Restaurant Brands International (RBI) has done a masterful job of taking Burger King, Tim Hortons and Popeyes into international markets, so long as you ignore China.
On Tuesday, the fast-food restaurant chain operator acknowledged that it has terminated its Burger King master franchisee in China, the world’s second-largest restaurant market, and a place where numerous chains are pushing aggressive unit growth—even when their sales may not always justify it.
“Burger King China has been struggling,” RBI CFO Sami Siddiqui told analysts. He noted that the master franchisee is disputing the termination and RBI is in talks with the operator on a potential solution the problem. Tab Foods Investments holds the development rights for Burger King China.
“We believe this is a short-term situation,” Siddiqui added, “and we are committed to the long-term success of the business in China.”
This isn’t the first situation in which RBI has had to step in to make major changes with its master franchisees in China.
The company recently made an investment in Tims China, the operator bringing Tim Hortons to the country. But it also bought back its development rights for Popeyes in the country from Tims China.
RBI’s inability to gain traction in China is holding the company back, at least when it comes to the company’s growth expectations. The company’s long-term goal is to generate 5% annual unit growth. It now expects unit growth to be just 3.5%.
A lack of expansion at Burger King China on its own contributed 100 basis points of that 150-basis-point shortfall.
The underperformance in China stands out given RBI’s overall performance outside the U.S., and particularly with Burger King. The burger chain drove 1.8% international same-store sales growth for RBI as a whole. And RBI’s four brands, including Firehouse Subs, generated 7.6% net restaurant growth outside the U.S. and Canada in the third quarter.
Two-thirds of Burger King’s restaurants are outside the U.S.
It also stands out given major brands’ overall push in China. McDonald’s, Yum Brands’ KFC and Pizza Hut chains, Starbucks and Domino’s have all pushed major unit growth, even when their sales have struggled. Starbucks, for instance, opened a record number of new restaurants in China last quarter despite a 14% same-store sales decline there.
A weak economy has only made RBI’s Chinese development task all the more difficult. The economy is hurting sales at a number of major chains, which is also driving consumer demand for cheaper products. All that provides a big development disincentive.
“The business performance there has been challenging in the short-run,” RBI CEO Josh Kobza told investors. “But I’ll tell you, we are all very committed and very excited about the long-term prospects for the Burger King business in all our businesses. Frankly, in China, it’s the No. 2 QSR market in the world. We think we have the brands that have every right to win in that market.”
“Just, I would ask for a little bit of patience and time, like you saw with Tims and Popeyes. Sometimes the stuff takes us a little bit of time for us to work through.”
The problem for RBI, or any other company looking to grow in a major market, is that doing so requires a certain amount of capital. The company’s chains are still in the early stages of their growth, and thus they require an infusion of cash to fund the opening of new restaurants.
That puts the company at a disadvantage compared with its competitors that are well established in China and can fund their own growth now.
RBI wants rapid growth now, so it needs operators willing to spend big to get restaurants open quickly.
“All three of the brands, while we’ve got some scale, it is still relatively early in their journey,” Executive Chairman Patrick Doyle said. “Our bigger competitors out there, if you look at the businesses of Yum, Starbucks and McDonald’s, they are at a point where their cash flow—and probably Domino’s as well—is not only enough to manage their day-to-day but to fuel their growth.
“We’re in a position where we need fresh capital to go into these businesses to develop these businesses at the pace that we think we need to get them to scale and we want for the long term.”
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