Burger Land feeling the bite

SHARES in McDonald's are locked in a two-year slide, Burger King's split from Diageo is in the offing and Wendy's founder Dave Thomas died earlier this year. There is chaos in Burger Land.

The big three American burger makers are fighting to adjust to a maturing $45bn (£32bn) US market. Burger King is readying itself for sale with increasingly restless franchisees pushing for quick turnover. McDonald's is in the throes of a revamp, selling off weak assets, dropping in customer satisfaction surveys and losing the confidence of major institutional investors.

Wendy's is facing a future against its two bigger rivals without Thomas who personalised an impersonal product and took the Florida small-town food chain to global expansion during 30 years in the business.

And the market for burgers and fries has levelled off after decades of robust growth. Allan Hickok, industry analyst for broker US Bancorp Piper Jaffray, said that from 1980 to 2000 the compound annual growth rate for the industry was 7%. In the past two years it was about 2%.

'It isn't rational to think these companies can generate the growth they did 10 or 15 years ago,' said Hickok.

In its new ads, fried chicken chain KFC encourages Americans to 'think outside the bun'. They are. One of the fastest growing parts of America's $260bn restaurant sector is non-burger fast food, including the likes of Pizza Hut and Taco Bell.

Even in advertising, the burger companies seem stuck in a rut. BK has yet to solidify a theme after the 'Have it Your Way' campaign left consumers cold. McDonald's ads stress its people- friendly staff and yummy new non-burger offerings - such as chicken fajitas - but the latest consumer surveys show it ranks last for product quality and service.

Market leader McDonald's has had a particularly tough time. Its market value has nearly halved since November 1999 and institutions, including mutual fund giant Fidelity, are said to have trimmed their holdings.

Forays into faster-growing niche markets have failed to boost profits substantially. It last week sold British coffee chain Aroma at a big loss after two frustrating years. Mickey Ds is also slowing expansion overseas, where mad-cow disease concern has not disappeared.

McDonald's and BK are now looking to increase profitability at their better franchises, focusing on same-store sales increases and closing weaker outlets.

BK's operating profits fell 29% in the first half of the financial year, even though sales rose 1%, because of the cost of upgrading its 11,500 global outlets in preparation for sale.

Big brand is ready to go

IN MIAMI this week, chief executive John Dasburg will outline Burger King's future, perhaps unveiling a public auction of America's second-largest burger franchise and maybe announcing his own leveraged buyout offer.

Dasburg, a former airline industry turnaround artist, was brought in last year to help Diageo dress up BK for sale. One potential stumbling block is price. Will Diageo receive near the top end of the $2bn (£1.4bn) to $3bn range in a less-than-sizzling market?

The franchisees who operate 94% of its outlets are running out of patience and have been actively courting private equity investors. Long frustrated with Diageo, Franchise Association president Julian Josephson said they have approached Texas Pacific Group, an investment company said to be one of the top buyout candidates.

An initial public offering, once planned by Diageo but shelved to await better market conditions, is not supported by franchisees who believe a private equity sale is best, especially if it involves Dasburg, the first chief executive to win their confidence. 'This is the best management team we have seen,' said Josephson.