Burger King to attack Yum! Brands and McDonald’s in China
Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Burger King has set its eyes on China. On Friday, the world’s second largest hamburger chain declared its ambitious plan of setting up 1,000 restaurants in China over the next five to seven years. This is the largest multi-unit development deal that the company has ever signed. Currently, the Miami-based food chain has only 63 outlets in the mainland.
The company desires to strengthen its global footprints in growing markets. Burger King, which runs over 12,500 restaurants globally, has teamed up with the Kurdoglu family and private equity firm Cartesian Capital Group to expand and open up new stores in the Chinese economy. The Kurdoglu family runs the company’s restaurants in Turkey and operates as its largest international franchise managing over 450 Burger King outlets outside the US.
What makes the King come to China?
The expansion in the mainland is quite a thought-out move of the company, which is of late struggling in the home market. The food chain is witnessing stiff competition from chief rival McDonald’s (NYSE: MCD) and Wendy’s (NASDAQ: WEN), which is battling for the second place as the US hamburger chain.
Also, 60 percent of Burger King’s stores are located in the domestic market. This means that most of its revenue is determined by the North American market, where the food chain’s performance hasn’t been that impressive. The company’s market share in the US has been declining in recent years and its outlook remains sluggish.
In such a situation, fellow player Yum! Brands (NYSE: YUM), which earns more from China than from US, must have surely given it some motivation to explore emerging markets. Burger King, which has only 908 restaurants spread across fourteen countries in the Asia Pacific region, is getting set to check out these markets, particularly China, for growth.
But expanding in the mainland is quite a challenge now, given the growing competition in the fast food arena.
The battle ahead…
Burger King is going to have a tough fight with 1,400 McDonald’s outlets and 4,600 Yum’s KFCs and Pizza Huts. Both McDonald’s and Yum have grand plans of expanding in the Chinese nation. McDonald’s proposes to open up around 250 stores this year, while Yum, the dominant fast food player in China, is to open roughly 600 restaurants by this year end.
In fact, the company will have to face the Asian and other local fast food chains as well. Kung Fu, Ajisen, Banana Leaf, and Da Niang Dumpling are some of the regional food chains that are giving their western counterparts solid contest.
Despite such severe competition, what is it that is drawing Burger King towards China?
China’s growing fast food market
The Chinese market is one of the fastest growing economies in the world. The nation has a growing middle class population with increasing disposable income. The economy’s spending power is improving, while time available for cooking is reducing. This offers immense potential and phenomenal growth opportunities to the fast food industry.
The country’s food service industry has witnessed double digit growth since 2003. And this gives enough reason to the food chains to flock and be part of the growth tale. Not only Yum and McDonald’s, other westerners such as US coffee chains Starbucks (NASDAQ: SBUX) and Dunkin’ Donuts of Dunkin' Brands (NASDAQ: DNKN), also want a bigger bite from their China operations after serving the saturated and sluggish domestic market. Starbucks, which presently runs 570 cafes in the mainland, desires to expand to 1500 outlets by 2015. Even Dunkin Donuts is set to increase its footprints.
The company which is facing tough times in the home country has similar expansion plans in Russia. Last year, it announced to increase its presence in Brazil. Now it’s eyeing China. It is still pretty early to say if Burger King will taste success in China. No doubt, Yum! Brands and McDonald’s will rule the market in the near term. Rest of the story, depends on the King’s performance in conquering Chinese palate.
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