Why Jubilant Foodworks is better off without a bite of Burger King

    Now, get this. Popeye’s is owned by Toronto-based Restaurant Brands International. In India, Popeye’s franchise is with Jubilant Foodworks, which means the Indian firm pays a royalty to Restaurant Brands International to operate Popeye’s stores here.

    Restaurant Brands Intl also owns Burger King, but in India, Burger King’s franchise is with Restaurant Brands Asia.

    So it would have made sense for Jubilant Foodworks to acquire a stake in Restaurants Brand Asia and run both Burger King and Popeye’s outlets here.

    Naturally, the Street assumed Jubilant was in the fray to pick private equity firm Everstone Capital’s 41 percent stake in Restaurants Brand Asia, which is on the block.

    But, Jubilant denied any such discussions were underway. “These are completely false and baseless and the company is not involved in any negotiations nor considering the aforesaid acquisition,” Jubilant said in an exchange filing on May 18.

    Mutual benefit

    Usually found next to a McDonald’s, Burger King has failed to scale in India as well as its peer. So one does wonder if Jubilant’s magic wand could have helped the Burger King franchise in India.

    Analysts believe a turnaround was possible. Burger King India has 391 stores while Jubilant operates 1,816 stores of Domino’s India across 393 cities.

    “The expertise of Jubilant’s management could have made Burger King a pan-India name. It could have leveraged the giant’s commissary kitchen network too,” said an analyst on condition of anonymity.

    Commissaries are essentially rentable commercial kitchens where foodservice operators can prepare and store their food.

    And it wouldn’t have been a one-way street. Jubilant also stood to benefit from the acquisition. Jubilant already has pizza (Domino’s India), chicken (Popeye’s) and coffee (Dunkin Donuts), so adding a burger chain would have completed its QSR portfolio, said the same analyst.

    It would have been a step towards Jubilant’s ambition of becoming a food-tech giant.

    Acquisition risks

    But there are some risks why the Domino’s operator probably does not want to check in into Burger King India.

    Burger King opened its first store in India in 2014 and nine years later it is yet to break even. In fact, the chain widened its losses in FY23. A rise in overall ADS (average daily sales) by 4 percent year-on-year to Rs 1.08 lakh was “underwhelming”, says ICICI Securities’ Manoj Menon.

    Plus, Restaurant Brands Asia’s margins have been in low single digits consistently, while Jubilant boasts of a 25 percent operating margin. Though RBA’s same-store sales growth (SSSG) at 8 percent was better than Jubilant’s (-0.6 percent) for Q4, it was lower than Westlife Development’s SSSG at 14 percent.

    “Burger King has very low brand recall. Their strategy does not stand out, they have simply followed what McDonald’s has done in India,” Karan Taurani of Elara Capital said.

    At this point, when end demand remains an issue and the growth rate is expected to remain low in the near term, an acquisition does not make sense, he said.

    McAloo Tikki vs Whopper

    The scepticism around Burger King’s growth trajectory also stems from the fact that it does not have a unique proposition in India that would draw in customers in large numbers, something its rival has cracked.

    Sreedhar Prasad, an adviser to consumer business and an ex-KPMG partner, says: “Burger King does not have a ‘hero’ in its portfolio.” For instance, for McDonald’s, it is clearly the McAloo Tikki Burger. “It is a product for all age groups – you love it as much as your grandmother, and it’s low-priced,” he said.

    It’s not that Burger King does not have a USP. Burger King’s “hero”, one can argue, is the Whopper, which is what it is famous for elsewhere in the world.  But a Whopper starts at Rs 130, while McAloo Tikki costs about Rs 40. “That’s where a Burger King loses out on the young crowd,” says Prasad.

    Understanding the Indian palate

    Amid low recall value, it also becomes difficult to compete with local players. Homegrown Biggies Burger is expanding rapidly and aims to have 350 stores across India by 2024. Meanwhile, Burger King has cut its previous guidance of 470 stores in FY24 to 450.

    These local players have been able to understand the Indian palate well, according to Prasad, which explains their success compared to Burger King. Whoever acquires the Everstone stake will have to get Burger King India’s positioning, pricing and menu right.

    The acquirer should also be willing to take up additional pressure on balance sheet with capacity expansion. Pizza QSR has limited store capex as store sizes are smaller and business is delivery-driven.

    “Burger QSRs have larger store sizes due to more kitchen space requirement, and a dine-in focus. This drives store capex higher and returns lower,” pointed out an Edelweiss report in the past.

    As Taurani foresees it, the acquirer might have to shut some Burger King outlets if the demand environment remains poor and also cut down on expansion in the Indonesian market, which is yet to achieve cash breakeven.

    Considering the financial commitments that would have accompanied the acquisition, the limitation faced by Burger King in terms of growth considering its premium positioning the serious competition from McDonald’s and local players, Jubilant’s decision to refrain from the acquisition seems well conceived, analysts say.

    The stock was trading flat at Rs 469, giving up the knee-jerk gains of May 17 on acquisition rumours. Restaurants Brands Asia has gained 15 percent over the past two days as news about its imminent sale gathers ground.

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