It’s Time for Africa

Eshna is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Residents of Cape Town in South Africa recently saw an intriguing sight. The queue in front of the city’s first Burger King (NYSE: BKW) was longer than municipal polling booths. People were waiting for hours to sample Whopper burgers for the first time.

So, Burger King has set up shop in South Africa to leverage the rapid growth opportunities of this emerging market. More store additions in South Africa and other parts of Africa are in the cards. Fast food lovers all over Africa are cheering. Should investors join them? Let's find out.

International expansion makes sense

The fast food scene in the US is quite challenging. According to NPD, the Quick Service Restaurant (QSR) segment has grown at just a 3% rate over the last 10 years. In 2013 most chains reported weak first quarter results.

In the US, McDonald’s (NYSE: MCD) reported just 1.2% comps growth and Burger King saw a decline of 3%. Yum! Brands (NYSE: YUM) had 1% declines in both KFC and Pizza Hut. Taco Bell, however, reported a 6% rise riding on the success of its Doritos Locos Tacos and Cantina bell menu.

In order to boost traffic most QSRs are engaging in store modernization, promoting value items priced around $1, and pepping up the menu with new food offerings. Burger King has also taken similar initiatives, but since the chain does not report monthly comps we would need to wait for the quarterly results to see the effects.

It is encouraging, though, that riding on similar strategies McDonald’s has reported 2.4% growth in same store sales numbers in May after six consecutive months of flat or negative comps.

However, with similar strategies adopted by most chains the QSR segment will become even more competitive. All fast food joints would look good, provide more value, and serve good food. In such a situation it would be difficult for any chain to make a clean sweep.

This is where new emerging markets outside the US come into the scene. There are such huge untapped markets in Asia, Africa, and parts of Europe that even if all fast food chains were to head there, it would take years before their full potential is exhausted.

Emerging markets

Burger King derives around half of its revenue from US and Canada. Aside from the US, only Germany accounts for more than 10% of sales. So, there is considerable scope for increasing penetration in emerging economies across the world. And this is what the company is doing.

In Europe, Burger King has established its presence in fast-growing Turkey and Russia while in Latin America it is present in Brazil, Mexico, Colombia and Central America. It is building a presence in the entire Asia-Pacific region with big plans for China. China had just 86 restaurants at the end of 2012 but Burger King intends to ramp this to around 1,000 outlets. 

The only piece that was missing was Africa, and now the company has fixed that. The Cape Town store is just the beginning, with the opening of 12 branches in the cards for next year. It helps that Burger King’s partner in South Africa, Grand Parade Investments, owns hotels and casinos which the company can leverage. The size of the South African fast food market is around $1.9 billion.

The company also sees exciting possibilities in sub-Saharan Africa. Likely focus areas would be Botswana, Mauritius, Mozambique, Namibia, Zimbabwe and Zambia.

Africa will see explosive growth

Experts from across the world agree that, buoyed by a growing middle class population, Africa is about to see some explosive growth in consumer spending over the coming periods. Apart from South Africa and Nigeria, sub-Saharan markets that stand out are Kenya, Ethiopia, Ghana, Tanzania, and Cameroon.

World Bank has predicted 2.5% economic growth for South Africa in 2013 and 4.9% growth for sub-Saharan Africa. This compares with 2.2% estimated overall global growth this year. According to a 2010-McKinsey report, household expenditures may increase as much as 63% through the decade to attain a size of $1.4 trillion by 2020.

No wonder Africa is the hottest destination for all consumer facing sectors. According to Ernst & Young, Africa is expected to see foreign direct investment of $150 billion by 2015 compared to $84 billion in 2010.

Although Africa, like any other emerging market, has its set of challenges like supply issues and a lack of appropriate infrastructure, it looks like Burger King has chosen its new market well.

Burger King has company

Burger King is not the first western fast food chain to discover Africa. KFC arrived in South Africa 42 years back and currently has 600 restaurants in the country and 900 all over the continent.

Yum’s International division, which includes its operations in all countries other than China, the US, India and some smaller countries in the Indian sub-continent, has had a 10-year compound annual growth rate of 12% in operating profits.

It is impossible to talk about fast food in the international arena and not mention McDonald's. Mickey D's reached South Africa about 18 years back and operates 170 restaurants in the country. As everywhere else, it enjoys good popularity for its signature Big Mac burgers, which sell for 22.95 rand, a little lesser than the 23.90 rand that Burger King is charging for Whoppers.

Barring China, Australia, and Japan, the other countries in the company’s Asia/Pacific, Middle East and Africa (APMEA) segment account for approximately 13% of total revenue.

Last word

Burger King is doing the right thing by looking for more presence in emerging countries. South Africa and sub-Saharan Africa are good places to set up business due to their tremendous growth opportunities. Although it will face competition from McDonald’s and KFC, the market is still large enough to accommodate all. Good growth in the emerging markets can act as an added catalyst for the stock on a long-term basis.

McDonald’s turned in a dismal year in 2012, underperforming the broader market by 25%. Looking ahead, can the Golden Arches reclaim its throne atop the restaurant industry, or will this unsettling trend continue? Our top analyst weighs in on McDonald's future in a recent premium report on the company. Click here now to find out whether a buying opportunity has emerged for this global juggernaut.

Eshna De has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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