August 26, 2014 9:00 pm

Burger King chief takes aim at McDonald’s

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In 1985, when Daniel Schwartz was a child, Burger King introduced the Croissan’wich and entered into battle with McDonald’s for the breakfast market. Some three decades later and McDonald’s continues to dominate the sector.

But Mr Schwartz, chief executive of Burger King, this week armed his company with a new weapon in the fight for breakfast with his planned $11.4bn acquisition of Canadian coffee and doughnut chain Tim Hortons.

At only 34, Mr Schwartz will head an enlarged global company with $23bn in sales and more than18,000 restaurants in 100 countries. He is a partner with 3G Capital, the Brazilian private equity firm that owns more than 70 per cent of Burger King.

“Our phones are already ringing off the hook to take this great brand [Tim Hortons] around the world,” Mr Schwartz said on a media call.

His youth makes him an outlier among leaders of major US companies, sharing more in common with his tech industry counterparts, such as 30 year-old Mark Zuckerberg, than with the chief executives of rival fast-food chains.

When Mr Schwartz was named chief executive last year, he took over a company that was struggling to compete with McDonald’s. He has surrounded himself with other millennials, including Joshua Kobza, chief financial officer, and investor relations head Sami Siddiqui.

Mr Schwartz said on Tuesday that the Burger King and Tim Hortons brands will be run independently and he will manage the day-to-day operations of the combined company. He said he wanted to accelerate Hortons’ international growth as 3G had done with Burger King, which opened 670 restaurants last year, compared with about 150 per year a few years ago.

Jack Russo, an analyst at Edward Jones, said the acquisition of Tim Hortons would help Burger King compete more effectively. “Burger King . . . wants to do a better job there, and McDonald’s kind of owns breakfast,” he said.

In October 2010, 3G acquired Burger King or $4bn including debt, when then-chief executive Bernardo Hees installed Mr Schwartz as deputy chief financial officer. Together they launched an intensive cost-cutting programme for which 3G has become known.

Under so-called “zero-based budgeting”, managers must build budgets from scratch rather than basing them on the previous year’s plan. The system requires the justification of every expense, and has resulted in hundreds of job cuts at Burger King, along with thousands at Heinz, which 3G took private in a $28bn deal last year.

The 3G model of cost cutting comes in many forms: communal rather than personal printers, removing mini-fridges from executive suites, or using Skype for long-distance calls. But for Mr Schwartz and the new Burger King leadership team, it also involved a major effort to refranchise its restaurants.

When 3G took over, the company owned about 11 per cent of its stores, or roughly 1,300 locations, but has since sold all but about 50 locations.

By turning over restaurants to franchisees, fast-food chains are able to offload much of the overhead and increase margins. Burger King’s profit margin jumped from 7.5 per cent in the year ended June 2010, to 20.4 per cent in 2013.

“When they acquired Burger King it was struggling . . . and here it is, one of the highest margins in the quick-service restaurant space a couple of years later,” said RJ Hottovy, of Morningstar.

Burger King’s shares have risen more than 60 per cent since Mr Schwartz took over in June 2013.

Before Burger King, he spent time as an analyst with various firms, including Credit Suisse First Boston and Altair Capital Management. He graduated from Cornell University in 2001 and joined 3G as an analyst in 2005.

Burger King was founded in 1954 in Miami, and launched the Whopper burger in 1957. Over the past 50 years, it has had a number of owners, including Pillsbury, Diageo, a group of private equity firms, and 3G.

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