When Joyce Jacaruso Castillo grabbed a quick coffee at a McDonald's (MCD) in Manhattan last month, she was wowed by the low lighting, cushioned stools, and piped-in bossa nova music at one of the chain's newly remodeled units. The 69-year-old New Yorker doesn't feel the same vibe at rival Burger King (BKC), however. "McDonald's is more uplifting," she says. "Burger King is so blah."
Leveling that playing field could be expensive for the new private equity owners of Burger King Holdings, who agreed in September to buy the chain for $3.3 billion. Burger King Chief Executive Officer John W. Chidsey said last month that 85 percent of the chain's 7,200-plus locations in the U.S. need to be remodeled. Modernizing stores with the company's new "20/20" redesign will cost about $500,000 each, he said in June, with some going as high as $1.1 million. That could push the cost past $3 billion. "The image is 20 years old," says Charles M. Fallon, president of Burger King's North American business. "We're working hard on making the economics work."
Persuading franchisees to go along may not be easy. Slowing sales at the No. 2 burger chain have made many store owners reluctant to spend on renovations, says Steve Lewis, who owns 36 outlets near Philadelphia. So acquirer 3G Capital Management may need to chip in funds to spur remodeling, says Jordan Krolick, president of consultant Tound & Drowth. "It's the hidden cost in any restaurant acquisition, and should be planned for as an addition to the initial investment," says Krolick, who previously ran acquisitions at McDonald's.
Susan Robison, a Burger King spokeswoman, says outlets without drive-throughs will be cheaper to remodel and franchisees can remodel using the old look, which costs less. Steven Lipin, an outside spokesman for 3G Capital, says "it's premature to talk about whether 3G's going to provide funding or what the cost will be" for upgrades.
McDonald's, which owns much of the real estate underlying its franchises, fuels renovations by matching 40 percent of funds put up by its franchisees, on average. At Burger King, franchisees, who own about 90 percent of outlets, are responsible for renovation costs and must remodel their stores every 10 years to Burger King's specifications.
Burger King unveiled its 20/20 redesign two years ago. So far, more than 30 U.S. restaurants have been outfitted with chrome-trimmed booths, brick walls, LCD menu screens, red and black paint, and "flame" chandeliers. Some franchisees say they won't pay for the extensive remodels. Lewis says four of his restaurants have come up for contract renewals in the past two years and he has opted for less expensive updates such as adding carpeting and terminals with Internet access. "I'm doing whatever the minimum is," he says.
Remodeling stores lifts sales 12 percent, according to Burger King. Shoukat Dhanani, who operates 61 Burger Kings in the Houston area, built the first 20/20 restaurant in the U.S. in May 2009. Sales are 40 percent higher than at his other locations, he says. Some customers couldn't believe the sleek store was a Burger King, he says. "Customers were like, 'Wow, this is nice!'" he says. "'Are we in the right place?'"
The bottom line: Burger King's new owners could face a hefty bill to help update its restaurants, which trail competitors in performance and appearance.