McDonald’s Corporation (MCD), Burger King Worldwide Inc (BKW): It’s Time for Africa

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Residents of Cape Town in South Africa recently saw an intriguing sight. The queue in front of the city’s first Burger King Worldwide Inc (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.

McDonald's Corporation (NYSE:MCD)

In the US, McDonald’s Corporation (NYSE:MCD) reported just 1.2% comps growth and Burger King saw a decline of 3%. Yum! Brands, Inc. (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 Corporation (NYSE:MCD) 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 Worldwide Inc (NYSE:BKW) 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 Worldwide Inc (NYSE:BKW) 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 Worldwide Inc (NYSE:BKW)’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.

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