Long thought of as a second place alternative to number one McDonald’s (MCD), Burger King is actually in 4th place amongst the country’s top restaurant chains, trailing not just McDonald’s but Subway and Starbucks (SBUX).
A play for Tim Hortons could help Burger King compete in the breakfast market – long dominated by McDonald’s and Starbucks. It also opens the door for Burger King to ‘invert.’ Inversions – when a U.S.-based company buys or merges with a foreign company, and then shifts its headquarters abroad – have surged recently.
But the pace is slowing, according to Yahoo Financed editor-in-chief Aaron Task. President Obama has called inversions “unpatriotic,” and has introduced a new idea to combat the practice: “economic patriotism.” Lawmakers are also looking to stop companies from leaving the country.
“There’s an effort afoot at Treasury and the U.S. Congress on the Democratic side to try and find some rules and regulations to prevent or delay or discourage companies from doing this, but right now it’s the law of the land,” Task said. “This is what companies should be doing.”
The reason, said Task, is pure business sense. The tax rate in the U.S. is as high as 40% versus 26.5% in Canada. Ignoring savings like that because of political pressure just doesn’t make sense.
Burger King is arguably the most high profile company looking to invert. Last month, Walgreen (WAG) flirted with the idea after buying Alliance Boots, but ultimately decided to keep its headquarters in Illinois. Even if Burger King goes the way of Walgreen, and bows to pressure to say in the U.S., there are still key advantages to a play for Tim Horton’s.
“Same-store sales [at Burger King] are flat, they have no growth in their core market. It’s a problem for McDonald’s, it’s a problem for Burger King. The old-fashioned fast food chains are struggling,” said Task.
A breakfast war is in full swing in this country. McDonald’s has long been the undisputed champ, with the Egg McMuffin as the gold standard. But that lead has been slipping away as Americans’ tastes shift away from breakfast sandwiches and towards gourmet coffee. Enter Starbucks, and to some degree, Dunkin’ Donuts (DNKN). Taco Bell (YUM) recently threw its hat in the ring, introducing the Waffle Taco this summer
With a purchase of Tim Hortons, Burger King could gain ground against its competitors.
“Tim Horton is a huge brand in Canada and gets [Burger King] into a new business. The coffee business is a very high margin business,” said Task. “It’s a good diversification play.”