Big burger joints lag behind growing Kiwi appetite for food and beverage services

Friday 15th June 2018

Three of the more prominent burger brands failed to sizzle in 2017 with sales rising at a slower pace than what Kiwis were willing to spend on food and beverage services, and are now contending with a hike in the minimum wage eating into gains from higher prices.

Government data show New Zealanders increased the value of retail spending on food and beverage services 9.1 percent to $11.28 billion in the year ended March 31, with the volume sold rising 6.8 percent, indicating higher prices.

While not entirely aligned, financial statements lodged with the Companies Office show total revenue - including rental revenue, license fees, service fees and interest received - at McDonald's Restaurants New Zealand rose a more modest 0.2 percent to $260.1 million in calendar 2017. About 80 percent of the restaurants are owned and operated by local franchisees.

Meanwhile, revenue at rival Burger King' New Zealand - owned by US private equity firm Blackstone Group via Tango Holdings NZ – slipped 2.2 percent to $187.3 million, and NZAX-listed BurgerFuel Worldwide’s New Zealand revenue, which includes franchise fees, rose 8.8 percent to $21.1 million in the year ended March 31. Carl's Jr, owned by NZX-listed Restaurant Brands New Zealand, posted a 3.9 percent decline to $34.9 million in the year ended Feb. 26.

Despite the muted sales performance, the burger chains' bottom lines were mixed. Of the majors, McDonald's local profit rose 28 percent to $67.7 million, while Burger King posted a profit of $3.1 million versus $3.8 million in the prior year, a drop of 18 percent. BurgerFuel’s net loss was $463,999, which it said was due to costs associated with the initial establishment and later exiting of the US, which all occurred within the period. Carl's Jr improved its profitability, doubling earnings before, interest, tax, depreciation and amortisation to $2 million.

The local McDonald's division paid $30 million to its US parent, unchanged from a year earlier.

The latest data from Statistics NZ showed there were increases in restaurant meals and ready-to-eat food prices, up 2.9 percent on the May year. Restaurant meal prices rose 2.7 percent while ready-to-eat food prices lifted 3.1 percent. The minimum wage increase of 75 cents to $16.50 an hour on April 1, 2018 may be a partial factor for these price increases, the statistics agency said.

On the staffing front, McDonald's NZ wage bill shrank 12 percent to $48.2 million in 2017, while Burger King NZ spent $55.6 million on salaries, up 0.9 percent.

Staffing issues at Burger King are in the limelight after 92 percent of union members who work at the fast food operation voted to start strike action today over pay, hours and health and safety.

"They need to spend a lot more on salaries," Unite Union national secretary Gerard Hehir told BusinessDesk in an email.

“Most of any increase probably comes from the tightening up of work visas. It is now very difficult to get visas for store level manager positions. We have noticed that the number of migrant visa managers in store has been dropping recently and the reality is that citizens and permanent residents feel more secure to refuse to work unpaid hours so their costs may well have increased. Unpaid work, unfortunately, it is still common though and a major issue in this dispute,” he said.

The statements showed Burger King's total equity was $77.7 million as at Dec. 31, having accumulated losses of $21.4 million. It had a net working capital deficit of $9 million at the balance date which the directors said can be funded by operating cash flows and available borrowing facilities. They adopted a going concern assumption, however, that is dependent on the group's continued access to banking facilities, something they said they are confident of.

"They are owned by the private equity group Blackstone - known worldwide for buying assets short to medium term, loading them with debt to reduce 'profits' in the country and squeezing them hard before flicking them off," Unite's Hehir said. The local Burger King holding company "has been highly leveraged to make a 'loss' and we think this guy can afford to pay managers more than the minimum wage."

(BusinessDesk)

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