Timbits, Whoppers and fried chicken have a few things in common: mainly, they’re all delicious. But there are also immense profits to be squeezed from each one. That explains why Restaurant Brands International (RBI), the Oakville, Ont.-based parent company of Tim Hortons and Burger King, will shell out US$1.8 billion in cash to acquire Popeyes Louisiana Kitchen, an American fried chicken chain.
The acquisition, set to close in April 2017, fits RBI’s playbook perfectly. The company was formed in 2014 by Brazilian private equity firm 3G Capital as a result of the merger between 3G-owned Burger King and Tim Hortons, and 3G has honed a ruthless but effective strategy that’s loved by shareholders—and feared by employees. Here’s what to expect after the Popeyes acquisition.
3G sticks to an aggressively tight financial plan through a strategy called zero-based budgeting. Rather than basing a company’s annual budget on the previous year’s financials, executives start with an assumed budget of zero and build from there. For every operating and capital cost, department managers have to present the business case for how much should be allocated. “That gets rid of a ton of cost,” says Bruce Winder, co-founder and partner of Retail Advisors Network. “Often companies have some buffer and bloat they can reduce, and there are initiatives that probably don’t yield as much return but they’re still on the budget line. So they effectively get rid of all that.”
That typically means heavy layoffs to reduce overhead, particularly in areas where the parent company can share services—like legal, public relations, and supply chain management—between its subsidiaries. For example, Tim Hortons promptly fired 350 staff after the RBI takeover, and six months later, 15% of its corporate staff were offered voluntary buyouts. Just over 3% of the staff took the offer.
The stringent budgeting means RGI’s selling, general and administrative expenses (SG&A), a measure of overhead, is just 1.3% of system-wide sales. “That’s best-in-class,” says Michael Halen, a senior research analyst for Bloomberg Intelligence. Meanwhile, Popeyes SG&A is 2.8%. “The first thing they’re going to do is close that gap,” Halen notes.
Fried chicken innovation
Tim Hortons die-hards remember the day the company scrapped eclairs, chocolate sour cream glazed donuts, and chicken fajita wraps from its menu. While these decisions were unpopular with some consumers, customers were soon placated by new menu items, including crispy chicken sandwiches, potato wedges, and espresso-based drinks.
Popeyes fans can likewise expect to see their menu change. “Restaurant Brands is really good at pruning items from their menu that don’t make money and adding new innovative items with higher margins,” says Winder. “The trick isn’t to just blindly raise the price on existing items,” he adds. “What they do is refresh the item and have a slightly different name and slightly different size. That grows the top line, and it also grows the margin line.” So far the strategy, which has been used with Burger King and Tim Hortons, hasn’t deterred customers: RBI reported 4.9% sales growth for 2016 compared to 2015.
Popeyes goes global
In 2016, Tim Hortons opened 200 new locations, up from 155 the year before, and Burger King opened 735, compared to 631 in 2015. While Burger King has long operated in dozens of countries on nearly every continent, RBI is responsible for spearheading the global expansion of Tim Hortons. Last summer, the parent company announced it had arranged partnerships in the Philippines and United Kingdom to operate Tim Hortons in those markets. And last month, RBI revealed plans to open restaurants in Mexico.
With 2,600 locations, the majority of which are in the United States, Popeyes will be the smallest of the conglomerate’s chains. (Tim Hortons has nearly 4,500 outlets, and Burger King has 15,000). But according to Halen, Popeyes is the most ripe for global expansion. “It helps that they already have a few hundred stores internationally,” says Halen. “And they have a product that travels well. Spicy flavours, chicken, rice—those aren’t new ingredients you’ll have to introduce to people in Asian markets, for example.”
While cost-cutting and operational tweaks are part of the game plan, Halen says that expansion is likely the real opportunity RBI sees for Popeyes. “They’re already growing like gangbusters in the United States,” he says. “If you can now amp up the international growth, forget it,” he says. “There’s a lot of potential there.”
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