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Burger King Sales Can’t Catch Beef Cost Rise

[Update on beef prices: Wendy's says it has had to up the price of its new W cheeseburger from $2.99 to $3.19.]

Burger King sales may be improving but not enough to avoid being flame-broiled by higher beef prices, the chain’s largest franchisee reported this week. But management told analysts they are encouraged enough by the brand’s shift to more premium menu items to invest $12 million to remodeling BK stores this year.

Carrols Restaurant Group President-COO Dan Accordino said that total revenues for the Syracuse, N.Y.-based company’s 298 Burger King units decreased 2.7% in fiscal 2011, with comparable-stores sales down 1.4% for the year. The good news: Comps were +1.5% in the 2011’s Q4 (vs. -6.1% a year earlier), after being in the black in Q3 as well. “This improvement was driven by favorable mix shifts, including a continuation of better balancing of our value products and promotions and to some degree, higher pricing,” he said.

The Q4 additions of the BK Toppers burgers, BK Chef’s Choice burger and reformulated, thicker french fries helped sales. Unit sales of fries are up 7%-8% since the change. Customer traffic declined 1.8% in the quarter; that was an improvement over year-earlier results. Average check rose 4.4%, helped by a 3.4% rise in effective pricing. But a 179 basis-point rise in Burger King’s cost of sales hurt the most.

BK wants to reduce dealing, but discounts work.

“The sales momentum in the fourth quarter was simply not great enough to overcome increases in commodity costs, particularly, higher ground beef prices,” Accordino said. Ground beef costs averaged $1.86 per pound during Q4, 19% higher than a year earlier.  It is averaging $2.06 in Q1 2012.

Carrols previously announced plans to spin off its Fiesta Restaurant Group subsidiary, which operates 91 Pollo Tropical restaurants and 158 Taco Cabana. Same-store sales were +9.9% for Pollo Tropical in fiscal 2011, +3.7 for Taco Cabana, both of which rely less heavily on beef than does Burger King.

CFO Paul Flanders said Carrols expects BK comp sales to rise by 3% to 5% this year, with commodity costs rising 3% to 4%. Up to $12 million will spent for remodeling 25 to 30 restaurants and another $6 million to $7 million will fund completion of a POS system rollout. Cost per unit remodel will be about $275,000.

Accordino called the Chef’s Choice burger, introduced at $4.99, “consistent with where Burger King wants to go in terms of premium products” and said its stores also have been averaging sales of 40 to 50 BK Toppers (priced at $1.99) daily. Ultimately, the “intent is to have less discounting” for the brand, he said, but giveaways and discounts have been effective in driving traffic.

Breakfast sales have slightly outpaced other dayparts, “which is really motivational for us because that’s a day part that we’ve been struggling with,” Accordino said. Burger King will continue to roll out smoothies and frappes this spring with more dessert and snack innovations planned.

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