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A Deeper Look at Burger King IPO and the

Food Services Business
Chetan Chhabria • Jan 09, 2020

BURGER KING Dominos DRHP Food Services Industry Analysis IPO KFC

McDonald's Pizza Hut Subway

Burger King India has filed the draft offer document with SEBI on November 5,2019
and is expected to hit the public markets this year. In this post we look at the IPO and
the food services business in India.

The Issue
At the date of filing the DRHP the paid up equity share capital of the company
consists of 26.66 Cr shares of 10 each and 1 Cr CCPS (compulsorily convertible
preference shares) of face value 100 each. The rate of dividend payable for the CCPS
is 8% per annum. The CCPS will be converted at the discretion of QSR Asia at anytime
within a period of 20 years from the date of their issuance at the fair market value.

99.39% of the equity shares are held by the promoter and promoter group, QSR Asia
is the promoter of the company. 0.61% is held by the public. The average cost of
acquisition for the promoters is 19.26/share.

The offer is a fresh issue of 400 Cr and OFS (offer for sale) of 6 Cr shares by the
promoters. Proceeds from the issue are to be utilized for rolling out new Burger King
restaurants. The company is considering a pre IPO placement amounting to Rs 150 Cr,
if the pre allotment process were to be completed the number of shares issued will
be reduced from the fresh issue.

Food Services Market

The Indian food services market is classified into two segments – organized and
unorganized. Key characteristics of “organized” outlets

Accounting transparency

Organized operations with quality control and sourcing norms and

Outlet penetration

Outlets that do not meet the above criteria fall into the unorganized segment and
include dhabas, roadside eateries, hawkers and street stalls.

The organized market can be further classified into

Standalone outlets and

Chains (domestic or international outlets that have more than 3 branches across
the country)

Chains can be divided into six sub segments based on average price per person,
service quality and speed and product offering
The food services market is estimated to be Rs 4,096 billion in FY19. Chart shows the
growth of various categories since FY14

Food Services Industry (In Rs Billion)

Resturants in
4000.0 Hotels

Chains
Organized
3000.0
Standalone

2000.0

Unorganized
1000.0
FY14

FY15

FY16

FY17

FY18

FY19

Chart: Capitalmind • Source: Burger King DRHP • Get the data • Created with Datawrapper

Observations
 Total market has grown by 9% CAGR. Organized market has grown fastest –
organized standalone at 13% and chains at 18%

The unorganized market constitutes majority – 62% of the total market.

However this is on a declining trend – 69% in FY14 versus 62% in FY19

The organized market (Standalone + Chains) stood at Rs 1,446 billion. Both

these have gained substantial market share over the 6 year period

Breaking out the Organized Market specifically.

Organized Market (In Rs Billion)

QSR CDR Café FC/IC PBCL FDR

800

600

400

200

FY14 FY15 FY16 FY17 FY18 FY19

Chart: Capitalmind • Source: Burger King DRHP • Get the data • Created with Datawrapper

QSR: Quick Service Restaurant

CDR: Casual Dining

FDR: Fine Dining

FD/IC: Frozen Dessert & Ice Cream Outlets

PBCL: Pubs, Bars, Clubs, Lounges

Key takeaways from the above chart

Total market has grown by 14% CAGR. The QSR and CDR segment have seen
the fastest growth – 18% and 15% respectively

Casual dining (CDR) constitutes 56% of the market followed by QSR which is
21%. Together these markets have 77% of the market

Fine dining (FDR) has seen the lowest growth 4% in the above period

QSR has seen the highest market share gains in this period at 3%

The chain market was Rs 350 billion in FY19, Burger King operates in this market
under the QSR category. Trend and breakup of the market by various categories

Chain Market (In Rs Billion)

FY14 FY15 FY16 FY17 FY18 FY19

QSR

CDR

Café

FC/IC

PBCL

FDR

Chart: Capitalmind • Source: Burger King DRHP • Get the data • Created with Datawrapper

Observations from the above data

Total market has grown by 18% CAGR. All segments except the Cafe segment
have seen double digit growth

QSR segment has 46% of the total market. QSR and CDR segment together
hold 80% of the chain market
 QSR and CDR have seen highest market share gains in the above period

The top 8 cities constitute 41% of the food services market. Mumbai leads the chart
with market size of Rs 438 billion, followed by Delhi NCR with a market of Rs 420
billion. Together these have 51% of the total market.

Food Services Market - Cities (In Rs Billion)

Search in table

Total Food
Organized Services
INR Billion Chain Standalone Unorganized Market
Mumbai 74 149 215 438

Delhi NCR 74 144 202 420

Bengaluru 46 72 47 164

Kolkata 25 34 102 161

Chennai 35 35 73 143

Hyderabad 16 41 78 134
Pune 23 52 44 119

Ahmedabad 12 22 56 91

The IPO Candidate: Burger King

Burger King was founded in 1954 in the United States and is owned by the Burger
King Corporation, a subsidiary of restaurant brands international inc. Burger King has
a global network of over 18,000 restaurants in more than 100 countries.

Burger King India has a master franchise and development agreement with Burger
King Asia Pacific, which is an affiliate of Restaurant Brands International Inc. The
master franchise agreement is valid until December 31,2039. The company operates
in the QSR segment and was a late entrant in the Indian markets. It opened its first
restaurant in November,2014. At the date of filing the DRHP the company had 216
company owned and 8 sub franchised Burger King restaurants spread across 16
states and UTs and 47 cities across India.
The company operates in the QSR segment and break up of the market by food type
is shown below

QSR Market - Food Type (In Rs Billion)

Burgers & Sandwiches Pizza (Ex Pizza Hut) Chicken Indian Ethnic Others

50
46

40

26
24
20 20 20
20
14

5
3

FY14 FY19

Chart: Capitalmind • Source: Burger King DRHP • Get the data • Created with Datawrapper

Burgers & Sandwiches account for 31% of the market, followed by Pizza with 28%,
however this does not account for Pizza Hut (which is classified as CDR and not QSR).
Chicken had a market share of 16% and the others category 25%.

The chain market has shown impressive growth in the last 5 years – 18% CAGR. Some
of the reasons for this are

Increased eating out and ordering in behaviour – 60% of Indians eating out are
millennials (15-34 age group), companies including Burger King target this
market segment

Increased internet and smartphone penetration

Offering exclusively suiting the Indian palate – like the Mumbai Indian masala
whopper offered by Burger King, wraps by Domino’s, KFC rice bowl

Rise of platforms like Zomato and Swiggy – delivery market has increased from
 $4.7 billion in FY16 to $8 billion in FY19, projected to reach $18 billion by 2024

Increase availability of retail space enabling expansion of food services outlets

Although Burger King has been a late entrant in the Indian market, it has been the
fastest-growing international QSR chain in the last 5 years. The below chart captures
the growth in the number of outlets of Burger King from FY15. The company is
obligated to develop and open at least 700 restaurants by December 31, 2025.

Burger King Outlets

216
200

180

160

140

120

100

80

60

40

20

0
FY15 FY16 FY17 FY18 FY19 Nov-19

Chart: Capitalmind • Source: Burger King DRHP • Get the data • Created with Datawrapper

Restaurants are spread across India as shown below

Source : Burger King DRHP

Restaurants vary across sizes from 400 square feet to 4,000 square feet. Standard
restaurant template size ranges from 1,300 – 1,400 square feet.

The USP or the value proposition of Burger King is to provide quality products that
suit the Indian palate and are not to heavy on the pocket as well. For instance, the
company has a lot of products which are under Rs 100 and runs promotions like 2
crispy veg burgers for Rs 69. The company also has a wide variety of product
offerings, it has a range of 22 different vegetarian and non-vegetarian burgers
covering both value and premium segment. The incremental pricing between
products is also kept low – 10-20 Rs, this enables the customer to upgrade easily.

Some of the suppliers of the company include – Hyfun Foods, Mrs Bectors, OSI Vista,
Pepsi Co, Schreiber, Veeba and Venky’s. Supply chain is an essential piece of the
business, it is very important for the company to get its supplies on time and in the
right condition. The company manages its supply chain through a third-party
distributor – ColdEX. The third-party distributor buy supplies from the vendors and
Burger King then buys it from ColdEX. This arrangement gives the company access to
ColdEX’s warehousing facilities and extensive logistics network across the country. In
addition, the company saves on investing in working capital, as the third party
distributor keeps all the supplies on its books before the company purchases it.

Source : Burger King DRHP

Burger King India is required to pay BK AsiaPac a non refundable fee of $15,000
upon opening of each restaurant which will increase to $35,000 from 2018 and will
remain so there after. The India unit will also have to pay a renewal fee upon renewal
of a restaurant licence.

There is also a monthly royalty fee, which ranges from 2.5-5% of sales that the
company has to make to the BK Asia Pacific.

Competition
The organized chain market has more than 100 brands with over 6,500 outlets
spread across various cities in India. Competitors of the company are other
international QSR chains such as McDonald’s, KFC, Domino’s Pizza, Subway, Pizza
Hut and other local restaurants operating in the QSR segment.

Some of the important metrics with regards to the competition are shown below

Competition Metrics
Search in table

Burger Pizza
Domino's McDonald's KFC Subway King Hut
Format QSR QSR QSR QSR QSR CDR

Outlet Count 1249 300 400 660 202 432

200- 200- 400-

APC(INR) 200-225 225-250 175-200
225 225 450
Average
500- 500- 1450-
Ticket Value 500-550 550-600 250-300
550 550 1550
(INR)

34- 35- 25-

COGS 22-23% 34-36% 32-34%
36% 36% 26%

Gross 64- 64- 74-

77-78% 64-66% 66-68%
Margins 66% 65% 75%

Advertisment 4-5% 5-6% 6-7% 4-5% 5% 4-5%

Royalty 3-4% 4-5% 7-8% 7-8% 4-5% 7-8%

14- 12- 17-

Store EBIDTA 21-23% 13-15% 20-22%
16% 14% 19%
Initial CAPEX
1.5-2 3.5-4 3-3.5 0.4-0.5 2-2.5 2-2.5
(In Rs Cr)

Average
1400- 2500- 750- 1300- 2600-
Store Size (In 2600-3200
1600 3000 1000 1400 3200
Sq ft)
Average
1.2- 0.30- 0.7-
Sales/Day (In 0.75-0.8 1.2-1.3 1.1-1.2
1.3 0.35 0.8
Lakhs)

Outlets of McDonald’s operated by South and West Franchisee

Observations from the above table

Domino’s dominates the market in terms of no of outlets – 1249 across the

country

The average price per customer is lowest for Subway, 175-200 Rs. Average size
of Subway stores are the lowest 750-1000 square feet

All companies enjoy high gross margins with Dominos leading the pack with
margins of 77-78%

Advertisement costs are in the range of 4-7% for all companies. Companies
operating in this space have to constantly spend on advertisements

All companies do pay royalty to the parent company. Royalties are in the range
of 3-8%

McDonald’s has the lowest EBIDTA in the range of 13-15%

CAPEX ranges from 1.5-5 Cr in setting up new outlets

McDonald’s is the category leader in the Burger & Sandwich segment with 42%
market share. In Pizzas, Domino’s has a market share of 80%.

Below are the revenues of key international brands in INR Billion

Domino’s is the leader in terms of revenues, the company posted revenues of Rs 36
billion (3,600 Crores) in FY19. The CAGR for the company was 15%. Westlife
Development, which runs McDonald’s outlets in the south and west grew sales by
17%. Burger King registered the highest growth at 64%,this is on the back of its
aggressive expansion of outlets.

Below is the trend in number of outlets opened every year since 2015 among the
various players in the industry.
Burger King has expanded its outlet base at 99% CAGR in the above period.

Same-store sales growth (SSSG) is an important metric in the food services business.
It is growth in sales that the company registers from stores that have been open at
least one year. The SSSG for key brands are shown below
The SSSG for Burger King in FY18 and 19 was 12.2% and 29.2%.

Financials
Revenues stood at Rs 632 Cr at the end of FY19, revenues have grown by 65% CAGR
in the two year period. Gross profits have grown by 71% CAGR, GPM stood at 64% in
FY19, 4% points higher than the margins in FY17. The company has posted operating
losses in all of the years, however, the gap has narrowed and the loss was 3.2 Cr in
FY19. Fixed costs have also increased as the revenues have increased. Other
expenses form a major portion of the expenses and have increased by 46% in FY19.
The major components of other expenses are – advertising, power & fuel,
commission & delivery expenses, royalty, and rent. Net loss during the year was 38 Cr,
however, the losses have narrowed.

On the balance sheet, front majority of the assets are PPE and right to use assets. The
financial statements have been reinstated to account for the new accounting
standard IND AS 116, which pertains to leases. Under IND AS 116 lessees have to
recognize a lease liability reflecting future lease payments and right of use asset for
almost all lease contracts. This is different from the earlier standard IND AS 17 where
there was distinction between financial lease (on balance sheet) and operating lease
(off-balance sheet).
Companies will have to recognize assets and liabilities for all leases with a term of
more than 12 months unless the asset is of low value. As a result, depreciation is
charged on the right to use assets and interest on the lease liability portion.

On the liability side, the majority is in the form to lease liabilities. The company has
taken on borrowings to the tune of Rs 100 Cr this year, the debt to equity ratio stands
at 0.4. Due to the losses incurred in all these years, there is a hit on the retained
earnings, total equity (Share capital + retained earnings) stood at Rs 249 Cr at the end
of FY19 as compared to Rs 368 Cr in FY17. The company has a negative working
capital, working capital at the end of FY19 was – 48 Cr, this is because the inventories
are in the books of ColdEX as mentioned earlier and there is no credit extended to
customers for its products. On the other hand, the company does not pay its suppliers
immediately.

The cumulative cash flow from operations (CFO) are positive as compared to the
cumulative net profits of -192 Cr. This is primary due to adding back of depreciation
and interest costs to arrive at the CFO. On the investment side the company has
bought both operating and financial assets. On the financing side the company has
issued equity shares worth 270 Cr in FY17 and raised monies through CCPS in FY19
for Rs 100 Cr.

Risks and Challenges

Some of the risks and challenges that the business faces are

Food services market is fragmented in India, 62% of the market is with the
unorganized players. In this kind of an environment it is a challenge to retain
customer loyalty and companies have to constantly spend/carry out initiatives
to gain footfalls

There is shortage of skilled labour and attrition rates in the industry are 35-40%,
the cost of manpower is also high. This can impact the quality of products that
the restaurant offers

Rentals are the 2nd highest cost component, the average rate is 12-15% of
revenues and in some cases can go upto as high as 20%. This is a fixed cost
and monthly payments have to be made irrespective of how the restaurant
does

There are lot of regulations and over licensing to start a food service business.
It is estimated that players wanting to enter the food services market require 12-
15 licenses from various authorities

Awareness among the public for healthy food may hamper businesses of
companies operating in this space offering pizza, burgers, sandwiches

Cloud kitchens offering the same type of food will be more profitable than walk-
in restaurants as there is no major CAPEX in setting this up versus a fully
furnished restaurant

Delivery aggregators may charge higher commissions to restaurants which will

impact the profitability of the players operating in this space

Final Thoughts
We will have to wait and see at what price/valuation will the shares be offered at by
the company. There are two other listed players in this space – Jubliant Foodworks
(Domino’s) and Westlife Development (McDonald’s).
Below is a table showing important metrics for listed players

Drivers like higher incomes, people eating out more frequently and women joining
the workforce will drive the demand for the offerings that companies make in this
space. The price at which retail investors can participate in this story will be the
decider.

NOTE: There is no other relationship between Capitalmind and the above company.
Please do not consider this article as a recommendation, It is purely for information
purposes only.

! " # $

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