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Burger King's New Owners Inherit $3B Problem: Outdated Stores

New Burger King owners 3G Capital paid $4 billion to acquire the second-banana burger chain. But the real price tag could be much higher, as many stores are overdue for a major upgrade that may have 3G on the hook for $3 billion more.
While McDonald's (MCD) has been laying slate tile and parking sleek, modern chairs in its units since 2004, most Burger King restaurants are still trapped in the pre-'90s era of brightly colored plastic chairs and tables. Ordinarily, chains require stores to remodel on a regular schedule, every seven to ten years or so. This keeps the chain refreshing itself and spreads the pain so that only a certain number of stores need an overhaul in any particular year.

But Burger King seems to have let that schedule slip in a big way. Recently ousted CEO John Chidsey said in August that 85 percent of the chain's stores now need remodeling. Yikes! That's a whopper of an upgrade that needs doing all at once -- the chain has more than 7,200 U.S. stores.

This also helps explain why Burger King restaurants seem so dingy. They aren't getting upgrades, and as McDonald's makes its stores look better, BK's look worse by comparison. Standing still isn't a good option for BK on facilities at this point -- 3G will need to find some way to get the remodeling train rolling again. The chain is caught in a negative cycle from which it desperately needs to escape: Stores are grotty so customers don't visit, so sales go down, so store owners don't have the money to remodel... and so on.

Ordinarily, franchisees pay part of the cost of a major remodel -- estimated in this case at $500,000 a unit or more -- while the parent company pays part. At the very least, the franchisor often provides financing to enable the store owner to get the remodel done.

Here's the problem with getting that owner-level buy-in: Burger King restaurant owners are currently so pissed off they're suing the company over being asked to sell $1 cheeseburgers below their breakeven cost. Along with the deferred store-maintenance mess, 3G inherited that lawsuit, too.

It might be smart to resolve the legal matter first to win franchise owners over, before trying to sell them on spending a small fortune to spruce up their stores. In any case, given the antagonistic relationship between the company and franchise owners right now, 3G will likely need to supply much of the cash -- through loans or outright spending -- to make badly needed remodels happen. Hope 3G budgeted for that.

Photo via Flickr user PinkMoose