burger king

Posted: August 13th, 2013

BURGER KING

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TABLE OF CONTENTS

INTRODUCTION………………………………………………………………………………………………………..2

TREND ANALYSIS …………………………………………………………………………………………………… 2

PAST TRENDS ………………………………………………………………………………………………….2

CURRENT TRENDS ………………………………………………………………………………………….3

SUMMARY OF TRENDS …………………………………………………………………………………. 4

ECONOMIC ANALYSIS …………………………………………………………………………………………….4

ECONOMIES OF SCALE……………………………………………………………………………………4

DIMINISHING MARGINAL COSTS……………………………………………………………………6

PRICING STRATEGY………………………………………………………………………………………..7

CONCLUSION …………………………………………………………………………………………………………….8

BIBLIOGRAPHY ………………………………………………………………………………………………………..9

Burger King

Introduction

Burger King that is mostly abbreviated to BK is the second biggest global chain in fast foods industry after McDonalds. It is headquartered in Miami-Dade County in Florida, United States. It started as Insta-Burger King, and over the last half century, it has changed owners four times and become public in 2002. Towards the end of 2010, its ownership changed when 3G capital of brazil bought a significant share of it at a value of 3.26 billion dollars and has since then undergone restructuring in order to remain globally competitive. At the end of year 2011, the company had 12,400 restaurants in about 73 countries with a 66% of the restaurants or outlets located in United States. Additionally, 95 percent of the outlets are privately operated and owned while the plan is to franchise all the outlets by the end of 2013[1]. The company has continued to grow with its employee status standing at 37,000 in 2007 while it is currently bigger considering the expansion. It serves more than 11.4 million clients on a daily basis. The company is also restructuring its restaurants to make them more appealing to the clients[2].

Trend Analysis

Past trend

Burger King has come a long way in its operations as well as through several restructuring to remain competitive. Initially, the company served burgers, French fries and milk shakes. The company has diversified to several more offerings including some health meals such as yogurt and salads, with its brand offering being the whopper[3]. Financially, the company has undergone several changes with the main changes being observed in reduction of revenue while the net profit grew. This resulted from reduction in cost of goods over the years and economies of scale experienced that have made it possible for the company to reduce its operational costs. Additionally, the company has been able to reduce the price on its offerings in order to capture more market. For instance, in 2007, the company reduced the price of its cheeseburger to $1 from $2 dollars[4]. This was a way to capture more customers.

Current trend

Burger King that is now owned by 3G Capital saw a percentage growth in net profit of 94 at the final quarter of year 2012, which is attributed to the reduction in expenditure as the revenues went up. The expenditure of Burger King stood at $161.2 million in the fourth quarter of 2012, which is a sharp fall from $351.3 million dollars at the fourth quarter of 2011, which translated to a 41% drop in the operating costs of the company[5]. However, the revenue fell as well but, not with the same magnitude. The revenue fell by 30% to $405 dollars, which was still higher than it had been expected. The analysts had predicted a fall of the revenues to $375 million[6].

Currently, Burger King is seeking to expand its business to other countries in order to encourage economic growth of the company[7]. Currently Burger King owns more than half the number of United States restaurants operating in other countries. China has almost 100 Burger king restaurants, with plans to open even more in china in order to capture the vast market. However, this market is dominated by other competitors such as McDonalds with 1600 restaurants and KFC with 4000 restaurants. This has been a continuous growth since it was started more than a half century ago. In 2007, company reported that it had more than 11,300 restaurants with 66 % of this in United States while others were in 69 countries. In a period of five years, it has added more than a 1000 restaurants or outlets with more being opened in foreign countries where the number of countries in which the company operates currently stands at 12,400 outlets[8].

Summary of trends

The company, having started about half a decade ago, has grown over time to become the second biggest company in the fast food industry globally after McDonalds. The company has around 12,400 outlets worldwide. Much of its outlets are found in America, a whole 66% while the rest are found in about 73 countries worldwide. China expects more growth considering the size of the market where it has more than 100 restaurants and plans to reach 1,000. In the final quarter of last year, the company made a 94% growth in net profits compared to the previous year. This resulted from the reduction of operating costs while the revenues did not fall by the same magnitude.

Economic Analysis

Economies of Scale

Economies of scale ensure that Burger King can operate at a lower cost as the output increases[9]. Burger King being the second biggest fast foods company enjoys economies of scale by virtue of its size as well as the menu that is not very differentiated among the restaurants especially in United States. The company’s size allows it to get its raw materials at a cheaper prize due to the size of its procurement. This makes the procurement process cheaper and easier as well.

http://mbaecon.wikispaces.com/economies+of+scale,+diseconomies+of+scale,+constant+returns+to+scale

Burger King uses a uniform or fixed menu for its clients, which makes its specialization easier. Worker at the restaurants have developed great skills due to specialization and producing the same menu items for a log time. This allows perfection, which in turn increases the efficiency of the restaurant. With fixed menu and, appropriate economies of scale are met considering it will be producing fewer products but in large quantities which allows them to produce at a cheaper price due to the equipments as well as the sizes of their kitchens that can produce more at a cheaper cost[10].

Diminishing marginal costs

Burger King is also affected by diminishing marginal returns and must ensure the right number of employees at every restaurant as well as the right number of production per unit of material. Within the restaurants, having more employees means the output for each of them goes down[11]. In this case, the restaurant space is the fixed variable that cannot be changed within the short run. Therefore, having too many workers will mean many people means more people producing the same amount produced by fewer. Therefore, the productivity level of each worker goes down since each employee only does so little because the number of tasks may not increase as the number of employees increases. This further means the company has to pay more for production of the same output level[12].

http://apecon1.wikispaces.com/Law+of+Diminishing+Returns

When buying materials such as tomatoes and beef for the burgers, the company has to make sure it buys enough according to the demand, and should not have a big supply more than necessary. Having a big supply o tomatoes and beef means the number of burgers produced might be high, while the demand might be lower. Therefore, in order to sell more burgers, the company has to define a way to pay them too, which is done through reducing the price of a burger. It can be done by offering discounts when one buys more than one burger, or buying three at a price of two. This means that the amount earned from one burger will reduce, in this case considering the demand might not increase. Additionally, considering the production space and equipment to be fixed within a short term, the restaurant has a maximum number of burgers that can be produced. Therefore, buying too much tomatoes or one material of production means the value of each will reduce.

Pricing strategy

In 1993, Burger King adopted a value pricing strategy to gain competitive advantage[13]. The value-pricing model based the prices according to customer perceptions to their products. The strategy was aimed at capturing more clients, which it did although not significantly. To do this, the company offered several options for clients to select from, in terms of its menu, which in a way reduced costs for the clients. This triggered reduction of prices for other competitors. The company offered a three-tiered menu that sought to boost sales and increase the number of clients. Offering a three-tier price with all at a low price is a sure way of capturing customers[14].

Currently, one pricing strategy cannot be used considering the complexity of the current market. However, cost based pricing is used where prices are determined by the costs as well as the profit margins. The company seeks to increase its profit margin in order to make more money. This requires lean systems within the restaurants in order to reduce operating costs. Adding the price cannot be a solution due to the high competition. However, modern equipments and kitchens enable the company to produce its offerings at cheaper prices than before, which makes them cheaper as well in order to attract more clients.

Conclusion

            Burger King being the second after McDonalds in the fast foods industry has come a long way since it was established. It has gone through several owners, but it is obvious that the current owners, 3G Capital are doing a good job to keep it competitive. The company has made some significant improvement over the last two years where it restructured its operations. The company has reduced its operating costs while increasing the profit margin considering revenues have not fallen by the same magnitude as the costs[15]. Additionally, the company has a chance for expanding its market in other countries such as china as well as the whole of Asia where the market is growing. Although its trend over the years has not been so smooth or even, it has remained competitive, and at its size, it has a bigger opportunity for creating a bigger competitive advantage.