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 most iconic and important business rivalries in American history. For more than 60 years, McDonald's has been the trailblazer that set the standard by which all other franchises operate. But there are clear 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 1953, respectively. McDonald's has always been the larger company, but each firm has unquestionably influenced the other over the course of their six-decade-plus rivalry.

Each restaurant boasts iconic products. Burger King has the Whopper sandwich, and McDonald's counters with the Big Mac and Quarter Pounder. In fact, the Whopper and Big Mac are the two best-selling burgers of all time. Burger King boasts 2.1 billion whopper sales per year, though it is very difficult to find verification for that figure. McDonald's suggests a more modest 550 million Big Macs are sold each year.

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 is the largest fast-food restaurant chain in the United States and represents the largest restaurant company in the world, both in terms of customers served and revenue generated. Its franchises span 36,000 individual units across nearly 120 countries, employ 1.5 million people including franchisees, and serve more than 65 million meals each year.

Consider that McDonald's could lose half of its sales revenue and still sit in first place comfortably; domestic McDonald's locations brought in $21 billion in 2018. Even with slumping growth figures since early 2014, McDonald's sits atop the fast food world. But 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 franchising visionary Ray Kroc, 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, while food costs remain low and service remains fast for a culture increasingly on the go.

Big businesses struggle to grow quickly 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 Q1 2015 to address concerns over performance. His turnaround strategy included an intentional examination of Burger King's recent success. While it is not likely McDonald's will be able to slash corporate overhead in half, something Burger King managed to do between 2011 and 2013, it is telling that Easterbrook identified refranchising company-owned restaurants as a way to drive up margins.

Meaningfully investing in Burger King and McDonald's usually means buying and operating a new franchise unit.

Burger King: A Fast Food Revival

After a very 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, igniting a recovery effort that was quite successful. Burger King merged with Canadian coffee staple Tim Hortons in 2014 to form a new publicly traded company called Restaurant Brands International (RBI).

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 24 percent in Q2 2011 to 36 percent by Q4 2018.

Burger King Worldwide (BKW) generates revenue from three sources. The primary stream comes from franchises, including royalties and fees; royalties come from a percentage of revenue from each unit. The company formerly leased properties, although 3G Capital has moved away from that, and, as of 2018, all Burger King locations are franchised.

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 a direct challenge to McDonald's products. In November 2013, Burger King introduced the Big King sandwich, two patties, three buns, and a "special sauce," as a not-so-subtle replication of the successful Big Mac from McDonald's. When McDonald's brought back the McRib sandwich, Burger King responded by unveiling a $1 BK BBQ Rib as a cheaper alternative. In 2018 Burger King announced a double quarter pound burger, seen as a direct shot at McDonald's' own quarter pound burger.

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 new morning coffee option, so Burger King targeted and acquired Tim Hortons, Inc., the leading Canadian coffee and donut outlet. Stock prices for both companies soared after the $11 billion deal, including $3 billion in financing from Warren Buffett.

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, possibly, cheaper. BK also subtly illuminates McDonald's oft-criticized nutritional value by offering the new "Satisfries," a healthier French fry option with "40 percent less fat and 30 percent fewer calories than the leading French fries." The leading French fries are, of course, McDonald's.

Franchises

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 2017 FDD for McDonald's, the initial investment amount for a McDonald's franchise falls between $1.008 million and $2.2 million. The corporation also charges an initial franchise fee ranging from just $500 up to $45,000 depending on the type of restaurant unit.

Not surprisingly, Burger King's franchises require similar investments. The 2017 BK FDD suggests that, including the costs of real estate acquisition and improvement, total initial investments fall between $317,100 and $3.046 million, with a $45,000 initial franchise fee.