Chasing its China dream: Burger King’s dilemma

Burger King’s ambitious plan to roll out 1,000 new restaurants in China is out of sync with reality.

Recently, Burger King announced an ambitious plan of opening another 1,000 new restaurants in China in the next 5-7 years. The plan is ambitious, no doubt, but in my opinion, it seems rather impractical. In my opinion, Burger King’s current pricing strategy does not seem to support such a plan. As of today, Burger King’s regular Whopper combo sells at RMB 35 and its deluxe version, the Bacon Cheese Whopper combo, sells at RMB 41. Such prices are much higher than what one would find in KFC and McDonald’s for similar combo meals. In contrast, the Big Mac combo is priced at RMB 18.5. Clearly, to differentiate itself from KFC and McDonald’s, Burger King has positioned itself at a higher quality level – and a higher price point. Although those who have tried both the Whopper and the Big Mac probably agree that the former has a higher quality and bigger portion sizes, I feel that many are simply deterred from trying Burger King because of its higher prices.

For fast food chains, bigger is prettier. There exist salient scale economies in advertising, procurement and distribution. Because a bigger chain purchases ingredients in larger quantities, it enjoys greater bargaining power when dealing with suppliers. And because a bigger chain has more outlets in the same city or region, it is more efficient to cover these outlets with one distribution center. Similarly, a 15-second commercial on CCTV potentially benefits all the outlets of a chain, and the advertising cost per outlet thus declines with chain size.

Another key advantage offered by a bigger network size is ease of access for customers, which is important because fast food customers seek convenience. For example, Burger King currently has 11 restaurants in Beijing. Sometimes even if one would like a Whopper for lunch, there may not be a Burger King nearby. On the other hand, wherever there is a Burger King outlet, KFC and/or McDonald’s are always not too far away.

Currently, Burger King has a tremendous size disadvantage relative to McDonald’s and KFC. As of June 2012, Burger King had 63 outlets in China, which is dwarfed by McDonald’s 1,400 outlets and KFC’s 3,800 outlets. That is, for every restaurant Burger King has here, McDonald’s has 22 and KFC has 60.

As China’s urbanization process continues, more people will migrate into cities, with a higher income and a faster pace of life. The population of 1.3 billion thus represents an enormous and growing opportunity for any fast food chain. However, surviving under the shadows of McDonald’s and KFC can be a challenge for Burger King, especially since its two main competitors already enjoy much stronger brand and physical presence and since the Chinese tend to view the three as close substitutes. Fast food customers certainly welcome better quality products. However, without lowering its prices to an appropriate level and better communicating its quality position via advertising, it’s hard to imagine how Burger King can achieve its ambitious expansion goal.