How Burger King’s Use of Data Increased IRR & Why Every PE Should Follow Suit

When 3G bought Burger King in 2010 the industry laughed at the installation of 30-year old executives. “It takes experience and grey hair,” they said. And they’re not wrong.

But they’re less right. Implicit in experience and grey hair is the idea that one has earned a base of knowledge that makes experience and grey hair valuable. But if you’ve accumulated years under your belt and learned nothing valuable, is it useful?

Meritocracy says no.

And the young executives at Burger King proved that. From its relisting on the public market in June of 2012 at a $4.6B valuation to doubling to $9B by July of 2014, the youngsters at Burger King are very actively proving that business acumen can be learned at any age, though it is obviously rarely applied. (For the record, the Dow Jones rose by only 30% from June 2012 to July 2014).

Even BK franchisees are happy.

“I don’t focus on how much experience they have,” says Tom Garrett, CEO of GPS Hospitality, which has bought 61 Burger Kings from the company since 2012. “They are extremely smart, which makes them very, very fast learners.”

More recently, after acquiring Tim Hortons and becoming Restaurant Brands International (RBI), Burger King acquired Popeye’s for $1.8B. And their shareholders couldn’t be happier.

Without getting into the details of financial engineering, 3G Capital is sitting on an asset worth $12.5B that it purchased only six years earlier for $1.56 billion (it paid back the initial capital within two years, by the way). Bill Ackman’s Pershing Square has nearly quadrupled its returns and Warren Buffett’s preferred equity placement is minting him $270MM in annual dividends.

Great news for the investors who understood that a 32-year old CEO would have higher regard for fiduciary responsibility than they grey hairs running other retail and restaurant companies. And he’d be cheaper, too.

So how did the “inexperienced” 30-year olds achieve all this while the rest of the restaurant market talks of doom and gloom?

Simple: they used data.

First the team cut costs. They found areas where money was being wasted on lavish travel and events and eliminated them from the budget. They eliminated redundant employees – there are a lot in large companies – and those who ignored fiduciary responsibility.

Then they focused operational improvements. They slimmed the menu and A/B tested products that resonated with their core demographics.

Employing a team of 140 people, RBI made site visits to teach franchisees how to improve profitability. Looking at anomalies and underperforming shifts, RBI found where it could make personnel improvements to increase sales.

This, ladies and gentlemen, is so basic, yet completely ignored in brick and mortar.

But doing the business basics, no matter the vertical, can have enormous returns.

Which brings us to the seminal point: making restaurants and retailers use data greatly improves shareholder returns, even if current management doesn’t understand it.

Industry great Henry Kravis, founder of KKR, admitted to consistently doing one thing wrong over his 40-year career.

We might have been too slow in changing out some CEOs of companies we had, keep thinking that he or she will get a lot better. I can pretty well tell you that what you see up front is pretty much what you’ll see in the end. You can help around the edges, but people don’t change that much.

Waiting is a lost opportunity, and we used to wait. And we didn’t do it just once — we did it a number of times because we kept thinking, ‘OK it’s not the right time. We don’t have the right person.’

I think today we move much faster than we ever did.

When you consider that data science can increment revenues by 5%+ and EBITDA by 20%+, it’s a confounding disaster knowing that nearly every private equity-backed restaurant and retail company employs “experienced” leadership that does little but swindle shareholders out of returns.

If we imagine a five-year holding period where operational improvements increase revenue 5% each year and EBITDA by 20%, even assuming the same positioning on an exit (i.e. the same EV/EBITDA ratio) we’re easily adding 1,000 basis points (bps) to the internal rate of return (IRR). McKinsey has gone through the details of proving this out in a refined example.

Considering most private equity investors seek a 25% IRR, that’s a 40% improvement by doing little more than ensuring the portfolio company executes the business basics.

If we acknowledge that financial engineering – while easier to employ because it does not require vertical-specific knowledge – has become commoditized, savvy investors can only turn to operational sophistication to add value and generate outsized returns.

Is the next wave of investor sophistication the application of data science unto business operations? The IRR irrefutably says it is.

Maybe Burger King’s CEO will start a fund and show his peers that their financial “experience” is just as stale as the “experience” inside their restaurant and retail investments.