Burger King just launched what may be the most disgusting dessert concept I've ever heard of: bacon sundaes.

But I'll write off this yucky-sounding sundae as a publicity stunt timed to coincide with the public offering of Burger King Worldwide (BKW), which re-entered the stock market two weeks ago.

As you consider whether to buy the fast-food shares -- fresh off the private-equity griddle -- don't let the gimmicks fool you.

Burger King's menu offerings are now pretty much a carbon copy of those at McDonald's (MCD). That's no accident. The undisputed king of fast food, McDonald's has launched several "healthier" premium offerings in recent years -- from Snack Wraps and the Angus beef burger to McCafé real fruit smoothies and specialty coffees.

All of this stuff has been a big hit, which is exactly why Burger King is in copycat mode. Its new menu is part of a campaign by the private equity shop 3G Capital which has been in charge for two years, to revitalize Burger King -- a key player in the burger wars since it was launched in 1954, in Miami.

Does this relaunch signal the start of a new round of burger wars that will threaten McDonald's, making Burger King stock a buy? Or will the Home of the Whopper turn out to be a flopper once again?

image: Michael Brush

Michael Brush

Of course, to be a good investment, Burger King wouldn't have to beat McDonald's. With a stock price at around $15, it would just need to show the potential for the same sort of growth that McDonald's - which has a stock price close to $90 -- has delivered for years.

But I don't think this is on the menu for Burger King, because the two businesses are in very different situations. "I think there's going to be tough sledding ahead," agrees veteran retail sector expert and financier Howard Davidowitz of Davidowitz & Associates, a retail consulting and investment banking firm.

Let's round up the chief challenges facing the "new" Burger King as it comes public yet again.

Burger King's McMenu

I suppose a company can make a successful business model out of imitating the leader in its space. But in fast food, it's no slam-dunk. There's a lot more to creating a successful fast-food menu than merely lifting the most popular ideas from your competitor.

After all, fast food is more complicated than you might think. Behind the scenes, there are a hundred things that have to happen to get that chicken wrap or smoothie to you with the consistently right taste, at the right price. To do so successfully takes years of planning and research.

McDonald's does that at its huge Innovation Center in Romeoville, Ill., where it painstakingly develops its offerings. Morningstar analyst R.J. Hottovy recently visited the center and came away citing it as key reason he thinks McDonald's will hold off competitors like Burger King well into the future.

"We're convinced McDonald's can put more distance between itself and its quick-service restaurant rivals in the years to come," says Hottovy.

A big part of the reason, I think, is that when it develops new menu items, McDonald's solicits feedback from everyone -- suppliers, equipment-makers, employees and more -- before giving one the green light. And for good reason. It's complicated to roll out new menu items that succeed, says Davidowitz.

I'm sure Burger King has test kitchens. But I see nothing in filings that hints at anything as elaborate as the McDonald's Innovation Center. And we haven't seen evidence of it in any regular stream of original menu items -- bacon sundae excluded.

This could be a problem for Burger King.

A company like McDonald's that develops products internally -- with feedback from all the key players involved -- is probably going to consistently do it better. "The bottom line is if the price is not lower than McDonald's, and the taste and service are not better, this whole plan could collapse. And I think probably will," predicts Davidowitz. "They are trying to catch up. But they could face problems in quality and taste."

Another problem is that the pricier and healthier items don't exactly fit in with the Burger King image typified by the Whopper, nor with the basic, no-frills -- and often worn -- look of a lot of restaurants. "It's incongruous," says Davidowitz.

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Burger King declined to comment. But in filings it says it plans to upgrade 40% of its U.S. restaurants over the next three years.

This is going to be a challenge, though, because of the next big problem facing Burger King.

Stocks mentioned in this article include: Goldman Sachs (GS), Starbucks (SBUX) and Whole Foods Market (WFM).

Private equity has sucked out the cash

The private equity crowd has flipped Burger King like a Whopper for a decade.

Along the way, they've loaded it with debt and sucked out huge amounts of cash -- money that could have instead gone to improve the company. That's the opposite of the McDonald's story, and it has left Burger King far behind.

Here's a brief history of how Burger King has been flipped on the private-equity griddle over the past decade:

Goldman Sachs (GS) and the private equity firms TGP and Bain Capital (famous for being co-founded by GOP presidential contender Mitt Romney) took control of Burger King in 2002. Four years later, they took it public, extracting a $448 million dividend in the process. Next, Burger King was taken private by 3G Capital in 2010. Now it's public again, though 3G Capital retains a 71% stake.

The upshot: In total, private equity has sucked $1 billion out of Burger King along the way, estimates Howard Penney, the managing director at Hedgeye, a stock research firm. "It's been a party for Wall Street," says Davidowitz. "The private equity guys have made a fortune." But like all parties, this one has come at a cost. "They've been jerking the company around, making a fortune. The problem is the company is a cadaver."

Davidowitz says that while much of Burger King's cash went to private equity fees over the years, McDonald's has used its cash to remodel restaurants, develop its menu and expand abroad. The contrast shows up in the numbers.

  • Burger King sales fell 6.8% to $2.33 billion last year. And 2011 sales were lower than sales in both 2009 and 2008, as well. In contrast, McDonald's sales grew 12% last year, to $27 billion.
  • Burger King has a return on equity, a common profitability measure, of 9.2%, compared with 38.2% at McDonalds.
  • Burger King's market share has fallen to 12% from 17% over the past 10 years, while the share for McDonald's has risen to 50% from 42%, says Davidowitz.

"McDonald's has gotten to 50% market share because it is in the business of serving the customer," says Davidowitz. "Burger King has been in the business of serving private equity. As long as I have followed them, they have been starved for cash."

Sure, but that's history, and investing is all about the future, right? So what about the future?

Here, there are challenges, too, and you can blame the same culprits. Despite the protests of the spin-meisters for Romney, it really is a pretty common trick of private equity firms to load a company with debt to support their fees before taking it public as a stock.

A look at the filings shows this is exactly what happened at Burger King.

Before 3G Capital bought it in 2010, Burger King had $888.9 million in debt. Now it has debt of $3.12 billion. To put that in perspective, Burger King now has a debt-to-equity ratio (which compares debt to shareholder investments) of 280, compared with 87 at McDonald's.

And all that debt constrains what Burger King can do now.

  • For one thing, by its own admission, it won't be offering shareholders a dividend any time soon. In contrast, McDonald's pays a 3.2% yield, which helps attract investors and support the stock.

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  • More important, the debt constrains Burger King in terms of growth prospects. It makes it tougher to remodel stores, develop original menu items or expand into emerging markets. "McDonald's has better resources to attack faster-growing markets," says David Abella, portfolio manager of the Rochdale Dividend & Income Fund (RIMHX), which gets a five star rating from Morningstar and counts McDonald's as its second-largest holding.

Stocks mentioned in this article include: Starbucks (SBUX), Burger King Worldwide (BKW) and McDonald's (MCD).

Franchisee fracas

Burger King admits in filings that its debt "may have an adverse effect" on its business. But it also says it has an advantage in that almost all of its stores are run by franchisees, who fund growth by paying for new stores and store upgrades.

This would make more sense if Burger King didn't have such a spotty record in getting along with its franchisees. "Burger King has had problems with franchisees over the years," says Hottovy. "There have been cases where they have not been on board with new products."

Burger King admits as much in filings. "Our franchisees are independent operators and we have limited influence over their restaurant operations," says the company.

In contrast, a strength of McDonald's is its generally good relations with franchisees, says Hottovy.

Tough competition

A good relationship with franchisees is crucial in a competitive playing field, where Burger King faces tough players on all fronts.

In one corner, there are the relative upstarts -- smaller chains like Five Guys, In-N-Out Burger and Smashburger, that are becoming quite popular.

Then there are powerful, established companies entering the ready-to-eat food fray, like Starbucks (SBUX) and Whole Foods Market (WFM).

And then there are the big, traditional players like McDonald's and Burger King. McDonald's has a huge advantage in its sheer size. McDonald's now has more than 33,500 restaurants in 119 countries worldwide, compared with just over 12,500 for Burger King, in 82 countries. This gives the Golden Arches bargaining leverage with suppliers to help ensure low prices and consistent quality.

Like many U.S. companies in relatively mature industries, Burger King is looking to expand in high-growth emerging markets such as Brazil, China, Russia and Turkey, as a path forward. Indeed in June alone, Burger King inked deals for a joint venture in Russia, China and Turkey. But there, too, Burger King faces McDonald's.

And back in the U.S. market, things definitely won't be easy for Burger King. "On the one end, there are a bunch of new guys growing fast and taking market share at a rapid clip. On other end you have the very dominant McDonald's," says Hottovy. "Burger King faces an uphill battle. I don't really look at them as a huge threat at this point."

In short, Burger King is going to need more than a bacon sundae to get out of this jam.

Stocks mentioned in this article include: Goldman Sachs (GS), Burger King Worldwide (BKW) and McDonald's (MCD).

At the time of publication, Michael Brush did not or control shares of any stock or fund mentioned in this column.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.