End Of Burger King Deal Eases Discounting Pressure Slightly

Date : 04/16/2010 @ 4:56PM
Source : Dow Jones News
Stock : Jack IN The Box Inc. (JACK)
Quote : 93.68  -1.31 (-1.38%) @ 3:04PM

End Of Burger King Deal Eases Discounting Pressure Slightly

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The fast-food industry could get some relief from a punishing stretch of discounting as Burger King Holdings Inc. (BKC) next week winds down its much-debated $1 double cheeseburger deal.

The move hardly signals an end to the $1 wars among the fast-food burger chains, as Burger King, while raising the double cheeseburger to $1.19, will add the Buck Double--a similar sandwich with one slice of cheese instead of two--to its menu for $1. McDonald's Corp. (MCD) is also still touting low-priced products, including a newly launched Dollar Menu at breakfast.

Still, Burger King's transition will mark the beginning of the end of the what its executives call the chain's longest and most aggressive push on value in the past decade. Outside of Burger King's walls, the end of the deal has the potential to ease some of the pressure that discounting has had on the space.

"It's a small baby step, but it's moving in the right direction toward less discounting," Deutsche Bank restaurant analyst Jason West said. "Hopefully, the rest of the industry will move in this direction as well."

The $1 double cheeseburger deal was a hot topic among analysts and investors who scrutinized how it would impact traffic, sales and margins. Burger King's initial boost of nearly double-digit customer traffic growth eventually waned, though the company says it helped improve its value position in the eyes of customers.

Undeniably, the deal shook up fast food, as the number of customers buying off of burger chain's dollar menus rose 11% between October and December of last year, after falling the previous three quarters, said NPD Group Inc. restaurant analyst Bonnie Riggs.

Some fast-food chains hit hardest by Burger King's promotion were marking their calendars to coincide with the deal's end, hoping it could spell an end to their woes.

Linda Lang, CEO of Jack in the Box Inc. (JACK), said last month that the competitive environment in fast food wouldn't improve until Burger King's deal ends. Jack in the Box, whose target customer base overlaps with Burger King, said it expects its same-store sales to fall up to 10% in its latest quarter, in part due to competitive discounting.

One area where Burger King may see some more immediate reaction is among its franchisees, many who have complained that they lose money when selling the double cheeseburger for $1. The Buck Double, with one less slice of cheese, saves about a nickel in food costs, while raising the price of the double cheeseburger to $1.19 creates a better margin on that product.

"We're relived that there's a more profitable product on the dollar side, relieved that it's evolving," said one Burger King franchisee, who declined to be named.

While the deal will end, a lawsuit sparked by the promotion remains pending. The issue over the lawsuit, filed in November, involves whether Burger King can set a maximum price at which franchisees must sell a product. Burger King argues that franchisees must comply with its value menu program, which includes selling products for $1.

Other fast-food chains were pleased to watch from the sidelines as the burger players compete over low prices.

"I'm happy to have them fight a burger war," Cheryl Bachelder, chief executive of AFC Enterprises Inc. (AFCE), which owns the Popeyes fast-food chain, said in a recent interview. "We're happy to sell chicken."

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; paul.ziobro@dowjones.com


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