McDonald’s vs. Burger King: An Overview
Like PepsiCo, Inc., versus the Coca-Cola Company, or Ford Motor Company versus General Motors Company, the battle between McDonald’s Corporation (NYSE: MCD) and Burger King represents one of the great rivalries in American business history. For more than 60 years, McDonald’s has been the trailblazer that set the standard by which all other franchises operated. But there are signs those roles may be reversing. A revitalized Burger King is forcing McDonald’s to adjust to it, not the other way around.
McDonald’s and Burger King started in the franchise food business in 1955 and 1954, respectively. McDonald’s has always been the larger company, but each firm has unquestionably influenced the other throughout their six-decade-plus rivalry.
- McDonald’s has the highest market capitalization of any fast-food restaurant chain in the U.S.
- Its vast size and global reach represent challenges on their own.
- Burger King’s turnaround has allowed it to challenge McDonald’s supremacy on quality and price.
Each restaurant boasts iconic products. Burger King has the Whopper sandwich, and McDonald’s counters with the Big Mac and Quarter Pounder. The Whopper and Big Mac are the two best-selling burgers of all time. Burger King boasted 1.7 billion Whopper sales per year in 2002. McDonald’s reached that same figure with Big Macs in 2017.
Each firm continues to push its international presence, although with mixed results. One reason is culture. Many Europeans, for instance, consider fast-food to be a quintessentially American tradition. Food menus for Burger King and McDonald’s sometimes struggle to appeal to foreign consumers, leaving international markets underdeveloped, particularly in the Asia-Pacific region.
McDonald’s: The Real King of Burgers
McDonald’s has the highest market capitalization of any fast-food restaurant chain in the U.S., at more than $168 billion in October 2020. (It’s worth noting that Subway has more stores and Starbucks has higher revenues.) It has 36,000 franchises in nearly 120 countries, employs 1.9 million people, and serves more than 70 million meals every day.
McDonald’s market cap as of October 2020. But Subway has more stores globally, at 44,758, and Starbucks has higher revenue, at $26.5 billion in 2019.
McDonald’s locations brought in more than $21 billion in 2019. Even with growth figures slumping since early 2014, McDonald’s sits atop the fast-food world.
But those slumping figures should concern investors, who have not realized a great return for several years. MCD performed admirably during and immediately after the global recession of 2008–2009. It turns out cheap fast-food is essentially recession-proof, but 2014 was the worst year for the company since 2003.
Under Ray Kroc, its founding franchising visionary, McDonald’s became the world’s premier food brand by selling the rights to operate a McDonald’s store. With this model, MCD keeps overhead costs down and lets local owners deal with individual units. Food costs remain low and service remains fast for a culture increasingly on the go.
The Burden of Size
But big businesses struggle to continue growing once they reach a certain size. It is logistically difficult to innovate or address individual business concerns when a burger empire spans 120 countries.
McDonald’s CEO Steve Easterbrook gave a presentation to shareholders in the second quarter of 2015 to address concerns over performance. His turnaround strategy included an intentional examination of Burger King’s recent success.
It is not likely that McDonald’s will be able to slash management and administrative expenses by more than 25%, as Burger King managed to do between 2011 and 2013. But it is telling that Easterbrook identified re-franchising company-owned restaurants as a way to drive up margins.
Burger King: A Fast-Food Revival
After a tumultuous and disappointing start to the 21st century, Burger King’s shareholders saw The Wendy’s Company, Subway, and Starbucks take turns passing them as McDonald’s’ chief competitor, at least in terms of sales revenue.
Then, private equity firm 3G Capital purchased the struggling giant for $4 billion in 2010. It ignited a recovery effort that has turned out to be quite successful. Burger King merged with Canadian coffee staple Tim Hortons in 2014 to form a new publicly-traded company called Restaurant Brands International (NYSE:QSR).
Trimming the Fat
By Q3 2017, Burger King was outperforming McDonald’s and Wendy’s by significant margins. A report by Citi Research concluded that 3G Capital made two significant strategic adjustments: trimming business fat and simplifying its public image. It worked, and operating margins grew from 17% in Q2 2011 to more than 40% by the third quarter of 2018.
The primary revenue stream for Burger King Worldwide (BKW) comes from franchises, including royalties and fees; royalties come from a percentage of revenue from each unit. As of 2020, 99.7% of Burger King locations are franchised.
Doubling the Stakes
At a time when the McDonald’s menu is as complicated as ever, creating record drive-thru wait times, according to Citi Research, Burger King is repackaging or rebranding old items to help consumers out.
One part of the revival strategy is directly challenging to McDonald’s products. In November 2013, Burger King introduced the Big King sandwich, with two patties, a three-layer bun, and a special sauce, as a not-so-subtle competitor to the successful Big Mac from McDonald’s.
When McDonald’s brought back the McRib sandwich, Burger King unveiled a $1 BK BBQ Rib as a cheaper alternative. In 2018, Burger King announced a double quarter-pound burger in a direct shot at McDonald’s’ quarter-pound burger.
The Coffee Wars
Next came a new fleet of coffee products from Burger King to challenge the McCafe menu. McDonald’s made waves years ago by partnering with Starbucks to create a recyclable-compostable coffee cup. So Burger King targeted and acquired Tim Hortons, Inc., the leading Canadian coffee and donut outlet. Stock prices for both companies soared after the CA$12.5 billion deal, including CA$3 billion in financing from Warren Buffett’s Berkshire Hathaway.
There is no confusion about Burger King’s value proposition. It is just as good as McDonald’s with the same products, just slightly more upscale and, sometimes, lower prices.
Meaningfully investing in Burger King and McDonald’s usually means buying and operating a new franchise unit. Since each company operates on an international level and no two markets are identical, the easiest way to compare franchising options is to look at Franchise Disclosure Documents (FDDs).
According to the 2020 FDD for McDonald’s, the initial investment amount for a McDonald’s franchise falls between $1.3 million and $2.3 million. The corporation also charges an initial franchise fee of $45,000.
Burger King’s franchises require similar investments. The 2020 BK FDD suggests that, excluding the costs of real estate acquisition and improvement, total initial investments fall between $333,100 and $3.4 million, with an initial franchise fee of up to $50,000.