Burger King Is Returning to France, but It Won't Be Easy

Burger King is expanding within Europe, but the company is going to have to compete with larger peer McDonald's.

Jan 8, 2014 at 3:59PM

You may know that Burger King Worldwide (NYSE:BKW) and McDonald's (NYSE:MCD) are the world leaders in the burger business, but did you known that the largest fast-food market outside of the US is France?

This is somewhat of a surprise, as the French are renowned around the world for their fine dining and complex recipes, not fast food. However, the French are now ranked second in the world for the consumption of junk food, coming in behind the United States.

In addition, Yum! Brands (NYSE:YUM) reported within its 2012 annual report that its French KFC restaurants are the most lucrative in its entire portfolio. In fact, the average KFC in France generates $3.5 million a year, roughly three times the company's global store average.

While this is an impressive figure, Yum! is not prepared to relax just yet. No, Yum! has only 150 KFC's within France and 100 within Germany, equal to around one KFC outlet for every 10 McDonald's restaurants. This is not good enough. The company has been driving hard-to-reach scale within these two European markets during the last decade, and this is set to continue, but competition is increasing.

The return of the King
Burger King left France 16 years ago but is now in the process of a comeback. Burger King opened its fourth French store on Dec. 17, 2013 and is planning on creating 1,200 new jobs within the country during the next year. If we assume that the company will employ an average of 15 employees per store, that's 80 restaurants in the first year.

Actually, taking into account the fact that Burger King has around 13,200 restaurants worldwide, 80 new eateries within France will not make a huge impact to the company's bottom line. Nevertheless, in the long run Burger King is aiming to gobble up 20% of all fast-food sales within France, which works out to $2.6 billion annually (sales of fast food in France are expected to hit $12.8 billion this year); this growth will certainly impact the company's outlook.

That being said, as Burger King operates a franchise model, these sales are unlikely to reflect on the company directly, but shareholders will still see some earnings growth.

Burger wars
Unfortunately, this expansion will bring Burger King into direct competition with fast-food industry behemoth McDonald's. McDonald's counts France as its second-biggest market within Europe, with Germany taking the top spot. The company has 1,283 eateries within France and 1,461 within Germany; Europe is the company's second-largest geography outside of the United States.

Actually, digging into the numbers, based on McDonald's 2012 figures, Europe was the company's most lucrative region with total revenue of $10.8 billion for the period -- Germany, the UK, and France accounted for 51% of this revenue.

However, with all three of these companies, Yum!, Burger King, and McDonald's all seeking growth within France, I am starting to question whether or not the market has enough room to accommodate them all. In particular, Burger King and McDonald's effectively serve the same kind of product. That said, McDonald's caters to French tastes with local menu options, but Burger King does not plan to do this.

Usually, when two companies are fighting over limited market share, price wars follow and margins are hit. Will this be the case with Burger King and McDonald's? Possibly, only time will tell, but as the smaller company, Burger King is starting on the back foot with more to lose.

Still, with the average KFC within France generating three times more in sales than the rest of Yum!'s global KFC portfolio, it would appear that company has plenty of space to grow.

Foolish summary
The French fast-food market has become one of the biggest in the world, and Burger King is seeking to capitalize on this. However, McDonald's stands in its way and Burger King could have a struggle on its hands if it wants to steal market share from McDonald's, which is already well established within the market.

On the other hand, it would appear that Yum! has plenty of room for further growth within France, as the company's KFC eateries appear to be in demand.

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Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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