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Read the case study “Burger King Beefs Up Global Operations”:
Burger King Beefs Up Global Operations
Burger King is the world’s largest flame- broiled fast food restaurant chain. 65 As of mid- 2009, it operated about 12,000 restaurants in all 50 states and in 74 countries and U. S. territories worldwide through a combination of company- owned and franchised operations, which together employed nearly 400,000 people worldwide. Only Yum Brands ( A& W, KFC, Long John Silver, Pizza Hut, and Taco Bell), McDonald’s, and Subway, with 36,000, 32,000, and 28,000 restaurants, respectively, were larger. Given that Yum Brands has no hamburger units, Burger King is second in the fast food hamburger restaurant segment/ market. Burger King plans to increase the number of net operating units by 3 to 4 percent per year in the near future, with most of that increase coming in international operations. Two major ways in which Burger King differentiates itself from competitors are the way it cooks hamburgers??" by its flame- broiled method as opposed to grills that fry??" and the options it offers customers as to how they want their burgers. This latter distinction has been popularized with the “ have it your way” theme. About two- thirds of Burger King’s restaurants are in the United States, and its U. S. and Canadian operations accounted for 69 percent of its $ 2.54 billion revenue in fiscal 2009. The geographic distribution of Burger King’s restaurants is shown on Map 12.2. Although the company began in 1954 by offering just burgers, fries, milk shakes, and sodas, the menu has expanded to include breakfast as well as various chicken, fish, and salad offerings. Nevertheless, burgers remain the mainstay of the company, and 2007 marked the 50th anniversary of the Whopper sandwich, which is considered Burger King’s signature product. Burger King has also differentiated itself with some innovative advertising campaigns through the years, such as its use of a figure of a man who is the Burger “ King.” Recently, the company ran a “ Whopper Virgins” campaign in which it assembled people who had never tasted a burger??" such as from remote parts of Greenland, Thailand, and Transylvania??" to participate in a comparative taste test between Whopper sandwiches and Big Macs. The Burger King logo has changed slightly through the years; for example, going from two buns separating a burger to two buns separating the company’s name. Yet it has always been displayed and recognizable globally, as illustrated in the photo of a restaurant in Taiwan with Mandarin lettering. A Bit of History Burger King can trace its roots to 1954, when it started as InstaBurger King. In 2006, the company went public, and since then the company has operated independently. During its first five years, the private company grew to five restaurants, all in the Miami, Florida, area. In 1959, the name was changed to Burger King, and it began domestic franchising. In 1967, Pillsbury, which had several other retail food groups??" such as Bennigan’s, Steak and Ale, and Godfather’s Pizza??" bought Burger King, which by then had 274 restaurants. During the first few years of Pillsbury’s ownership, franchising increased substantially. Then in 1989 Pillsbury got out of the restaurant business and sold Burger King to the British company Grand Metropolitan, which then converted most of its Wimpy restaurants in the United Kingdom to Burger King restaurants. Grand Metropolitan merged with Guinness in 1997 to form Diageo, and Diageo divested itself of restaurant operations in 2002 when it sold Burger King to a consortium of private equity firms controlled by TPG Capital, Bain Capital Partners, and the Goldman Sachs Funds. In May 2006, Burger King consummated its initial public offering, becoming a publicly traded company listed on the New York Stock Exchange. The years of transformed ownership took a toll on Burger King as emphases changed and the company’s interests were sometimes made secondary to those of its parent company. For instance, in the period leading into the twenty- first century, some of Burger King’s franchisees experienced financial problems. Despite Burger King’s evolving ownership, the company did expand internationally. In the early 1960s, it entered the Bahamas and Puerto Rico. In the 1970s, it entered markets in Europe, Asia, and Latin America. While some of these moves turned out to be highly successful, a few were not. It entered and then retreated from operations in such countries as Colombia, France, Japan, and Oman. ( We will see in later discussion that Burger King has re-entered some of these markets.) Much of Burger King’s early international forays came about either because someone in another country approached Burger King or because someone in the company was familiar with a particular country and thought it would offer opportunities. Two reasons have been prevalent in the decision to leave a market: ( 1) the franchisee does not perform adequately, such as not investing sufficiently in the business or not making royalty payments; and ( 2) the market turned out to be too small to support the necessary infra-structure, such as being too small to develop slaughterhouse and beef grinding facilities. Over time, especially since the company went public, Burger King has taken a more systematic approach toward restaurant expansion. While it still sees substantial growth opportunities within the United States, it sees the United States as a mature market for fast food, especially for hamburgers, in comparison with many foreign countries. In looking for new countries to enter, Burger King looks most favorably at those with large populations ( especially of young people), high consumption of beef, availability of capital to franchisees for growth, a safe pro- business environment, growth in shopping centers, and availability of a potential franchisee with experience and resources. Overall, Burger King has expanded internationally later than its primary rival competitor, McDonald’s. This has resulted in both advantages and disadvantages. On the one hand, later entry is a disadvantage in very small markets because there may be few adequate suppliers. For instance, there may be only one slaughterhouse, and the owners may be unwilling to work with more than one customer. On the other hand, in larger markets, such as in the BRICs, being a later entrant may be advantageous because the earlier entrants have built demand for fast food and have created a supply infrastructure. In some later- entry markets, Burger King has been able to concentrate almost entirely on emphasizing its product ( have it your way, good taste of flame- broiled burgers), without incurring the early developmental costs. For instance, in Latin America and the Caribbean, McDonald’s and Burger King compete in 27 country markets, with Burger King currently leading McDonald’s in the number of restaurants in 15 of those markets. However, keep in mind that local companies also learn from the successes of foreign fast food companies, and they sometimes alter their menus and flavorings to appeal to local tastes. Some notable examples are Bembos in Peru, Mr. Bigg’s in Nigeria, Pollo Campero in Guatemala, and Quick in France. Outside of Burger King’s Americas group ( United States and Canada), 37.0 percent of the countries and 24.6 percent of the restaurants are in the Latin American and Caribbean group, yet these countries accounted for only 13.5 percent of the non- Americas group revenue in fiscal 2009. This is largely because many of these countries have very small populations, such as the Cayman Islands, Aruba, and Saint Lucia. So why did Burger King develop a presence in these markets, even though at this writing it is not in countries with much bigger populations, such as India, Pakistan, Nigeria, Russia, and South Africa? The answer is largely due to a location factor. Burger King remains headquartered in Miami, which is often called the capital of Latin America. Because so many people from Latin America and the Caribbean come to or through Miami, Burger King’s reputation spilled over to that area early on. This simplified gaining brand recognition and acceptance. Further, the nearness of the Latin American and Caribbean countries to Miami enhances the ability of Burger King’s management to visit these countries and for franchisees to visit Burger King’s headquarters. In 2008, Burger King opened its thousandth restaurant in the Latin American and Caribbean region. Although Burger King prefers to operate in markets through franchising, doing so is sometimes initially difficult because suppliers and prospective franchisees do not know the company well enough. If such a market looks sufficiently attractive, Burger King will enter with its owned operations. ( Overall, Burger King owns 12 percent of its restaurants and franchises the rest.) By owning, Burger King demonstrates market commitment. For instance, there may only be one meat- processing plant, and the owners may otherwise be reluctant to invest in added capacity or the processing of ground beef. Further, if the country turns out to be as attractive as anticipated, then the owned operations may be more profitable for Burger King than royalties received from franchisees. Throughout its long history, the company has consistently focused on expanding its global portfolio into new and existing markets. Since becoming a publicly traded company, it has entered a number of markets for the first time, including Indonesia, Egypt, Hong Kong, Suriname, and the Czech Republic. It has also re- entered several markets that it had earlier abandoned, including Japan, Curacao, Uruguay, and Colombia. Let’s take a look at the decision to re- enter Colombia. Re- Entering Colombia Burger King entered the Colombian market in the early 1980s but pulled out after several years of operating in the market because it was not allowed to expatriate royalty payments. In addition to the problem of expatriation of royalty payments, Colombia was going through a prolonged period of economic and political turmoil. Also, at the turn of the century, the beef industry suf-fered from foot- and- mouth disease outbreaks and cattle rustling by guerilla groups. These con-ditions combined to make Colombia a less attractive market for fast food restaurants. Burger King re- entered Colombia in 2008. By this time, Colombian cities were considered safe for people to go out to eat. The beef health and rustling problems were largely under control. ( Currently, Colombia accounts for about 2 percent of global beef production.) With about 44 million people, Colombia is the third most populated country in Latin America, after Brazil and Mexico. The Colombian peso was strong and, when coupled with a rise in two-income families, there was more disposable income to spend on eating out. In 2005, about 77 percent of the population was classified as urban, and Colombia boasted some large cities such as Barranquilla, Bogotá, Cali, and Medellin??" all with large and recently built shop-ping centers. About 31 percent of the population was under 15 years of age. Although incomes were very unevenly distributed, the richest 20 percent of the population ( almost 9 million people) had a per capita expenditure in 2007 of over U. S. $ 17,000. While all the above factors were favorable, there were some negative things to consider. From a political standpoint, there were potential problems with leftist- leaning governments in the neighboring countries of Ecuador and Venezuela, which could support a resurgence of political unrest. Economic problems in the United States from the global recession and in Venezuela from fluctuating oil prices could cause Colombia to lose sales because those two countries comprise half of the country’s export earnings. Further, about 2 percent of Colombian GDP in 2007 came from remittances of Colombians working abroad, mainly in Spain. These were at risk because Spain was hard hit by the global recession. In effect, economic downturns could hit sales of fast foods. Burger King learned this lesson in Mexico and Germany, which in response caused the company to tactically develop a more relevant value proposition, including value meals. Overall, though, the Colombian situation looked bright. Burger King signed an agreement with KINCO for franchise rights to Medellin, Cali, and northern Colombia. KINCO is a well- established Colombian company with restaurant experience. Burger King signed a second franchise agreement with Alsea, a Mexican company, for rights to Bogotá. Alsea owns 75 percent of the Colombian operation of Domino’s Pizza and operates Burger King restaurants in Mexico. Thus both of these companies seem very compatible with Burger King’s criteria for selecting franchise operators with capital and restaurant experience. Although Burger King’s operations in Colombia are still in the early stages of development at the time of this writing, Burger King’s management is optimistic about the future of Colombia and its own future therein. Brazil as Model for Entry into Russia In our “ Meet the BRICs” case in Chapter 4, we explored why so many companies have been putting emphasis on Brazil, Russia, India, and China. Burger King is no exception. The possibilities in these four countries are simply too great to ignore. Burger King opened its first restaurants in two of the BRICs, Brazil and China, almost simultaneously, in November and June 2004 respectively. By then, many foreign fast food franchisors had entered the markets, many without success. For the most part, failure occurred because of underestimating what it would take to succeed in such a large country. However, Burger King’s success in Brazil has led it to use the Brazilian experience as a model for entry into Russia, which is expected in the near future. On the one hand, Burger King had a recognition advantage in Brazil because thousands of Brazilians fly into Florida, where Burger King restaurants abound. In addition there are about 300,000 Brazilians living in the South Florida area, most of whom have relatives back in Brazil. On the other hand, the failure of many prior fast food entrants into Brazil made potential suppliers apprehensive. By observing the mistakes of other fast food chains, Burger King forged a strategy that has proved successful. In fact, for the last few years, Brazil has been one of Burger King’s fastest growing markets. By mid- 2009, it had 68 restaurants in Brazil. This strategy can be summarized in five parts: ( 1) develop an infrastructure before putting in restaurants, ( 2) develop a local management team, ( 3) focus development on major cities and adjacent geographies with established shopping mall location, prevalent in Brazil’s largest cities, instead of the whole country, ( 4) establish a local office, and ( 5) support continuous development and the use of local suppliers that meet Burger King’s global specifications. For smaller markets or those where all the restaurants are franchised, Burger King does not set up a regional restaurant support center or local headquarters. However, management deemed a Brazilian office necessary because of Brazil’s size ( in both area and population), its language barrier ( Portuguese), and the magnitude of investment that suppliers and franchisees would eventually need to make. At first, the office served to demonstrate the company’s market commitment and to handle early supply- chain procurement and management. The result was that Burger King was able to initially secure about 80 percent of its supplies within Brazil and has since upped that figure to over 90 percent. By focusing initially on São Paulo, Brazil’s largest city, Burger King was able to develop economies in its marketing and distribution. Its subsequent expansion has focused on cities and states near São Paulo. Finally, by building a staff of Portuguese- speaking Brazilians, the company showed its commitment to the country and developed a competency to deal with external stakeholders. Burger King’s success in Brazil has led its management to follow the same strategy for expansion into Russia. It has offices in Moscow, where initial penetration is planned. In fact, duplication of the successful Brazilian strategy may be even more important for Russia because Burger King lacks the same pre- entry brand recognition that it had in Brazil. The Future At this point, Burger King has many opportunities for expansion, such as moving into new countries and growing operations within markets where it is already operating. Despite its international growth, it is still in less than 40 percent of the world’s countries. Thus, it faces the challenge of deciding where the best locations are for placing its future emphasis.
Incorporate into your analysis responses to the following questions. You should make sure to incorporate core concepts from your reading assignment.
1. What is Burger King’s core competency? How does it relate to its chosen strategy?
2. How would you explain how Burger King has decided to configure and coordinate its value chain? Which of Burger King’s value chain activities create the most value for the company?
3. Burger King globally expanded later than its main fast food competitor. What advantages and disadvantages has this created?
4. When entering another country, discuss the advantages and disadvantages that an international restaurant company, specifically Burger King, would have in comparison with a local company in that market.
5. About two-thirds of Burger King’s restaurants and revenues are in its Americas region ( United States and Canada) and one-third elsewhere. Should this relationship change? If so, why and how?
6. The case mentions that Burger King prefers to enter countries with large numbers of youth and shopping centers. Why do you think these conditions would be advantageous?
7. How has Burger King’s headquarters location influenced its international expansion? Has this location strengthened or weakened its global competitive position?
8. As CEO of Burger King, what tools and strategies would you use when deciding on possible future locations for the company.
9. What do the implications of the challenges identified in the case have for Burger King’s strategy today and in the future?
Please use this reference as one of the five
References
Daniels, J., Radebaugh, L., & Sullivan, D. (2011). International business, environment &
operations (13th ed.). Upper Saddle River, NJ: Prentice Hall., 465-470.
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