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McDonald’s Sales Get Yellow Card

The $10 million to $25 million McDonald’s reportedly spends annually to be a World Cup sponsor is the proverbial double-edged sword. On the one hand, the Cup is one of the best events with which a brand can be associated. But for McDonald’s, the success of this year’s World Cup meant millions of people were at home, at bars or a Buffalo Wild Wings cheering throughout June. Not at McDonald’s.

McDonald's made french fries the focus of its multi-million-dollar World Cup campaign.

McDonald’s made french fries the focus of its multi-million-dollar World Cup campaign.

How better to explain same-store sales for McDonald’s, which saw a 1.5% decline in comp sales for Q2 overall led by a 3.5% drop in June. McDonald’s Europe sales likely would have been positive in Q2 but for a sudden 3.4% drop in June. One analyst at today’s McDonald’s quarterly earnings call actually, embarrassingly asked, “Was there anything happening to explain the sales decline in Europe?” That analyst needs to spend less time dining at Balthazar and more time among the living because yes there was. No analyst asked a question about the World Cup during the call. That was good for McDonald’s since it hardly could blame poor sales on an event of which it is a global sponsor. CEO Don Thompson didn’t mention the World Cup; not even the global ad campaign supporting the event on which it spent millions.

Only Mark Kalinowski, restaurant analyst for Janney Montgomery Scott, had the smarts to wonder if the biggest global sporting event of the year might have had an impact on McDonald’s sales. As Kalinowski wrote in a brief to investors after McDonald’s quarterly report was issued, “Anything that keeps folks at home watching TV, keeps them away from their local McDonald’s restaurant. This may help explain the weaker-than-expected results in Europe and APMEA, in particular.”

The World Cup doesn’t explain away the frightening June decline in total, of course. Unfortunately, no analyst on today’s call asked about sales for the Bacon Clubhouse, the premium burger on which McDonald’s pinned its Q2 sales hopes. Comp sales were down for Q2 but was that because the Bacon Clubhouse underperformed expectations? We won’t know because analysts never ask such simple questions.

McDonald’s poor Q2 sales clearly put Thompson on the defensive. The mantra of the day was “moving with a sense of urgency.” He used it multiple times to indicate that he knows something’s very wrong. The usual response is to point to “a highly competitive environment and a contracting eating out market,” but that is especially unconvincing when you have Chipotle Mexican Grill reporting 17.3% same-store sales. Nothing contracting there.

The Bacon Clubhouse failed to keep McDonald's from a declining customer count in Q2.

The Bacon Clubhouse failed to keep McDonald’s from a declining customer count in Q2.

The conference call’s other key phrase was “foundational elements.” These are those building blocks of McDonald’s business—pricing, menu, operations, service, marketing—that will be strengthened under the two-path strategy Thompson outlined. The other path includes increasing customization, accelerating digital efforts and making McDonald’s “an even more respected brand” through ties to organizations such as World Wildlife Fund.

Thompson alluded to but didn’t elaborate on a “learning lab” he says the company has established in California to probe what consumers today want from McDonald’s. There were no analyst questions about the lab either, by the way. Thompson’s emphasis on the benefits of customization and personalization might mean an expansion of the build-your-own-burger option tested in California, or it may just be the expansion of condiment options that will be possible with the new High-Density Kitchen layout.

Why not try the "My Burger" promotion in the U.S. It worked in the UK in Q2.

Why not try the “My Burger” promotion in the U.S. It worked in the UK in Q2.

At one point in the call Thompson said McDonald’s will “evaluate the relationship between pricing and quality perception.” That seemed to answer the concern voiced by a McDonald’s franchisee in Janney’s survey. “We still serve the most customers because we’re considered cheap, rather than the best quality,” said one franchisee. “We certainly have the best facility but we have to find a way to convince them that we offer the combination of service, quality, and cleanliness at the best value, not the cheapest.”

Thompson agreed that McDonald’s needs to reemphasize the quality of its food. But that won’t mean dropping the Dollar Menu & More. “We’re looking at the overall pricing on our menu board. But we’re not giving up on value or affordability,” he said.

Changing advertising creative also part of Thompson’s turnaround plan. He wants ads to focus on product quality and he wants to revive that “emotional connection” between brand and consumer that McDonald’s used to have.

If McDonald’s wants to improve consumer engagement with the brand, why doesn’t it try the “My Burger” promotion—where consumers suggest new burgers and the one with the most votes actually goes on the menu as an LTO—in the U.S.? The crowdsourcing approach was tried for the first time in the UK this spring and what happened? UK sales were among the best, globally, in Q2. Despite the World Cup.

Bruegger’s Tries Bagel Burgers

BrueggerBagel BurgerBruegger’s Bagels will cross into the burger category, if only for a limited time, to promote its reservation app and boost its online presence.

On July 22, consumers can use the Bruegger’s Bagels Reservation Application on the chain’s Facebook page to reserve a burger for later pick up (between July 28 and August 17) at any of the 21 Bruegger’s Bagels locations in Boston (only). Diners who are not yet members of Bruegger’s eClub can “like” the brand on Facebook to gain access to the reservations app.

Unlike Boston Market, which erroneously claimed its new pulled-chicken sandwich is a burger, Bruegger’s is offering two real burgers, each with a 3.5-oz. beef patty. The Bistro Burger has Cheddar cheese, a proprietary sauce, lettuce, tomato and pickled onions on any bagel a diner chooses. The Barnyard Burger is topped with a fresh-cracked egg, Cheddar and the same house sauce on an Asiago Parmesan bagel.

McDonald’s stores in France have been toying with bagel burgers since the introduction of the American & Bacon burger on a sesame-seed bagel in 2010. The following year it tried three different bagel burgers and the idea since has become a nearly annual menu event. In the U.S., McDonald’s offers bagel breakfast sandwiches, so if it’s looking for something new and minimally disruptive to operations, bagel burgers could score. Just a suggestion.

As Expected, Taco Bell Declares Victory

You’ll recall that this spring when Motley Fool was running frantic headlines such as, “Look Out McDonald’s, Here Comes Taco Bell With Its Breakfast Menu,” BurgerBusiness.com was talking sense. I wrote that Yum! Brands CEO David Novak’s proclamation that “we’re in to win at breakfast” was a bit of sleight of hand because he was predicting only $100,000 in per-store incremental sales or about 7% of sales at breakfast. With victory defined so modestly (breakfast’s share is at least double that at every burger chain that sells breakfast), Taco Bell couldn’t help but “win.” But it sure wasn’t going to spell doom for the Arches.

McDonald’s Corp. reports its Q2 sales next week and even if they’re not pretty, Taco Bell shouldn’t claim victory. But it did, of course, just as predicted. Yesterday, Yum’s Novak called March 27, the day Taco Bell began selling breakfast, “a day that will go down in history.” That’s enough swagger to make you lose your breakfast, but there’s more.

"A day that will go down in history" Yum's CEO calls it.

“A day that will go down in history” Yum’s CEO calls it.

For Q2, Taco Bell reported a 2% gain in same-store sales—below the Consensus Metrix number of +3.6%—and a 1% gain in units. Most analysts called the numbers disappointing. Novak said they smelled like victory in the morning. “Our breakfast day part mix [is] around 7% of sales in the second quarter. We fully expect breakfast to be incremental and [bring] anywhere from $70,000 to $120,000 per unit in annualized sales,” Novak told analysts during a conference call.  He added, “And for the long term there is no question we’ve enhanced our brand position as the choice of the new generation.” OK, but that new generation can turn on you faster than you can say “selfie.” He must have forgotten that many Millennials and others abandoned Taco Bell after the much-publicized lawsuit in 2011 questioning how much meat was in its tacos.

OK, so breakfast is a hit, Novak has declared. “Now the big question you’re probably asking is this: Given the success of the breakfast launch, why did same store-sales increase only 2% in the quarter?” he asked. And he had an answer ready: “Keep in mind that during the first two months of the quarter, our immediate emphasis was almost totally on breakfast. Once we returned to advertising our core business, it was with Cool Ranch Spicy Doritos Locos Tacos chicken. And frankly, this product underperformed versus our expectation.”

In other words, it spent so much time and money promoting breakfast—which won’t account for more than 7% of sales, compared with 25% of sales for McDonald’s—that sales for its more-important core menu suffered. But when it did promoe the core menu, their highly touted taco loco-doco LTO didn’t sell so well. If McDonald’s CEO Don Thompson offered that kind of convoluted explanation, Wall Street pundits and Motley Fool snarkers would be all over him. But that’s Novak’s explanation for Taco Bell’s underperformance.

“Our franchisees are in breakfast to win,” Novak said once again yesterday, adding that “they have been cheering us on to broaden our breakfast offerings with new products that we had already in the pipeline.” So they want new products that Taco Bell already had in development, such as new Grilled Breakfast Burritos. And Taco Bell also will be innovating with its core menu to drive business and will introduce mobile ordering, Novak said.

I’ll stand by what I said in April: Taco Bell’s breakfast will be a success because the chain has set the success bar so low. But McDonald’s, Burger King, Carl’s Jr., Jack in the Box and other QSRs don’t have to “look out” or panic. They’ll all be fine.

McDonald’s Operators: Time for Reinvention?

The surveys of McDonald’s franchisees conducted regularly by Janney Montgomery Scott analyst Mark Kalinowski usually produce gripes about corporate management’s handling of marketing, menu and internal communications. But the latest survey, released this week, also includes a few expressions of doubt about that brand itself that are unusual. Given that McDonald’s U.S. sales were down 0.2% for 2013 and have been negative or flat each month in 2014 (and Janney predicts -2.6% U.S. sales for June,), questioning whether the concept has lost its way is understandable.

Too many choices?

Too many choices?

Says one of the 27 U.S. franchisees (representing 231 restaurants) interviewed for the survey, “It was time for this brand to reinvent itself a couple of years ago. We are now overdue. Who is it, exactly, that we want to be? I continually receive mixed signals from Oak Brook on this issue. On the one hand we are trying to simplify things yet on the other we are trying to see if we can fit more equipment for other products.” Another says, “Our best years are behind us.”

Adds another, “We’re the top restaurant in numbers, and people frequent us because we’re [convenient] and most of the time they receive a good experience. However there is not a compelling reason to visit us versus competitors. Having said that, we still serve the most customers because we’re considered cheap, rather than the best quality. We certainly have the best facility but we have to find a way to convince them that we offer the combination of service, quality, and cleanliness at the best value, not the cheapest.”

To be fair, some voices are positive about the brand and its prospects. Says one franchisee, “Good promotions and products in the pipeline. Economy and gas prices seem to lead to more staycations which should help sales.” Another adds, “McDonald’s future is strong. With the buying power of McDonald’s I would hate to be a competitor.”

But the overstuffed menu still is a focus of discontent from several of the operators surveyed. “We’ve introduced so many new products over the last few years it seems customers now only come in to try a new product,” complains one franchisee. “McDonald’s is becoming more and more like a convenience store due to the sheer number of products we sell. The quality is very basic and will never be good or great without drastic changes,” according to another. “Need to trim the menu and focus on our core business,” is another opinion.

One operator points to the recent Consumer Reports ratings that had McDonald’s at the bottom (although it should be noted it has been at the bottom in past rankings as well). “All the money spent on rebuilds and remodels got us nothing! It’s all about the menu. The recent Consumer Reports survey reflects this. Our competitors with simpler menus are doing just fine and run with far less labor.”

Should McDonald’s Fear Chick-fil-A?

ChickLogoDespite the incessant chatter about “burger wars,” the competitor McDonald’s should be closely watching is neither Burger King nor Wendy’s but Chick-fil-A, according to an investor brief from Janney Montgomery Scott analyst Mark Kalinowski. He calls the chicken chain a “serious and growing competitive threat” to the largest QSR brand.

Chick-fil-A won’t top McDonald’s in total sales over the next decade, but Kalinowski argues that it may grow faster. “If Chick-fil-A can add $6.3-$9.0 billion to its systemwide sales over the next 10 years, it is entirely possible that this will be similar to—or worst-case, from McDonald’s perspective—greater than the systemwide sales that McDonald’s can add to its domestic business over that same time,” he writes.

Privately held Chick-fil-A had U.S. sales of $5.052 billion in 2013 (from 1,775 units), about triple its size in 2003. Publicly held McDonald’s dwarfed it with domestic sales of $35.856 billion (and 14,278 stores), and while its 47% increase since 2003 is solid, it doesn’t match Chick-fil-A’s growth, and certainly not the chicken chain’s 12.7% compound annual growth rate. Kalinowski says Chick-fil-A’s growth “was achieved through a balanced mix of unit expansion (which ranged annually from +3.2% to +6.2%, depending on the year) and consistently positive same-store sales growth.”

mcdonalds-logoKalinowski postulates several scenarios about future growth by both chains. Under what he calls Sensitivity Analysis #1 (positing 4.5% annualized unit growth and 4% annualized same-store sales growth), Chick-fil-A would rise to domestic sales of $11.4 billion in 2023. A second scenario—assuming 5% unit growth and 6% same-store sales growth)—grows Chick-fil-A to domestic sales of $14.3 billion in 2023.

“While Chick-fil-A remains meaningfully smaller than McDonald’s U.S. today, to the extent it could be ignored as a competitive threat ten years ago, we would argue that it can no longer be ignored as a long-term competitive threat today,” according to Kalinowski.

His scenarios for McDonald’s growth are far less confident. One, based on a 2.6% annual sales gain and just 0.6% unit growth, moves McDonald’s from an estimated $36.8 billion for 2014 to $46.3 billion in 2023. A second is even more dire, based on a 0.3% annual gain in both sales and units. Under that scenario, McDonald’s sales would grow less than 3% to $36.9 billion in 2023.

Chick-fil-A’s rapid rise from a distant No. 2 in chicken sales to the category leader, passing KFC, “may hint that it could become a larger competitive threat to many more fast-food brands over 2014 and beyond—and not just chains traditionally defined as ‘chicken’ brands,” Kalinowski writes. McDonald’s sells a lot of chicken, he notes, and it is the largest QSR brand so it has the most to lose by the continued ascent of Chick-fil-A. Kalinowski rates McDonald’s shares Neutral.

Boston Market’s Pretend Burger

Sorry, Boston Market. This is NOT a burger.

Sorry, Boston Market. This is NOT a burger.

Fast-casual chicken chain Boston Market wants to think it’s now taking on former owner McDonald’s and other burger concepts but really it’s going up against Panera and other upscale sandwich concepts.

Boston Market—which McDonald’s Corp. owned from 2000 to 2007—has announced the introduction of what it calls a BLT Rotisserie Chicken Burger as a limited-time offering through Aug. 24. The chain claimed it is “entering the ‘Burger Wars’” with this item, which is in no way a burger.

Instead Boston Market has put pulled rotisserie chicken and some burger toppings—thick-cut applewood-smoked bacon, bacon, lettuce, tomato and a roasted-garlic-avocado aïoli—on a burger-style sesame brioche bun. Putting it on a bun doesn’t make pulled chicken a burger.

What Boston Market has may be a bit like the BBQ, Bacon & Cheddar Smashchicken sandwich that Smashburger offers—although that is a solid breast patty—but it’s really closer to the Frontega Chicken Panini that Panera Bread menus. Either way, Boston Market’s sandwich is just not a burger

Boston Market’s pricing certainly separates it from all the QSR “better burger” concepts it wants to think it’s now competing with. The BLT Rotisserie Chicken Burger is $6.49 without the bacon; $6.99 with. A combo with drink and side is $9.48. That’s priced comparably with the Smashburger’s $6.99 Smashchicken sandwiches but well above QSR pricing. The new Big Chicken Fillet sandwich at Carl’s Jr. and Hardee’s is a 6-oz. chicken breast fillet sandwich for $3.99 alone or $6.49 for a combo.

Boston Market is the 8th largest chicken chain, according to Technomic. The No. 1 chain, Chick-fil-A, sells chicken sandwiches that are much closer to being burgers than is the BLT Rotisserie Chicken Burger. So really Boston Market simply is trying to catch up with the leader of its own category and is not really entering the burger arena at all.

Last Week’s Most intriguing Burgers

It was a quiet week in Burgerland, but these seven caught my eye.

Toma's Dream Come True

Toma’s Dream Come True

Spritz Burger's Collision

Spritz Burger’s Collision

→ Toma-Burger Addiction in Toronto called their burger a Dream Come True and it just might be so. That’s a beef patty with double Cheddar, house-made pulled pork, caramelized onion and onion rings with roasted-garlic aïoli on a house-made brioche milk bun.

→ James McNair, the creative chef Chicago’s new Spritz Burger came up with the Collision Burger. What’s coming together are a pork patty, barbecue, bacon, blue cheese and pickled-onion mayo.

→ Elevation Burger doesn’t develop new burgers very often, but up in Maine it has a Surf & Turf burger in two locations. The build is an organic grass-fed beef patty topped with Maine lobster meat and organic bacon on lettuce, tomato and a toasted potato roll.

Hops' Cuban Cowgirl

Hops’ Cuban Cowgirl

→ Hops Burger Bar in Greensboro, N.C., has something new and enticing almost every week. Last week it was a Cuban Cowgirl burger. That’s their standard burger topped with grilled ham, pulled pork, house-made spicy pickles, Swiss cheese and lime-Dijon aïoli.

AjBombers' Atomic Bomber

AJ Bombers’ Atomic Bomber

→ AJ Bombers in Milwaukee doesn’t always have something new that’s a daunting as The Atomic Bomber. That, my friend, is a Stuffed Shroom with Cheddar and Muenster cheeses plus jalapeňo, habanero, serrano, and Anaheim peppers.

→ Rok Burger in South Miami had a clear favorite for the World Cup final. Its German Burger was a Certified Angus Beef patty with horseradish Cheddar, smoked sausage and sauerkraut.

Byron's Ronoldo

Byron’s Ronaldo

→ The Byron chain in the UK couldn’t resist. It promoted its Ronaldo burger with the line, “Well at least there’s one Brazilian that will be here until the end of the World Cup.” Ouch. But the burger honoring “El Fenomeno” is no joke. The build is “two 6-oz patties, rashers of crispy bacon, onions gently fried in butter until soft and sweet, pickles and crispy fried onions for crunch, and American cheese. None of your fancy sauces here – just a no-nonsense dollop of ketchup and American mustard, all inside our classic glazed bun.” Score.

Happy Monday.

Fewer LTOs Slows Restaurant Ad Spending

Restaurants reined in advertising spending in 2014’s first quarter after significantly exceeding the average throughout 2013. According to Kantar Media, total U.S. advertising expenditures (all businesses) increased a surprisingly strong 5.7% to $34.9 billion in the first quarter.

However, restaurant spending in Q1 increased just 1.9% to $1.678 billion. That ended the industry’s year-old streak of topping the average in each of the last four quarters.

full-year 2012, total U.S. advertising rose 3%. Restaurants were roughly in line with a 4% increase. But once 2013 began and slowing sales by many restaurant chains fueled an overheated competitiveness that translated into heavier ad spending. In 2013’s Q1, total spending declined by 0.1% but restaurant ad spending jumped up by 8%.

Spending accelerated in Q2 with restaurant spending up 12.6% while overall ad spending rose 3.5%. Them restaurant industry calmed itself a bit in Q3 with a 5.5% increase (vs. 3.5% overall) and ended the year with a 5.2% increase. Total U.S. ad spending was up just 0.9% for the year.

Now 2014 has begun fairly meekly with a 1.9% gain despite the presence of the ad-heavy Winter Olympics. The first quarter is traditionally fairly quiet in sales growth but last year’s 8% spike in Q1 spending shows that this year’s soft spending isn’t a seasonal phenomenon.

What I think the 1.9% ad spending increase represents is the impact of the this year’s slowdown in menu introductions that McDonald’s and Burger King and others have instituted. Fewer LTOs require fewer ad bursts to support them. Q1 did see some rollouts, including McDonald’s Bacon Clubhouse (introduced in March, it was the chain’s first significant new product of the year), Burger King’s quarter-pound Big King, Wendy’s Ciabatta Bacon Cheeseburger and Jack in the Box’s Bacon Insider. But there fewer “secondary” product introductions and a less frenzied marketplace overall. Worn out by 2013, chains aren’t as eager to one-up each other this year.