This meeting could be for fund raise… just my guess 
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Will the tax incentive cause a fillip for burger king? Will SSSG start increasing and is burger king well placed to get those additional sales in. If SSSG starts increasing ( high single digit ) and the recent store addition would mean that the cash generation increases significantly and will management rethink the need for significant QIP.
Initial market reaction on the stock indicates that investors are still doubting if the tax cuts will help the company significantly.
Looking forward to some views.
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we have to understand how SSSG moves in the industry - it has two variables
- price inflation
- customer jump
once a store matures - the customer jump is very hard and almost impossible to increase after a thresh hold. post this - only inflation related jump comes in SSSG. so in longer run - SSSG should merry with CPI of the country.
needless to say - a new store will have a rampup period of SSSG post which it will stabilize on ADS.
on the other point - which is Tax incentive - then the thesis is same for every consumer brand - but please be mindful its also applicable for competition too. so in nut shell - as long as BK is able to counter the competition, and able to withstand indonesia troubles (which is a major headwind) - i doubt it can perform better than market
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Same-Store Sales Growth (SSSG) among major quick-service restaurant (QSR) chains in India:
Burger King India :
• Q3 FY25: Reported a 0.5% decline in same-store sales, attributed to flat demand. Despite efforts to attract price-sensitive consumers with affordable meal deals amid high inflation, same-store sales fell by 0.5% due to flat demand.
Domino’s India (Jubilant FoodWorks) :
• Q1 FY25: Achieved a 3% increase in like-for-like sales, driven by value meals and promotional offers that appealed to budget-conscious customers during periods of high inflation.
McDonald’s India (Westlife Foodworld) :
• Recent Trends: The company experienced a decline in revenue for the first time in three years, with profits falling significantly short of analyst expectations. This downturn reflects a broader trend of reduced consumer spending on fast food in India.
Industry Overview :
The Indian QSR sector is currently facing challenges due to high inflation, which has led to decreased discretionary spending among consumers. Despite introducing affordable menu items and promotions, major chains have reported subdued demand and declining same-store sales. Analysts anticipate that intense competition and the impact of inflation will continue to exert pressure on earnings in the short term.
In summary, while Domino’s India has managed modest same-store sales growth through strategic value offerings, both Burger King India and McDonald’s India have faced declines, reflecting the broader economic challenges impacting the QSR industry in the country.
Doesn’t increase consumer spending also lead to increased SSSG.
May be more people visiting malls, travelling places, just going around would also lead to increased SSSG?
Hence my question was that will the tax cut lead to change in fortunes for burger king n other qsr companies.
Agree that they have to fight competition and McD definitely seems a more preferred option but that’s assuming that the base is same. Will tax cut increase the base itself i.e. more outings leading to increase revenue in general for all? If the answer to the question is yes then do we see this as a major structural shift in fundamentals n in a way fortunes for the company?
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Here are my views about QSR/Casual Dining in general, and Burger King jn particular:
QSR Industry:
- Bulls view it as a multi decade trend in India relating to eating out in QSR, and probably for right reasons.
- Which means that these food chains can multiply sales multifold in coming years and investors can become filthy rich.
- The problem I see is that everyone in the market agrees to bull view and current valuations discounts earnings of multiple years ahead.
So, can something go wrong? I think a lot can go wrong:
- History, teaches us that dining as a industry has high fatality rates, most of the companies die with the desire of scaling. Very few succeed. Which basically means base rates (probabality of success) is not in your favour.
- The industry is fragmented and its extremely difficult to find the winner. Winners of today in developed world (Burger King, Macdonalds, Dominos, Pizzahut, Subway), are few survivors among many that died.
- What happened in west, will be replicated in India? Yes, with high probability. We have inheriting all the worst, we can from the west, and QSR/ dining, will not be an exception. But is it easy to find the winner in fragmented market? I dont think so.
- As per First principles, its extremely hard to scale. Execution is the key, and management matters most. Success comes one at a time, setting up one restaurent, stablizing it, moving the next. Its not a easy business.
Coming specifically to Burger King:
The company is running hard to meet the goal of setting up 700 stores in next 2 years.
Where are the funds coming for this aggressive growth? Data since its listing says, the funds are coming from raising equity again and again, next round of equity raise is few months away.
It cannot raise debt, as it is loss making and does not have balance sheet strength to convince creditors to raise funds.
Does it means it will prove bad investment? Off course not, no one knows.
As long as investing community agree that company will succeed, and this narrative continues, it can raise tons of cash as equity at decent valuation. And if it executes well, it may succeed as well.
But if the music stops, funds dry up and share price tanks, it will have no place to go to survive. However, Share price performance of last few years, says it is not going to happen
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i dont think it can bring a structural change where burgers are avilable at 30-40-50 rupees on entry point. i doubt it will bring any strutural change unless some premiumization happens at BK and they differentiale themselves from low cost singe joints which are operated by just 1 -2 employees
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Running a successful restaurant chain requires few important attributes:
- Capable management
- Strong Balance Sheet and operating cash flows (adequate financing)
- Methodical approach to expansion
There are several ways to increase earnings , which include:
- Adding more restaurants
- Same store sales growth (SSGR)
- High turnover with low priced meals ( e.g. Road side vadapav)
- Low turnover with high priced meals (e.g. Barbeque nation)
- Low operating costs (e.g. Chain at the outskirts of the city with low real estate costs)
As long as Indians continue to eat outside , which I think is a long term irreversible trend, industry will grow multi fold. However, it does not mean every player will also have their pie and grow along with industry. In fact, I think it will be the opposite, very few will survive and grow, most will churn and vanish. As a investor, its our job to identify the winner and buy it at reasonable price.
If you try to expand too rapidly, you may
- End up picking wrong sites or wrong managers,
- Pay too much for real estate
- Fail to properly train the employees
- Run in too much debt that you cant service
Burger king is able to sell itself to investors by promising 700 outlets by FY27 I think. Will it be able to do it judiciously remains to be seen. To my limited understanding, promoters don’t have confidence in it, that’s why they are trying hard to sell their stake. It may also be the case that stake sale has nothing to do with Burger king, they probably need money for some other reason.
Note - No original thoughts. Most of the points above are from “Beating the Street” from Peter Lynch
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Restaurant Brand International buys the China business (~1500 stores) at 158M$ all cash deal.
India business currently trades has 510 stores
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All media reports are stating that final stake is 100%. Its not mentioned anywhere that how much incremental stake has been acquired using $158m.
I searched it yesterday and found that other parties were trying to bring IPO when covid struck. At that point in time rbi owned 23% and rest if them 77%
Not sure if the stake was diluted inbetween.
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Restaurant Brands Asia QIP at floor price of Rs. 62.32/-
In my opinion it is a very very bad decision to come up with the QIP at this price. They should have waited longer. This is very close to its all time low price.
They could have simply slowed the pace of growth of their restaurants for the time being rather than diluting the company at these levels.
Edit: Though it is only the floor price; and not the issue price. Lets hope issue price is quite higher but don’t think it would be possible..
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They are bound by the commitment to open 700 restaurants by 2027, and it needs cash. Whatever cash they had has been leaking / flowing into Indonesia.
Unfortunately they do not have much options but to dilute.
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Agree. But it also shows that management is also not confident about the company’s valuation being low. It is almost near its all time low. They could have explored debt as an option for the time being.
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QIP done at Rs 60. Good to see the fund houses such as HDFC, ICICI, JM financial already holding decent stake buying more. Shows they are confident.
Also SBI MF and MIT have invested.
Institutions consider the serviceability of company before lending. They are just managing to pay the interest rates.
If you look at last year cashflows, they have operating profits of 276 cr. Out of this 266 cr goes into servicing the debt & leases itself.
Now they have to speed up opening the restaurants to meet the target. 180+ restaurants to be opened in 2 years. Average cost of each restaurant is around 2-2.5 crores.
So, I think they will be able to survive net net. But it seems that 500cr should be sufficient to survive as the debt servicing will stay the same
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Its really sad that a company is pushed to the brink by its initial contract and we small retail investirs suffered most out of it.
What is further sorry is that this disastrous situation doesnt look like result of poor execution of BK in India.
A big learning on PE contract focussed companies. BK India story so far seemed to be impacted by its poor capital allocation inspite of such strict contract.
There is no respite from the main BK on the contract inspite of knowing the situation and also why this company fell into it is even more frightening based on how such contracts are signed and what impacts the parent…only revenues…
I do not know if its a good investemnt at this stage now but the fort is itself built on poor foundation.
Disc: Was invested, exited at loss and switched ship in current crash. Above post only for learning. I can be wrong in all my assessments. Not a buy/sell recommendation. Not eligible for any advice.
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Kenneth Andrade handles MIT portfolio. Check the SHP of Barbeque Nation on screener. MIT’s name appears with a 4% stake. Kenneth also holds it in his old bridge mutual fund pf.
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