Burger King

The Indian Conundrum

Strategic Management- Group 1, Section A
Burger King

Burger King – The Indian Conundrum

When Forbes India first visited Burger King in July 2013, its office in Mumbai’s Lower Parel
was a beehive of activity. Employees were busy searching for locations, negotiating with
suppliers, conducting blind tastings and fine-tuning the international hamburger chain’s Indian
menu according to Indian taste and culture. At the time, the $1.1 billion (2013 revenues) global
fast food giant was about a quarter away from launching its operations in India, but the
countdown had begun. A late entrant into the market, Burger King has seen many a competitor
trip in its understanding of the Indian consumer. Which is why, 45-year-old Rajeev Varman,
chief executive officer of Burger King’s India operations, emphasizes that menu will be the
differentiator. “We will have burgers that no one in India has ever had before,” he tells Forbes
India. This would sound like a grand claim, one that is easier said than done. Development of the
menu and more importantly, adapting it to Indian tastes has taken established international
players years to implement. Rivals such as McDonald’s and KFC met with success only after
they indigenized their offerings as per local taste profiles. It took them a decade to arrive at a
winning and money-making formula.
Swimming through a tide of problems in the past decade, Burger King had finally decided to
swim ashore the Indian market. The company had found a reliable local partner, Everstone
Capital to help it lay claim over the growing quick service restaurant (QSR) business. Also, the
management felt confident that a change in government regulations favored their entry. But still
some basic questions remained. Would the Indian customers, accustomed to the local flavor and
tailored menu of international fast food chains, embrace a new and embattling entrant? And how
quickly and efficiently could the chain hope to expand in the face of opposition from both local
and international fast food chains?

Company Background
Burger King is a global chain of hamburger fast food restaurants that is headquartered in Florida,
United States (Exhibit 1). At the end of fiscal year 2013, Burger King reported it had over 13,000
outlets in 79 countries. Of these, 66 percent are in the United States and 99 percent are privately
owned and operated with its new owners moving to an entirely franchised model in 2013. Burger
King has historically used several variations of franchising to expand its operations. The
company designs and deploys corporate training systems while overseeing brand standards such
as building design and appearance. The company also develops new products and deploys them
after presenting them to its franchises for approval. The company has limited approval over
franchise operations such as minimum hours of operation and promotional pricing. Additionally
Burger King designates approved vendors and distributors while ensuring safety standards at the
productions facilities of its vendors.
The Burger King menu has expanded from a basic offering of burgers, French fries, sodas, and
milkshakes in 1954, to a larger, more diverse set of product offerings. In 1957, the Whopper was
the first major addition to the menu and it has since become Burger King's signature product.
Conversely, Burger King has introduced many products which failed to succeed in the
marketplace. Interestingly, these failures in the U.S have seen success in foreign markets, where
Burger King has also tailored its menu for regional tastes.
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From 2002 to 2010, Burger King aggressively targeted the 18–34 male demographic but since
2011, the company began to move away from the previous male-oriented menu and introduce
new menu items and product reformulations.

Burger King determined four markets for expansion - the US and Canada; Europe, the Middle
East and Africa (or EMEA); Latin America and the Caribbean (or LAC) and Asia Pacific
(APAC) (Exhibit 1). The company predicted that over a 10-year period, starting in 2008, 80
percent of their market share would be driven by foreign expansion, particularly in the Asia-
Pacific and Indian subcontinent regional markets. For the Asia Pacific Market, Burger King
reported $16 million in revenues in fiscal year 2013; an increase of 13% from $14 million a year
ago. Operating margins grew to 87% in the second quarter from 83% in 2Q13. Also the franchise
restaurant count grew from 1,072 to 1,298. Thus, entry into the Indian market looked like a lucky
bet.

Indian Fast Food Market

India, with its population of 1.2 billion, is one of the largest consumer markets in the world. It is
also demographically one of the youngest with more than 50% of its population below the age of
25 and more than 65% below the age of 35. India’s annual growth of 8% is boosting incomes
rapidly. According to forecasts, by 2025, India will have 583 million people living on incomes of
above US$4,380 (around US$23,530 after accounting for the purchasing power parity). A report
by Euromonitor shows that Indians spent an estimated $1.3 billion on chain restaurants in 2009
and about $400 million of that was at fast food restaurants. Also according to a McKinsey Global
Institute’s (MGI) study, the total annual household consumption in India is likely to triple,
making India the fifth largest consumer market by 2025. Out of this urban India will account for
nearly 68% of consumption growth while rural consumption will account for the remaining 32%.

The foodservice sector in India comprises of two distinct market segments – the organized and
the unorganized sector. The organised segment accounts for 16% of the industry and is worth
about $2 billion (Exhibit 2). It is growing at a compounded annual rate of 25%. The organized
sector is characterized by an organized supply chain with quality control and sourcing norms,
multiple outlets with standardized design, and accounting transparency. The unorganized
segment accounts for the bulk of the industry (84%) but lacks technical and accounting
standardization and a structured supply system or business practices. Amongst the various
formats in the organized sector, quick service (or fast food) restaurants (QSRs) have been
growing the fastest, registering an year-over-year growth of 21% (Exhibit 3).

The QSR market in India is worth $13 billion and is dominated by global players like Domino's,
McDonald's, KFC and Pizza Hut. QSRs are well-entrenched in the big metropolitan cities, and
companies are now pushing into tier II and III cities such as Pune, Ahmedabad and Chandigarh.
The rise of large organized retail formats like malls, multiplexes, and food courts has provided
ideal spaces for QSRs to set up shop. International fast food brands have teamed up with small
Indian franchisors to setup their brands in India and this route is working out well for the
companies. Despite the exponential expansion of QSRs their share of the entire F&B foodservice
industry continues to be low. Evolving lifestyles, a young population, increasing income,
expansion of retail space, increase in travel and commuting, media exposure to global brands and
Burger King

other factors indicate that more and more Indians are choosing to eat out, thus creating vast
opportunities for existing and new players to expand.

The agriculture sector in India has also received a major boost due to the expansion of QSRs.
Contract farming has emerged as a preferred way for big global and domestic F&B brands to
source agricultural produce wherein companies sign contracts with farmers to grow a specific
crop and guarantee to buy the produce at an agreed price. An example in this case is of McCain
Foods, which supplies McDonald’s, that has 400 farmers cultivating 2,000 acres of potato fields
in Gujarat under contract.

In January 2012, the Government of India announced 100% FDI in single brand retail under the
government approval route i.e. global single brands can have full ownership of their Indian
businesses. But a catch to the new rules is that companies choosing to own their Indian
operations at a 100% level will have to procure at least 30% of the value of products from Indian
small industries. For well-established QSRs like McDonald’s, Pizza Hut and KFC that entered
the Indian market under the old rules (where FDI was permitted at a level of 51%) this does not
seem attractive and is a major reason why these companies do not want to break away from their
Indian partners.

Potential Competitors

McDonald’s
McDonald’s is the highest selling fast food chain in India and held 40 percent of the market
share among fast food chains (for a list of complete financials see Exhibit 6). McDonald’s
opened its first Indian outlet in 1996 when the fast food concept in India was not popular and
eating out was restricted to local restaurants. Initially, the company had to face many challenges,
such as adapting to Indian tastes and local food culture. McDonald’s present strategy lies in its
greater complexity attained by pursuing localization and customization, having recently
announced plans to let regional groups of franchisees select menu items from the company’s
global innovation pipeline and tailor them for local tastes. McDonald’s also allows customers to
build their own burgers in a small number of test markets. McDonald’s recently heavily
refocused its marketing around those concerns, including the recent “Our Food. Your Questions”
campaign and a sustainable beef initiative.
Also, McDonald’s gets more customers during off-peak hours than any other chain. The
dramatic impact from off-peak business explains why chains like Taco Bell are entering the
battle for morning customers, while others such as Starbucks are seeking more afternoon and
evening business. The power of the Happy Meal is another tool that McDonald’s has, leading to
the largest share of kids meal sales in the fast-food industry and generates about 10 percent of its
total sales.
McDonald’s also takes advantage from its edge on efficiency. Despite the recent operational
challenges that McDonald’s has had it is still more efficient as compared to its competitors.
Another major reason behind McDonald’s success is its visibility. Its worldwide advertising
spends in 2012 were $787.5 million vs. Burger King’s $48.3 million, and the gap widened last
year when Burger King itself spent only a few million on advertising in order to focus on
equipment updates.
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Yum! Brands
In India, slightly behind McDonald’s are KFC, Taco Bell and Pizza Hut, which are subsidiaries
of Yum! Brands. Yum! Brands is the world’s biggest restaurant operator, with over 37,000
outlets in 117 countries. By 2012, there were 215 Pizza Huts, along with 156 KFCs and 3 Taco
Bells that were operated by Yum! Brands in India, and this number is expected to go up to a total
of 2000 by 2020. Both KFC and Pizza Hut have plans to expand into second and third tier cities.
KFC’s success has come as a combination of clever localization, savvy pricing strategies,
successful consumer education and a menu that appeals well to the changing preferences of the
sophisticated Indian consumer. Despite initial political and social opposition, KFC managed to
shed off its image of being a restaurant that catered to only non-vegetarians. Various vegetarian
products were introduced to cater to the large vegetarian population in India. As for chicken,
which was its core product, KFC specially designed a menu to suit the Indian palate.

Jubilant FoodWorks
Dominos, operated by Jubilant FoodWorks, is the largest seller of pizzas in India. There are 818
outlets of Dominos across the country and this number is expected to go up to 1500 to 2000 by
2020. Realizing the price sensitivity of the Indian market Dominos quickly adapted to the
income levels of Indian consumers and introduced pizzas priced at Rs. 49, which was the lowest
rate at which it sold pizzas for in the world. Apart from that, Dominos also adopted diverse
marketing strategies like promising to deliver pizzas within thirty minutes. Despite a huge
number of international brands flocking to the country, the middle-aged Indian population still
prefers regional family restaurants that served Indian food. These restaurants dominated one-
fourth of the organized restaurant market. However, there has been a gradual shift in consumer
tastes with an increase in the number of the working age population and the rise of nuclear
families.

Refer to exhibit 7 for international and domestic competitors

Burger King’s Strategy

The twenty-first century saw the company fall into its greatest turmoil when it was purchased
from Diageo by a group of investment firms led by TPG Capital for US$1.5 billion in 2002. The
new owners rapidly moved to revitalize and reorganize the company, culminating with the
company being taken public in 2006 with a highly successful initial public offering. But as more
and more franchisees started airing grievances with the company publicly, the chain passed into
different ownership several times and jumped on and off the public markets every few years.

During this period, Burger King doubled down on its core customer (young males with an
appetite for burgers) to cope with McDonald’s extensively increasing range and effectively
forfeited a lucrative new consumer base to McDonald’s. The mistake in this strategy became
painfully apparent when the Great Recession hit in 2008. As other quick serves managed to
mitigate their losses by drawing in consumers accustomed to eating at pricier restaurants, Burger
King struggled to capitalize on the “trade-down” phenomenon.

In September 2010 Burger King Holdings Inc agreed to a takeover by investment firm 3G
Capital for $3.26 billion. The deal allowed some breathing space to the struggling giant in the
Burger King

race to catch up with the leader McDonald’s Corp. The intense brainstorming sessions that
followed the acquisition resulted in a four-pillar strategy that Burger King announced in April
2012.

The first pillar of the strategy was the menu expansion. The people-in-charge took cues from
both McDonald’s and Starbucks to include a new range of smoothies, fresh salads and caramel
frappes in an attempt to broaden Burger King’s consumer base to include women, families and
health-conscious people.

The second pillar of the strategy was Burger King’s new marketing campaign. A thorough
consumer research revealed that though people were quite passionate about the brand, the
advertising did not click, especially with the women. Burger King decided to drop its mascot,
The King, from its advertisements. The company then enlisted several A-list celebrities including
Salma Hayek, David Beckham, and Sofia Vergara to push a new message in its commercials in
the hopes of bringing about a brighter future for the embattled burger chain. The new
commercials did a great job of communicating with women by focusing on the chain’s new,
healthier menu items, while not altogether forgetting about its core customers – the young males.

The third pillar, improving operations at Burger King restaurants, was the most important part of
the overall strategy. The Burger King business model aimed at gaining revenues through the
following three businesses - revenues from franchises, income from leased or subleased
properties and sales at company-operated restaurants.
Earlier the focus had been on all the three modes but now the company primarily focused on the
1st and the 3rd one. The company's revenues via the franchise model have increased by 8% from
$225.8 million to $248 million contrary to the 65% observed decrease via operating restaurants.
The company plans to attain a 100% franchise model. Through this, Burger King is focusing
more on menu innovation, brand development, and franchisee operational support. It hopes to
improve profitability by adopting this strategy, which has resulted in lower costs and improved
operating margins, from 24% in 2011 to 48% in 2013.

The last pillar of the four-part strategy was location renovations. Burger King improved the
restaurant experience with enhancements at every one of its around 13,000 outlets, including
digital menu boards to replace the traditional slide boards, new employee uniforms, and new
packaging. It also offered royalty reductions and discounts on fees to encourage franchises to
renovate their stores early. The chain also created a $250 million lending facility to give those
franchises easy access to funding for the reimaging and to pay for the equipment needed to
prepare the new menu items.

Though these were still early days, but 3G Capital, the multi-billion dollar Brazilian private
equity parent, had made all the correct moves. “The only reason we had not entered the Indian
market till now was because we couldn’t find the right partner,” says Elias Diaz, president, Asia
Pacific, at Burger King. The company was aware that there were taxation and other issues in
getting stores up and running in India but the opportunities it presented were excitng. So, in
2013, Burger King tied up with the Everstone Group (an Indian private equity firm with
experience in the QSR space) to help it navigate the already-crowded Indian market.
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Challenges for Burger King in Indian Fast food market

Burger King’s expansion into the Indian market has the company at a competitive disadvantage
with other fast food restaurants such as KFC because of the aversion of the country's large Hindu
majority to beef and also a firm presence of McDonald’s. Burger King hopes to use their non-
beef products, such as their Tender Crisp and Tender Grill chicken sandwiches, as well as other
products like mutton sandwiches and veggie sandwiches, to help them overcome this hurdle to
expand in India.

Menu creation and differentiation is one of the toughest challenges that any global entrant had to
face in India. In the words of Mr. Sameer Sain, co-founder of the Everstone Group, "One of the
biggest challenges in the India market is to come up with a good sense of taste and localization
without compromising on your core product."

Discretionary spending i.e. government spending implemented through an appropriations bill, is

also a vital determinant of Burger King`s profitability. Discretionary spending in India has
plummeted significantly over the past 2 years, validated by the significant slowdown in Jubilant
Food Works’, Yum Brands’ and other chains` same store sales growth (SSG). However hope of
revival in discretionary spending is slowly building up in the economy due to confluence of
factors such as lower interest rates, lower inflation, lower crude prices and an increase in
employment rates and wages (Exhibit 5).

Health consciousness, though slowly but surely, is increasing among different sections of people.
It has been established that fast food can cause high blood pressure and obesity, due to the high
amounts of salt and fat in the food - two major risk factors for heart disease.
Even McDonald’s own employee resources website quoted - “Fast foods are quick, reasonably
priced, and readily available alternatives to home cooking. While convenient and economical for
a busy lifestyle, fast foods are typically high in calories, fat, saturated fat, sugar, and salt and may
put people at risk of becoming overweight”. Thus healthier eating habits are increasingly
becoming a threat to the fast food chains and forcing the chains to constantly modify their
offerings.

As quoted by Amit Jatia, head of McDonald’s in West and South India, it took the fast-food
chain nearly a decade to become profitable in India. Clearly Burger King does not have that
luxury as Everstone has tight targets of turning an outlet profitable. In the words of one of
Everstone’s top executive - “If an outlet does not make money in the first six months, it will be
shut down.” Being a new entrant in the crowded Quick Service Restaurant space, gaining good
market share and remaining profitable simultaneously in an environment of high real estate and
labour costs is going to be a herculean task for Burger king.

The industry’s supply chain is fragmented in nature and marked by the presence of multiple
intermediaries. The lack of appropriate infrastructure, inadequate technologies, and the non-
integration of the food value chain are factors key to the wastage of nearly 30-40% of prepared
food across the supply chain. Maintaining a cost-effective supply chain is a prerogative with this
industry, failing which, all other input would be useless. It is also necessary to establish a chain
Burger King

of supply in a new region. For outsourced products or those procured from third parties, it
becomes important to constantly monitor the quality of such goods.

Last but not the least the Indian restaurant industry is burdened with multiple taxes like VAT,
excise duty and service tax, besides different state taxes, which add up to almost 20- 25% of the
bill value thereby making it increasingly difficult for QSRs to keep prices low in a highly price
sensitive market.

The Big Question

Burger King is entering the hyper-competitive QSR space in India at a time when consumer
spending has been under pressure. The company looks to open some new avenues in the country
and to quickly expanding its reach.

As the sun dawns, Varnan casts a glance on the army of employees scurrying around the office,
pondering over what new offers should they bring to the table to win the customers who at the
moment are loyal to McDonalds or KFC. Can he find a way to make Indians love Burger King
from day one?

Exhibits

Exhibit 1

Source: Yahoo! Finance

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Exhibit 2

Source: Crisil Research

Exhibit 3

Source:

Exhibit 4
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Exhibit 5

Discretionary spendings as a
% of total spendings
100%

50%

0%
FY01 FY06 FY11 FY12 FY13 FY14
Necesseties Discretionary

Exhibit 6

Market
Company Symbol Price Change Cap P/E
McDonald's Corp. MCD 96.36 0 92.54B 19.98
Yum! Brands, Inc. YUM 77.9 0 33.61B 33.45
Starbucks Corporation SBUX 92.52 0 69.42B 28.07
KFC Corporation Private
Burger King

Company MCD YUM Industry

Market Cap: 92.54B 33.61B 1.09B
Employees: 4,20,000 69,810 8.49K
Qtrly Rev Growth (yoy): -0.07 -0.04 0.09
Revenue (ttm): 27.44B 13.28B 526.43M
Gross Margin (ttm): 0.38 0.26 0.3
EBITDA (ttm): 9.61B 2.78B 74.70M
Operating Margin (ttm): 0.29 0.15 0.08
Net Income (ttm): 4.76B 1.05B N/A
EPS (ttm): 4.82 2.32 0.4
P/E (ttm): 19.98 33.45 36.73
PEG (5 yr expected): 3 1.99 1.8
P/S (ttm): 3.37 2.54 2.38
Source: Yahoo! Finance

Exhibit 7

Source: d’Essence Hospitality Advisory

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BIBLIOGRAPHY

http://forbesindia.com/article/big-bet/burger-king-eyes-a-big-slice-of-the-indian-
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