable the burger chain to relocate its headquarters to Canada. The move would lower its tax obligations, a fact the media has latched onto. But even without the so-called tax inversion, Burger King could win with the deal. Here’s how.

  1. Burger King continues to compete in the breakfast daypart, and coffee is essential to attracting patrons. Although Burger King has integrated Seattle’s Best coffee into its breakfast offering, replacing it with Tim Hortons’ premium-blend 100% Arabica bean could be a more financially advantageous opportunity on coffee purchasing.
  1. With increased emphasis on global brand growth, a combined Burger King/Tim Hortons provides strong growth opportunity through co-branding. Giving potential licensees the opportunity to offer a strong breakfast/lunch offering from Tim’s and lunch/dinner offering from Burger King maximizes rents and revenues.
  1. Competing with McDonald’s has become a challenge for larger brands. Since both Tim’s and Burger King compete with the global burger giant, Burger King should get a leg up in the competition. With greater opportunities to fine tune their Canadian operations, Tim’s knowledge of the market should support BK’s strategy and planning in Canada and create stronger competition with McDonald’s stores overall.
  1. Consumer loyalty and sentiment toward Burger King would likely improve with the Tim Hortons marriage. As the majority of Tim Hortons’ customers are brand fans, the strong emotional connection could carry over to Burger King with the new relationship. Emotional connections are important to younger Millennial consumer, and the connection could help strengthen brand perceptions.
  1. Out-of-the-bun thinking is becoming increasingly important to consumers. Menu innovation, limited-time offerings and the need to build what’s new and what’s next on the menu is important for consumers to maintain relevance to restaurant operators. The crossover of Tim Hortons’ and Burger King’s insight and development teams can provide some new perspective and ideally leverage staff experience and skills to support ongoing development programs.

Final Thoughts: Although this investment makes strong financial sense, the post-investment reality will be on leveraging synergies that exist and maximizing the relationship with new emphasis on overall brand growth objectives. How quickly each brand accepts the new realities and bands together culturally will determine the expected success.


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