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Burger King tries to fatten margins with skinny fries

BLOG: Burger King (BKW-N) is taking calories out of its fries but the stock has been producing some fat returns. The shares are up 18% so far in 2013, outpacing the 7% gain for fast-food colossus McDonald’s (MCD-N).

Piper Jaffray analyst Nicole Miller Regan rates the stock Overweight (sorry), saying sales are being lifted by an aggressive program of ads touting two value meals for $5 US plus new product launches. And, she says, “from an international perspective, we specifically highlight opportunities for development in Brazil, Russia and China, where the brand has a large and accelerating growth opportunity.”

Miami-based Burger King runs the second-largest fast food hamburger chain in the world with locations in 80 countries. As of December, 2012, there were just under 13,000 BK restaurants worldwide. McDonald’s has more than 33,000 restaurants in 119 countries.

The new products from Burger King include “Satisfries,” trumpeted as offering 40% less fat and 30% fewer calories than the McDonald’s equivalent.

In English-speaking Canada, the fries are called Gratifries. In Quebec, it’s Magnifrites.

Canada got different names because they tested better with consumers, Burger King North America president Alex Macedo told us in an interview on Friday’s Commodities.

The new fries were developed in partnership with Canada’s McCain Foods, which says it supplies one third of all the frozen French fries produced in the world.

Burger King says McCain can't sell the fries to other fast-food clients.

French fries are actually a stagnant food category, according to Maureen Storey, president and CEO of the Alliance for Potato Research & Education, an industry group. She told the Associated Press that per capita consumption has declined over the years, prompting efforts to make them healthier and easier to market. But “it's actually not an easy thing to do to because consumers want the same taste and the same texture.”

It’s no surprise that a fast-food chain would want to sell more fries because the product is enormously profitable, according Eric Schlosser’s Fast Food Nation, published in 2001. The products offer “huge markups,” he wrote. “The fast food companies purchase frozen fries for about 30 cents a pound, reheat them in oil, and then sell them for about $6 a pound.”

Farmers don’t participate in the bonanza, though. “Out of every $1.50 spent on a large order of fries at a fast food restaurant, perhaps 2 cents goes to the farmer who grew the potatoes,” Schlosser reported.

Burger King plans to fatten the margins still more by selling the new product for 30 cents more than the regular fries.

But how do they taste? Tough-minded tester Consumer Reports found that “Satisfries' flavour is fairly similar to Burger King's regular fries. (That's not necessarily a good thing, since the regular fries are relatively low in flavour.) We found that Satisfries have a slightly tough coating that yields to an interior that's like a soft mashed potato, if not a bit drier. We also confirmed that McDonald’s fries still taste better, delivering a more intense potato flavour and a crispier texture.”

The bottom line: “Next time you have a hankering for fries and want to save a few calories, give Burger King Satisfries a shot. Just don't pair the Satisfries with a Triple Whopper (1,020 calories, 66 grams of fat) and a 20-ounce chocolate shake (980 calories, 24 grams of fat).”

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