"Patriotism may be the last refuge of a scoundrel, as Samuel Johnson put it, but a lack of it may be the last refuge of corporate executives who have run out of ideas on how to improve their business," groused Daily Beast global finance editor Daniel Gross in the open of his 9-paragraph screed "Burger King Plots Canadian Invasion to Save His Faltering Kingdom." "It’s one thing for a fairly anonymous company that sells pumps or valves or industrial products to other businesses to renounce its citizenship for the sake of saving a few bucks on taxes. It’s quite another when you’re an iconic American consumer-facing company that relies on fickle consumers for a large share of its business," Gross fumed.
By contrast, folks reading coverage of the planned merger at Time.com's money section were treated to an article which actually dealt with the facts rather than diving into overheated political rhetoric. As Time.com's Paul J. Lim explained, "Burger King Wants to Cut its Exposure to Hamburgers, Not Just Taxes" (emphasis mine): [ads:im]
The initial media reaction is that Burger King is turning its back on America by reportedly seeking to buy the Canadian coffee-and-doughnut chain Tim Hortons. After all, it can move its headquarters to Ontario to pay less in taxes.
The $11 billion burger chain is in talks to buy Tim Hortons THI 18.4118% , Canada’s biggest fast-food chain with a market value of around $10 billion. The deal would reportedly involve a so-called inversion, where Florida-based Burger King would for tax purposes be headquartered in Canada, where the top corporate tax rate is 15%, versus 35% in the U.S.
But as The New York Times pointed out, Burger King’s tax rate is actually closer to 27%, and this inversion really wouldn’t cut its taxes that much because the majority of its revenues are generated in the U.S. Even if it moved to Canada, BK would still be on the hook for U.S. taxes on sales made on American soil.
No, there’s something else driving this deal, and it could be that Burger King wants to abdicate its rule over burgers and switch kingdoms.
As Americans’ tastes have changed, burger sales, which have long dominated the fast-food landscape, have started to stall. Last year, for instance, revenues at Burger King restaurants in the U.S. that have been open for at least a year fell 0.9%, while U.S. same-store sales at McDonald’s slumped 0.2%. By comparison, Starbucks SBUX 0.9317% reported an 8% rise in comparable store sales in fiscal 2013 while Dunkin’ Brands DNKN 0.2057% , the parent company of Dunkin’ Donuts, enjoyed a 3.4% rise in revenues.
This isn’t just a short-term problem. Analysts at Janney Montgomery Scott recently noted that while three of the five biggest fast-food chains in the U.S. are still hamburger joints (McDonald’s, Wendy’s, and Burger King), by 2020 that number should drop to just one: McDonald’s.
Meanwhile, coffee chains Starbucks and Dunkin’ Donuts are expected to move up the ranks. And McDonald’s is itself doubling down on coffee, pushing more java not just in its restaurants but also on supermarket shelves.
Noticing a common theme here?
[W]hile Burger King isn’t really positioned to go after the Chipotles of the world, the acquisition of Tim Hortons could quickly make it a bigger player in the coffee and breakfast markets, where it has languished far behind McDonald’s and Dunkin’ Donuts.
Tim Horton’s already controls 75% of the Canadian market for caffeinated beverages sold at fast-food restaurants, according to Morningstar, and more than half the foot traffic at the key morning rush hour.
Morningstar analyst R.J. Hottovy noted recently that same-store sales throughout the chain are expected to rise 3-4% over the next decade, which would be a marked improvement over the same-store declines that Burger King has been witnessing lately.
Even though Burger King is a bigger company by market capitalization, it generates less than half the $3 billion in annual revenues that Tim Hortons does. This means that by buying the Canadian chain, Burger King will be able to buy the type of same-store growth that it could not muster with hamburgers and fries.
So the next time you go to Burger King, don’t be surprised if they ask you “would like some coffee to go with that?”
So to summarize, yes, there are obvious tax benefits for Burger King to move to the Great White North, but that's only a small part of the story. Guys like the Beast's Daniel Gross, who is far from ignorant when it comes to business reporting, most certainly has to know this. It seems, however, that he simply chooses to play politics rather than inform his readership.
Related: Be sure to check out Mike Ciandella's excellent look into how "President [Obama] condemns tax ‘inversions,’ yet profits from them politically."