The owner of Tim Hortons and Burger King saw its third-quarter sales growth at existing stores decline in much of North America amid a sluggish fast-food market as consumers took advantage of lower food prices at grocery stores.
Restaurant Brands International Inc., while reporting a better than expected third-quarter profit – buoyed by new menu items and lower costs — said Monday sales at existing stores grew just 2 per cent in the quarter at Tim Hortons compared with 5.3 per cent a year earlier.
Those same-store sales at Burger King rose 1.7 per cent in the quarter ended Sept. 30, mostly due to higher demand in Asia Pacific and Latin America, compared with 6.2 per cent the previous year. But in Canada and the United States, Burger King same-store sales slipped 0.5 per cent compared with a rise of 5.2 per cent last year.
Company executives pointed to overall softness in the so-called quick-service restaurant sector.
“QSR in North America has been a little bit softer these past couple of quarters,” Josh Kobza, chief financial officer of Restaurant Brands, said in an interview Monday. “We’ve read all the research reports about food-at-home deflation. It doesn’t really change our strategy.”
North American restaurants are battling fierce competition from both established and upstart chains as well as the squeeze of falling grocery prices, which are encouraging more consumers to shop at grocery stores and eat at home.
Archrival McDonald’s Corp. has been racing to recapture lost ground, offering a two-for-$5 menu, all-day breakfast in the United States and Chicken McNuggets made without preservatives. The initiatives helped the giant chain post a global 3.5-per-cent sales gain in its third quarter, although trailing last year’s 4-per-cent rise.
Restaurant Brands, which was formed in late 2014 when Brazilian owner 3G Capital merged its Burger King chain with Tim Hortons, reported Monday its third-quarter net profit rose to $86.3-million (U.S.), or 36 cents a share, from $49.6-million, or 24 cents a share, a year earlier.
On an adjusted basis, Restaurant Brands earned 43 cents per share, beating analysts’ average estimate of 40 cents per share, according to Thomson Reuters I/B/E/S.
The Oakville, Ontario-based company’s revenue rose 5.5 per cent to $1.08-billion, beating analysts’ estimate of $1.06-billion. Restaurant Brands’ total costs fell 3 per cent to $655.2-million.
Mr. Kobza said the company is focused on stripping down costs while improving customer service and franchisees’ bottom line through more efficiencies, such as getting consumers through the drive-through faster.
“Some quarters will be a little softer, others will be stronger,” he said. “Our markets internationally performed quite well across both brands. But, like we said from the beginning, we’re here for the long run.”
The company is counting on expanding Tim Hortons globally following the same playbook it used at Burger King. At Tim Hortons, it recently signed master franchisee agreements with established players in Great Britain and the Philippines, while also closing similar deals in parts of the United States such as Minneapolis and Cincinnati.
And at Tim Hortons, it is reducing capital spending by shifting the costs of developing new restaurants to the franchisees, which is a strategy it used previously at Burger King, Mr. Kobza said.
“That’s the business model we found to be the most effective and that’s the one we’re moving to with Tim Hortons,” he said.
“Our goal is to replicate the pace of growth and the acceleration of growth that we had at Burger King with Tim Hortons,” added Daniel Schwartz, chief executive officer of Restaurant Brands.
But Mr. Schwartz said the company doesn’t plan to move to a master franchisee model for Tim Hortons in Canada but rather keep the current strategy of having more individual franchisees run their own restaurants.
He said that speeding drive-through times is a priority for the company as more consumers pick up their orders in their cars. At McDonald’s, almost 70 per cent of its U.S. business is done through drive-throughs, according to recent reports.
Last year, Burger King started to place timers at its drive-throughs, which helped make “a good amount of progress” on faster service, Mr. Kobza said. He said Tim Hortons already measured its drive-through times. “We’re making that a big priority because speed of service is important for our guests [customers.]”
Peter Sklar, retail analyst at BMO Nesbitt Burns, said the 0.5 per cent drop in same-stores sales at Burger King in North America marks the second quarter of negative sales at existing outlets. However, “we do not believe that this result is particularly surprising given the current QSR environment in North America.”
The company’s overall results are “a neutral to slightly negative event,” Mr. Sklar concluded.
MARINA STRAUSS – RETAILING REPORTER
Globe and Mail update (correction included)
Published Monday, Oct. 24, 2016 7:13AM EDT
Last updated Tuesday, Oct. 25, 2016 3:02PM EDT