Although Burger King has had its fair share of failures in international markets, things haven’t been going all that bad for the fast food giant over the last decade. Last month, however, the King was (partially) deposed in Germany. After repeated reports of poor hygiene and sub-standard working conditions, Burger King has terminated the contract with its largest franchisee in Germany. Over night, franchisee Yi-Ko Holding was ordered to close 89 stores or more than 10 % of all Burger King stores in Germany. Approximately 3,000 employees all over Germany were let go. What had gone wrong? In bare bone terms, investigative reporters had reported on severe breeches of the franchise agreement. The franchisee allegedly had ordered employees to alter the expiration dates on food products. Also, according to the reports, some of the restaurants didn’t even have the most basic restaurant equipment like dishwashers or garbage disposals. So much for the facts. But what has happened behind the scenes? If a franchisee of a global brand is in severe breech of the most basic stipulations of a franchise agreement, then the blame is often shared – particularly when it takes investigative journalism to uncover such a massive failure. It is hard to tell at this point, but in general it is the franchisor who sets the stage for success or failure. Successful global franchising starts by setting clear performance expectations and unambiguous language about contract enforcement. Another critical issue is the selection of the right franchisee who understands the culture of the global brand and has the capacity to implement the franchise system. If the franchisee acquires a master-franchise, then contractual arrangements, ability, and trust become even more important as the master-franchisee has the right to appoint sub-franchisees, leaving the brand owner even more removed from the market. And then there are training, permanent quality control and enforcement. In the recent case in Germany, it is almost certain that Burger King headquarters must have failed in some aspect. Once again, it has suffered from a disease that many global brands suffer from, a certain inability to transfer competitive advantage coming from a global brand and a well-oiled defined business model. So in some way, the King was not deposed in Germany. He has abdicated.
Posts Tagged ‘Fast Food’
As the English edition of the Chinese newspaper Renminbao (People’s Daily) reports, fourth quarter sales at Yum! Brands, the parent company of Kentucky Fried Chicken (KFC) and Pizza Hut have significantly declined. What has happened in the Middle Kingdom that not only has a huge love for chicken dishes, but also for foreign brands, a market that has been promising nothing but growth for the fast food giant? It all started out with a media report on China’s national TV station CCTV in December 2012. The broadcast alleged that some poultry farms, among them suppliers to KFC, ignored regulations by using hormones and antibiotics, and triggered unfavorable media attention and social media activity. An investigation by authorities in Shanghai only resulted in some vague recommendations concerning a strengthening of KFC’s supply chain, but no fine was assessed and no further action was taken. Unfortunately, as is often the case in such circumstances, the good news got much less media coverage than the original bad news. And so the Chicken scare started to nest in the minds of the Chinese consumers. As the Economist reports in its February 9th issue, KFC’s January sales in China fell by a dramatic 41 %. What makes this even worse is the fact that Yum! doesn’t operate under the usual franchise system in China, but owns most of its stores. With currently approximately 5000 restaurants in 800 Chinese cities, this is a costly development to digest – probably worse than eating a big bucket of deep fried poultry. KFC’s example just shows how tricky it can be to operate in far-away markets. Cultural, geographical and legal distance make it very difficult to first perceive and interpret the early warning signals correctly and then to react quickly and appropriately. Often in such cases, foreign companies quickly pick up the stigma of being an imperialist monster that has no respect for the local environment and whose only interest is exploitation of the local market. Or, in this case in the words of the Economist, to be the “Yucky Kentucky”!
Looking at the mere numbers, Burger King does look impressive. Burger King operates close to 11,000 franchises and owns close to 1,500 restaurants globally. It is present in 76 countries where 40 % of all of its restaurants are located. Unfortunately, 40 % of the restaurants abroad only generate about 30 % of the total revenue. Plus, Burger King hasn’t been doing so well in the home market, either. Time to change gears, time to change owners. Only eight years ago, Burger King switched owners when Diageo, the spirits maker based in the UK sold the fast food chain to a consortium of investment firms made up of TPG Capital, Bain Capital, and Goldman Sachs Capital Partners. After its owners took Burger King public in 2006, it will now sell itself to private equity group 3G Capital. What is interesting besides the 3.3 bn US$ price tag which presents a hefty 46 % premium, is the fact that 3G capital is backed by Brazilian interests including Brazilian billionaire, Harvard graduate, Wimbledon tennis player, and resident of Switzerland, Jorge Paulo Lemann. It therefore doesn’t come as a big surprise that plans have already been announced to expand foreign operations into Latin America, with a focus on Brazil. It’ll be interesting to see if the mastermind behind some of the most publicized deals in the beer market can work his magic for Burger King. In the past, Burger King hasn’t been doing so well in a number of foreign markets, including Europe. Burger King has been in Finland for a short period of time in the 1980s before leaving again, it has briefly been in Greece in the 1990s, it pulled out of France in 1998, then left the Ukraine in 2006, and closed operations in Iceland in 2008. They left and re-entered countries such as Austria and Japan. It seems that in many markets they have been up against first movers such as McDonald’s or KFC. But that alone would be nothing but a bad excuse that no executive should get away with. Ill advised product programming, price strategies gone haywire, restaurant design that falls way behind that of McDonald’s restaurants, and a less than ideal use of technology that allows to track trends in sales in real time have all contributed to its poor performance abroad. It seems as if global market potential is there, but Burger King has never been able to fully tap into it. Brazil seems to be different. Burger King has entered the country in 2004 and expanded impressively since then. With its GDP per capita steadily growing since 2002, the Brazilian market certainly holds a lot of promise for Burger King.
Is it a deadly sin not be a first-mover in foreign markets? Burger King, the world’s second largest burger chain, recently announced that it would expand it’s business in China by 250 to 300 outlets. Compared with McDonald’s 950 or KFC’s 2,200 this seems to be a relatively small number. Looking at the timing of entry, the link between time of entry and market penetration seems apparent: While KFC (a part of Yum! brands which also operates Pizza Hut) entered China in 1987 and McDonalds entered the Middle Kingdom in 1990, Burger King only joined the crowd in 2005. KFC also seems to cater to local tastes much better. Chinese prefer chicken over beef, and KFC has even added a long list of new items to it’s menu, including deep-fried dough sticks (youtiao) or pumpkin porridge. My prediction is, this will be a case to watch…