Fast food companies have long relied on franchising (offloading the operation of stores to smaller independent business owners to collect royalty payments from those store owners) to maximize growth and profitability. But when big sweeping changes occur in the economy, major brands may have limited ability to sway how much change those franchisees make at their respective stores.
The restaurant industry has been presented with new challenges in the wake of the pandemic, but new technological tools (including AI) are now being used to bolster their operations. A push to totally overhaul stores -- including tech-powered restaurant equipment -- has led Burger King's parent company to acquire its largest franchisee. Restaurant Brands International (NYSE: QSR) (owner of Burger King, Popeyes, Tim Horton's, and Firehouse Subs) is acquiring Carrols Restaurant Group (NASDAQ: TAST) -- owner of over 1,000 Burger King restaurants and 60 Popeyes -- for a "whopping" $1 billion.
The acquisition is part of Burger King's "Reclaim the Flame" overhaul announced in late 2022. It plans to give Carrols' Burger King stores a facelift and invest $500 million in 600 building remodels in need of a refresh. More importantly, though, "Reclaim the Flame" is also about dumping money into tech-powered kitchen equipment, connected restaurant experiences (ordering via an app and digital kiosks), advertising, and an overall push for better operational efficiency (read "more restaurant-level profits"). Over the next five years, these refreshed locations will be sold back to local franchisees.
But AI and tech-focused restaurant tools are likely going to be the centerpiece of Restaurant Brand's "Reclaim the Flame" plans. Will AI kick off the next round in the fast food wars?
The Whopper has been losing to the Big Mac
Restaurant Brands and its fast-food portfolio have been trailing McDonald's (NYSE: MCD) for the last few years. While Burger King and company have been losing steam on operating profit margin from its royalties collected from franchisees, mighty Mickie D's has been climbing.
Data by YCharts.
A key to understanding McDonald's success has been its investments in technology to help its franchised stores offer a better guest experience in the digital age. The use of digital ordering kiosks, some drive-thru automation, and AI in its supply chain has been a steady trend in the last few years. At the tail end of 2023, McDonald's said it would be partnering with Alphabet's Google Cloud to upgrade stores with new hardware that can make use of generative AI to further automate the restaurant experience.
Meanwhile, choices abound for Restaurant Brands to catch up with its rival. Besides big tech like Google rolling out new software tools, a myriad of smaller tech service partners have also been targeting the restaurant industry. For example, SoundHound AI is pushing its voice-recognition software for drive-thrus and order kiosks. There are plenty of digital payments companies (Block, Toast, Shift4 Payments, and others) offering online ordering and delivery integration. Generative AI can help speed up the development of marketing campaigns, too. Restaurant Brands hired a new marketing agency as part of its "Reclaim the Flame" initiative.
Bet on the Whopper's return?
Restaurant Brands stock has underperformed its big competitor, McDonald's, over the last five years, and maybe a shot of AI-fueled operational upgrades can help it make a comeback.
Data by YCharts.
But the stock looks flame-broiled to perfection at 26 times trailing-12-month earnings. The company's need to overhaul its restaurant-level tech by buying out large franchisees is a clear indicator of strength for the tech industry, not Burger King. Fast-food burgers will get a new side of AI in 2024, but top AI stocks are likely to be the biggest winners -- and many are priced at a similar valuation as Restaurant Brands International and McDonald's stock while offering much better growth prospects.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients have positions in Alphabet, Block, and Shift4 Payments. The Motley Fool has positions in and recommends Alphabet, Block, and Toast. The Motley Fool recommends Restaurant Brands International and Shift4 Payments. The Motley Fool has a disclosure policy.
