Burger King Global Performance and Strategy Review

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

2. 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 Contents

3. Global Foodservice Trends

4. 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. • Consumers focusing more on health as world gets fatter and older • 1. Global Foodservice Trends: Health and Nutrition 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.

5. 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. • It’s not enough to taste good, food must “wow” the tastebuds • 1. Global Foodservice Trends: Gourmet and Indulgence Burger King’s range of premium and healthy smoothies highlights “real” fruit content. Upscale “better burger” joints like gourmet burger kitchen and Five Guys take burger and fries to next level. McDonald’s Black and White burgers target aspirational consumers in China and Hong Kong. Panera leverages artisan bakery proposition to encourage US consumers to treat themselves.

6. 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. • Moving beyond singular menu to specific options for different times of day • 1. Global Foodservice Trends: Daypart Segmentation 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. US burger chain Steak ‘n Shake launched its AllNighter menu in February 2013, which includes a 7-patty 1300 calorie cheeseburger.

7. 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. • Mini snack menu items on the rise for cash and time poor consumers • 1. Global Foodservice Trends: Snacking and Convenience 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.

8. 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. • Consumers want to know where their food comes from more than ever • 1. Global Foodservice Trends: Sourcing and Provenance "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.

9. Burger King Global Strategy

10. 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. • Global strategic goals • 2. Strategy • New formats • Outlet revamps • New product development To operate in more convenient locations including smaller bar format and in transport hubs. Improve image of restaurants to entice consumers

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

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

13. Burger King Corporate Performance

14. Global competitors 2012 CAGRs and banner sales: • 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. • 3. Corporate Performance 6.7% 4.5% 5.4% 5.6% -13.1% USD87.70bn USD13.32bn USD44.32bn 3.7% CAGR 2.2% CAGR 2.2% CAGR USD9.17bn USD17.36bn CAGR* Compound Annual Growth Rates 2010-2012

15. 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. Corporate Performance • Company income: USD751.4 million 3% CAGR

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

17. Burger King Regional Performance

18. North America

19. 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.

20. 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: Food Trends • 4.1. Regional Performance: North America

21. 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. • North America: Healthy Eating & Extended Dayparts • 4.1. Regional Performance: North America 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.

22. 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. • What is Burger King doing? • 4.1. Regional Performance: North America 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. Two pronged approach of value and gourmet which was announced in Q1 2013.

23. Latin America & Caribbean

24. 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. • Analysis of Burger King and its competitors • 4.2. Regional Performance: Latin America & Caribbean 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.

25. 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. • Latin America & Caribbean: Food Trends • 4.2. Regional Performance: Latin America & Caribbean

26. 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. • Latin America & Caribbean: Snacking & Health • 4.2. Regional Performance: Latin America & Caribbean 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

27. 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. • What is Burger King doing? • 4.2. Regional Performance: Latin America Caribbean Mexico Brazil Brazil Argentina Mexico Latin America Caribbean

28. Europe & Middle East

29. 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. • Analysis of Burger King and its competitors • 4.3. Regional Performance: Europe 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.

30. 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’.

31. 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. • Europe: Gourmet & Healthy Eating • 4.3. Regional Performance: Europe & Middle East UK Austria UK Italy Poland France

32. 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. • What is Burger King doing? • 4.3. Regional Performance: Europe & Middle East Czech Republic Switzerland Italy Russia Germany Netherlands UK Germany

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

34. Asia & Oceania

35. 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. • Analysis of Burger King and its competitors 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. • 4.4. Regional Performance: Asia & Oceania

36. 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: Food Trends • 4.4. Regional Performance: Asia & Oceania

37. 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. • Asia & Oceania: Transparency & Daypart Segmentation • 4.4. Regional Performance: Asia & Oceania 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

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

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

40. Burger King Implications & Opportunities

41. Is Burger King aligned properly? • 5. Implications & Opportunities • On trend Opportunity

42. Opportunities within New Product Development • Opportunities for Burger King • 5. Implications & Opportunities • Extend snacking and daypartofferings 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

43. McDonalds • Opportunities within Expansion • Opportunities for Burger King • 5. Implications & Opportunities • 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

44. If you have any questions, please send them to us, we will answer you shortly. Iris Meyer Business Development Manager Email iris.meyer@nestle.com David Field Head of Sales & Customer Development Emaildavid.field@nestle.com