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 Mumbais 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 chains 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 Kings 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 McDonalds 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.
From 2002 to 2010, Burger King aggressively targeted the 1834 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

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. Indias 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 Institutes
(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 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
McDonalds, that has 400 farmers cultivating 2,000 acres of potato fields in Gujarat under contract.

Burger King

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 wellestablished QSRs like McDonalds, 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
McDonalds
McDonalds 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). McDonalds 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. McDonalds 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 companys global innovation pipeline and tailor them for local
tastes. McDonalds also allows customers to build their own burgers in a small number of test markets.
McDonalds recently heavily refocused its marketing around those concerns, including the recent Our
Food. Your Questions campaign and a sustainable beef initiative.
Also, McDonalds 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 McDonalds has, leading to the largest share of kids meal sales
in the fast-food industry and generates about 10 percent of its total sales.
McDonalds also takes advantage from its edge on efficiency. Despite the recent operational challenges
that McDonalds has had it is still more efficient as compared to its competitors. Another major reason
behind McDonalds success is its visibility. Its worldwide advertising spends in 2012 were $787.5
million vs. Burger Kings $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.
Yum! Brands
In India, slightly behind McDonalds are KFC, Taco Bell and Pizza Hut, which are subsidiaries of
Yum! Brands. Yum! Brands is the worlds 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.
KFCs 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

Burger King

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 Kings 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 McDonalds extensively increasing range and effectively forfeited a lucrative
new consumer base to McDonalds. 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 race to catch up with
the leader McDonalds 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
McDonalds and Starbucks to include a new range of smoothies, fresh salads and caramel frappes in an
attempt to broaden Burger Kings consumer base to include women, families and health-conscious
people.
The second pillar of the strategy was Burger Kings 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 chains new, healthier menu items, while not altogether forgetting
about its core customers the young males.

Burger King

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 couldnt 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.
Challenges for Burger King in Indian Fast food market
Burger Kings 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 McDonalds. 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).

Burger King

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 McDonalds 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 McDonalds 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 Everstones 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 industrys 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 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

Burger King

Exhibit 1
Source:

Yahoo! Finance

Exhibit

Source:
Crisil

Research

Exhibit 3

Source:

Exhibit 4

Burger King

Exhibit 5

Discretionary spendings as a % of total spendings

100%
80%
60% Discretionary

Necesseties

40%
20%
0%

FY01 FY06 FY11 FY12 FY13 FY14

Exhibit 6
Company
McDonald's Corp.
Yum! Brands, Inc.
Starbucks Corporation
KFC Corporation

Symbol
MCD
YUM
SBUX
Private

Price
96.36
77.9
92.52

Change
0
0
0

Market
Cap
92.54B
33.61B
69.42B

P/E
19.98
33.45
28.07

Company
Market Cap:
Employees:
Qtrly Rev Growth (yoy):
Revenue (ttm):
Gross Margin (ttm):
EBITDA (ttm):
Operating Margin (ttm):
Net Income (ttm):
EPS (ttm):
P/E (ttm):
PEG (5 yr expected):
P/S (ttm):
Source: Yahoo! Finance

Exhibit 7

Source: dEssence Hospitality Advisory

MCD
92.54B
4,20,000
-0.07
27.44B
0.38
9.61B
0.29
4.76B
4.82
19.98
3
3.37

YUM
33.61B
69,810
-0.04
13.28B
0.26
2.78B
0.15
1.05B
2.32
33.45
1.99
2.54

Industry
1.09B
8.49K
0.09
526.43M
0.3
74.70M
0.08
N/A
0.4
36.73
1.8
2.38

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