On September 2, 2010, 3G Capital announced that it planned to acquire Burger King Holdings. The deal itself is valued between $3 billion and $4 billion with 3G currently working on the tender offer of $24 per share for the company’s outstanding shares. With Burger King being the world’s second largest hamburger fast-food chain, it was not difficult for 3G to find financing for this highly-leveraged buyout. However, is 3G truly ready to tackle Burger King’s problems?
3G Capital is a private-investment firm based in New York with ties to Brazil. Even though Burger King is its first acquisition, 3G Capital brings prior consumer products and retail experience to the table through its previous investments in companies like Anheuser-Busch InBev. Additionally, through “investments in the Wendy’s and Carl’s Jr. restaurant chains,” 3G was able to learn about the fast-food industry. According to Diane Brady in her article, “The Challenges Facing Burger King Buyer 3G Capital,” 3G seems to be ready for the challenge and is planning to grow Burger King long term (at least a decade) instead of espousing the more short-term goals typical of many private-investment acquisitions. Brady’s sources explain that 3G plans to fix Burger King’s problems through cost-cutting measures and international expansion.
While cost-cutting and international expansion can be potential fixes, the underlying issue at the heart of Burger King’s current woes may not be adequately addressed by 3G’s current restoration plans. Six years ago, Burger King re-envisioned itself and its target market. According to Julie Jargon’s article, “As Sales Drop, Burger King Draws Critics for Courting ‘Super Fans’,” since this strategy shift Burger King’s target market has been 18-34 year-old people (mostly males) who visit the chain “on average almost 10 times a month.” Aiming mainly for these so-called “super fans,” the company geared its promotions, advertising, pricing and even menu towards this demographic. This resulted in food options that were perceived to be less healthy and ad campaigns that seemed to alienate women and children. Jargon notes that as a result of this strategy “Burger King posted 20 consecutive quarters of same-store sales growth in the U.S. and Canada through its fiscal 2009 third quarter. But as the economy weakened, Burger King started to suffer.” Not only did the economic situation make Burger King’s super fans less inclined to eat out, but health concerns also seemed to creep into their minds making Burger King’s “super-fan-geared” food choices less enticing. Additionally, since its period of financial growth ended, Burger King has been scrambling to maintain the super fan market by trying to woo them back with pricing deals that have angered franchisees and resulted in lawsuits.
Clinging to this outdated strategy has led to slumping sales and fighting franchisees and is the true underlying problem 3G inherits in its acquisition of Burger King. Before 3G can even begin to think about reworking Burger King through cost-cutting and (more importantly) international expansion, the issues of domestic strategy needs to be rectified since, as of now, 69% of Burger King’s revenue comes from US and Canadian sales. With so much of their revenue coming from domestic sales, the specter of the super fan needs to be addressed. Despite past success, these super fans, either because of health awareness or economic issues, have not flocked back to Burger King in the numbers they used to. The current running promotions including the $1 double cheeseburger that has led to the debacle with franchisees (wsj) are aimed at recapturing the heyday of the super fan instead of looking forward towards a new strategy. The days of the dominance of the super fan are seemingly over and instead of looking towards cost-cutting measures and international expansion as the most important orders of business, 3G Capital first need to figure out how to replace a target audience that has all but disappeared