Burger King Global Performance and Strategy Review Prepared for Nestlé Professional Centre of Excellence Robert Gregory Louise Howarth Global Research Director Senior Analyst

Contents Global Foodservice Trends Burger King Global Strategy Burger King Corporate Performance Burger King Regional Performance 4.1. North America 4.2. Latin America & Caribbean 4.3. Europe & Middle East 4.4. Asia & Oceania 5. Burger King Implications & Opportunities

Global Foodservice Trends

Consumers focusing more on health as world gets fatter and older 1. Global Foodservice Trends: Health and Nutrition Consumers focusing more on health as world gets fatter and older Global obesity levels have nearly doubled since 1980 according to the WHO. Consumers worldwide are demanding fresh, healthy and quality items from all foodservice operators, including fast food. Health and nutrition can take one of three forms: balanced, all-natural diet; fat/sugar/salt/ calorie reduction; functional and fortified food. McDonald's launched a new strategy in September 2013 to promote healthier menu choices across 20 major markets worldwide. As obesity mounts in US, 2013 has seen KFC focus on grilling over frying and Burger King launch new turkey burger for health conscious consumers.

It’s not enough to taste good, food must “wow” the tastebuds 1. Global Foodservice Trends: Gourmet and Indulgence It’s not enough to taste good, food must “wow” the tastebuds Consumers want full-flavour, novel and unique eating experiences, not just “food”. Image-building is critical to winning consumer acceptance: “artisan”, “hand-crafted”, “real”. Foodservice consumers willing to spend more, but also want value for money. Providing the quality for the menu item’s price point is critical. Burger King’s range of premium and healthy smoothies highlights “real” fruit content. Panera leverages artisan bakery proposition to encourage US consumers to treat themselves. McDonald’s Black and White burgers target aspirational consumers in China and Hong Kong. Upscale “better burger” joints like gourmet burger kitchen and Five Guys take burger and fries to next level.

1. Global Foodservice Trends: Daypart Segmentation Moving beyond singular menu to specific options for different times of day More foodservice operators creating new opportunities – and things – for people to eat at different times of day. Breakfast has been fully utilised, but tremendous opportunities remain for other dayparts including lunch, teatime, happy hour and late night dining. Casual dining establishments stand to gain the most from leveraging new dayparts, especially happy hour and late night thanks to higher margin alcohol sales alongside food. US burger chain Steak ‘n Shake launched its AllNighter menu in February 2013, which includes a 7-patty 1300 calorie cheeseburger. In China and Hong Kong, Pizza Hut offers a special “teatime” menu in late afternoon, between the lunch and dinner dayparts, featuring smaller portions, gourmet items, desserts and coffee drinks.

Mini snack menu items on the rise for cash and time poor consumers 1. Global Foodservice Trends: Snacking and Convenience Mini snack menu items on the rise for cash and time poor consumers Will it fit in your car drinks holder? Can you eat it with one hand? Can you dip it? Snack menus enable time-pressed and on-the-go foodservice consumers to eat any time and anywhere they’re hungry, regardless of time of day. Smaller sized snacks are also typically cheaper than full-portion menu items, allowing foodservice operators to better reach lower income consumers. Arby’s and Wendy’s have launched new menus in the US, aligning value with all day snacking. Burger King’s Change Range menu in New Zealand combines snacking daypart with value offer.

Consumers want to know where their food comes from more than ever 1. Global Foodservice Trends: Sourcing and Provenance Consumers want to know where their food comes from more than ever In developed markets, transparency around ingredients sourcing and food provenance has become a unique selling point in both retail food and foodservice markets. Sourcing is also increasingly top of mind in emerging markets such as China, which has been blighted by various food safety scares in recent years. Sourcing and provenance speak to other rapidly growing consumer trends such as animal welfare, ethical production and cutting food miles. "I've been eating at KFC the last few days, could that be a problem?" ("前几 天刚吃了肯德基会有问题吗") Chinese Weibo user Posted in April 2013, a month where KFC same store sales in China fell 29% y-o-y thanks to growing consumer concerns over the safety of its chicken supply and a new strain of avian flu. McDonalds has gone to great lengths to highlight how more than half of its food served in UK and Ireland is locally sourced.

Burger King Global Strategy

International Expansion 2. Strategy New product development Global strategic goals International Expansion Develop menu to driver consumer sales and to attract a wider customer base. Burger King aims to capitalise on under-penetrated markets and rising middle class consumer spending. To operate in more convenient locations including smaller bar format and in transport hubs. Outlet revamps New formats Improve image of restaurants to entice consumers

Analysis of global strategic goals: Expansion 2. Strategy Analysis of global strategic goals: Expansion Convenient locations for the modern consumer. Build a presence across untapped sites Expand in high-growth emerging markets where current penetration is low Hospitals Transport hubs Festivals

VS. Analysis of global strategic goals: New Product Development 2. Strategy Analysis of global strategic goals: New Product Development Gourmet Dayparts Healthy VS. Transparency Snacking

Burger King Corporate Performance

Global competitors 2012 CAGRs and banner sales: 3. Corporate Performance Burger King ‘s sales have been on the rise since 2011. However, at 2.2%, Burger King’s three year CAGR* is lower than four of its biggest competitors who have seen impressive growth. Global competitors 2012 CAGRs and banner sales: 4.5% 6.7% USD87.70bn 5.4% USD13.32bn -13.1% USD44.32bn 2.2% CAGR 3.7% CAGR 2.2% CAGR 5.6% USD9.17bn CAGR* Compound Annual Growth Rates 2010-2012 USD17.36bn

3. Corporate Performance North America is Burger King’s largest market by far in terms of sales and profits. Comparing regional sales against income both APAC and EMEA are underperforming. However, most future growth projected to come from outside of North America. 3% CAGR Company income: USD751.4 million

3. Corporate Performance Broken down by country, four of the top 10 fastest growing markets by 2017 are located in Latin America. Russia 300+ 38% 12% Venezuela 150+ Turkey 750+ 24% 27% 27% China 800+ 39% Japan 150+ 26% Colombia 100+ 30% Malaysia 100+ Brazil 500+ 60% 30% S Africa 10+ Paraguay 75+

Burger King Regional Performance

North America

Analysis of Burger King and its competitors in North America 4.1. Regional Performance: North America Analysis of Burger King and its competitors in North America For the last several years Burger King has underperformed against the market average and many of its closest competitors. However, it managed to buck this losing trend in 2012. Implication/Opportunity: Burger King’s focus on its core Male customer has damaged its appeal to the wider market. It needs to promote itself to Females and Children by creating iconic new products. There’s an opportunity for Burger King to widen its customer base by moving away from a reliance on The Whopper and emphasizing a broader array of more nutritious items available 24/7.

North America: Food Trends 4.1. Regional Performance: North America North America: Food Trends Consumers in the US are becoming increasingly interested in the nutritional value of food they’re eating. At the same time, consumers are eating less at traditional meal times and are snacking throughout the day. The same demand for choice and convenience is driving the extension of traditional daypart times.

North America: Healthy Eating & Extended Dayparts 4.1. Regional Performance: North America North America: Healthy Eating & Extended Dayparts North America’s QSR and fast food industry is trying to shake off its reputation as being “bad for you” with an increasing array of fresh-focused marketing efforts and healthy menu options. Simultaneously, operators are looking to cater to the consumers’ demand for convenience with extended dayparts. In order to cater to consumer demand for all types of food outside of the traditional daypart times, McDonalds has trialled a 24 hour breakfast menu while Taco Bell has played on the US’ ‘fourth meal’ in its late night marketing campaign. Panera Bread’s six ‘hidden’ menu items are designed to be health-conscious.

What is Burger King doing? 4.1. Regional Performance: North America What is Burger King doing? 2012 saw Burger King revamp domestic menu, leading to a larger emphasis on gourmet burgers. In H1 2013, the company realised this unbalanced tactic was leaving a significant portion of its customer base underserved in terms of value menu options. Two pronged approach of value and gourmet which was announced in Q1 2013. Burger King has begun to introduce a ‘fresh’ approach to tackling the issue surrounding fast food’s unhealthy image. Launch of Satisfries in September 13 offers 30% few calories but at a 25% price premium. Snacking options are becoming an increasingly important initiative for Burger King.

Latin America & Caribbean

Analysis of Burger King and its competitors 4.2. Regional Performance: Latin America & Caribbean Analysis of Burger King and its competitors Key competitors have out-performed Burger King over the last five years however, the operator has seen steady growth since 2010 while others experienced a drop in the last year. Implication/Opportunity: Burger King has seen slightly below average Y-o-Y growth recently however, the operator is still experiencing strong growth across the region. BK could look to extend its partnership with brands and move into co-branded products, including desserts, dairy and beverages.

Latin America & Caribbean: Food Trends 4.2. Regional Performance: Latin America & Caribbean Latin America & Caribbean: Food Trends Mexico has surpassed the US to become the most obese country in the world, with 32.8% of adults classed as obese - just above the US’ 31.8%. Somewhat contradictory to this is the fact that many Mexicans also suffer from malnutrition. Across Latin America Caribbean as a region, small food portions and snacking is popular with people tending to pick up bites to eat from local street vendors.

Below, a traditional street vendor. Left, a McDonald’s roadside kiosk. 4.2. Regional Performance: Latin America & Caribbean Latin America & Caribbean: Snacking & Health Traditionally, Latin America has a culture of ‘on the go’ snacking , particularly Brazil. Snacks or small meals are picked up from street vendors and roadside eateries. As a result major fast food chains have expanded across the region via traditional and kiosk-style concepts. These are popular, especially given their cheap price position in a region where there are big economic disparities within the population. Colombia Below, a traditional street vendor. Left, a McDonald’s roadside kiosk. Brazil Mexico Disparities in wealth are a contributing factor to the increase in unhealthy eating. However, operators in Latin America Caribbean have failed to act quickly to meet demand from governments and consumers for cheap, healthy options . Brazil

Latin America Caribbean 4.2. Regional Performance: Latin America Caribbean What is Burger King doing? Like its competitors, Burger King offers comprehensive snack menus, comprising mainly dairy products. The company appears to be ahead of the curve when it comes to thinking about healthy eating in Latin America Caribbean. Mexico Brazil Brazil Argentina Mexico Latin America Caribbean

Europe & Middle East

Analysis of Burger King and its competitors 4.3. Regional Performance: Europe Analysis of Burger King and its competitors Burger King’s Y-o-Y growth performance has hovered around the average*, interestingly seeing good growth during the recession when overall consumer spending was low. Implication/Opportunity: Burger King has a good balance between value and gourmet which is serving the company well. Low value items are driving traffic while higher priced items are boosting profits. Burger King should look to tie in health & wellness as well as transparency into its two- pronged value/gourmet strategy.

Europe: Food Trends 4.3. Regional Performance: Europe & Middle East Europe was hit hard by the recession, resulting in the vast majority of consumers changing their spending patterns by trading down on price when it comes to food. That said, recent scandals like the continent-wide Horse Meat scandal has put concerns in the minds of consumers looking for a ‘cheap meal’.

Europe: Gourmet & Healthy Eating 4.3. Regional Performance: Europe & Middle East Europe: Gourmet & Healthy Eating QSR’s and fast food operators in Europe are aware Europeans are trading down to cheaper fast food but still looking for quality, in terms of taste, ingredient sourcing and nutritional value. UK Austria UK Italy France Poland

What is Burger King doing? 4.3. Regional Performance: Europe & Middle East What is Burger King doing? In comparison to competitors Burger King lags behind in healthy offerings, with only limited options in most markets although its offer is better in northern European markets. Burger King has recently placed a strong emphasis on offering premium items across Europe. The company is repositioning itself to appeal to more consumers. Czech Republic Switzerland Italy Russia Germany Netherlands UK Germany

What is Burger King doing in Middle East? 4.3. Regional Performance: Europe & Middle East What is Burger King doing in Middle East? In the Middle East, Burger King has placed a focus on gourmet and indulgence items, similar to that of its competitors in the region. UAE Egypt Oman Bahrain Jordan

Asia & Oceania

Analysis of Burger King and its competitors 4.4. Regional Performance: Asia & Oceania Analysis of Burger King and its competitors Burger King’s growth was impacted by the economic recession, as was its competitors. However, the biggest foodservice operators have experience relatively constant growth overall thanks to strong emerging market economies. Implication/Opportunity: Burger King’s growth was impacted by the economic recession, as was its competitors. However, its focus on value and low-priced snacking items has helped it ride this wave in recent years. There’s an opportunity to increase market share in the breakfast daypart by taking a similar route to McDonald’s and its McCafe banner. In addition, such outlets would allow Burger King to capture more daytime snack and drink revenue.

Asia & Oceania: Food Trends 4.4. Regional Performance: Asia & Oceania Asia & Oceania: Food Trends Asian diets traditionally involve a high proportion of fresh vegetables, fish and rice – vastly different from the typical western fast food offering. In general, people in the region tend to be concerned with food safety – especially from local players. Reinforcing this food trend are the recent food scandals which have occurred in certain Asian markets, pushing food transparency concerns to the forefront of many consumers’ minds.

Asia & Oceania: Transparency & Daypart Segmentation 4.4. Regional Performance: Asia & Oceania Asia & Oceania: Transparency & Daypart Segmentation Local food scandals have led to a shift in consumer behaviour. In China and South East Asia, Western fast food operators have been seen as more “clean” or “safe” compared to local competitors however, recent food safety violations by suppliers have rocked this image. Many QSR operators have identified breakfast as a key area for growth in Asia, and are offering a huge variety of options for the daypart. Malaysia Pizza Hut in Indonesia offers breakfast options, including locally adapted rice porridge. KFC in Malaysia combines healthy and daypart segmentation while McDonalds offers its traditional breakfast menu options alongside Eastern traditions. Malaysia

What is Burger King doing in Oceania? 4.4. Regional Performance: Asia & Oceania What is Burger King doing in Oceania? Burger King’s focus here very much reflects trends in North America and Western European due to relative cultural similarities. This is despite consumers in Oceania being highly concerned with sourcing locally. Burger King is failing to capitalise on the sourcing trend in Australia. New Zealand Snacking menu at value prices in New Zealand. Australia Indulgent offerings with nutritional content. New Zealand

What is Burger King doing in Asia? 4.4. Regional Performance: Asia & Oceania What is Burger King doing in Asia? In Southeast Asia, Burger King has placed a focus on the breakfast daypart, as many of its competitors in the region are also doing. Malaysia Thailand Indonesia Combining breakfast and snacking in the Philippines. Singapore Philippines

Burger King Implications & Opportunities

Is Burger King aligned properly? 5. Implications & Opportunities Is Burger King aligned properly? Region North America Latin America Europe Asia Middle East Oceania Health & Nutrition Gourmet & Indulgence Daypart Segmentation Snacking & Convenience Sourcing & Provenance Key: Stars- represent opportunities for BK. The trends are developing in the regions, therefore BK has the chance to grow and expand on what they are doing to align with the trends. Green ticks- BK are on trend - Not a popular trend On trend Opportunity

Opportunities for Burger King 5. Implications & Opportunities Opportunities for Burger King Opportunities within New Product Development Extend snacking and daypart offerings to move beyond the classic Whopper to attract more consumers. Develop desserts, smoothies, coffee beverages Provide more healthy nutritious propositions and maintain value. Grow health and nutrition propositions Balance of value and premium options Promote transparency

Opportunities for Burger King 5. Implications & Opportunities Opportunities for Burger King Opportunities within Expansion McDonalds Burger King should be partnering with established brands in new markets to reinforce a strong co-branded positioning. Boost value proposition Work with locally recognisable manufacturers to leverage brand equity and add authority in emerging markets Venturing into new locations and channel formats to widen the existing customer base. Tailoring its product offering to localised trends. Develop new concepts to exploit key trends. Taco Bell

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