Food Fight
By : Charles Ward
As McDonald's rolls out its 165th restaurant this month in the southern town of Jasienica, the company looks set to win the burger wars, cleanly boxing out its primary competitor, Burger King, in Poland.
While McDonald's has spent the last eight years opening restaurants at almost every major and minor crossroads in the country which has included shopping centers and gas stations Burger King has somewhat let opportunity pass it by. With just 25 restaurants, the burger chain suffered a four-year setback in opening any new restaurants due to a legal dispute.
While Burger King claims that it has plans to open as many as 10 new burger points this year, it has a long way to go if it wants to eventually match McDonald's stride. At the same time, unspecified problems are likely to force the chain to close some restaurants this year a decisive step backwards.
"McDonald's will be the market leader in fast food restaurants for a long time to come," said Piotr Kaszynski, a retail agent at real estate consulting firm Healey & Baker, which has worked with both companies in finding sites for their fast food joints. "They have the organization, the know-how, the structure and the brand, and wherever McDonald's goes the others follow."
Both McDonald's and Burger King arrived in Poland in 1992, the former pre-empting its global rival by around six months. Key to McDonald's success has been its deep corporate pocket, which allowed that multinational to penetrate Poland quickly by opening up corporately owned sites. That differed greatly from the franchise approach Burger King incorporated, a move that has caused the company more strife than it had hoped. Burger King has worked with franchisee International Fast Food Polska to open restaurants here.
Despite the fact McDonald's is a publicly traded company, the firm refuses to release any figures concerning its revenue in Poland. International Fast Food Polska for that matter also refused to reveal its sales figures. However, McDonald's global sales rose 7% in 1998 to $36 billion, although net profit fell 5.6% to $1.6 billion. In contrast, Burger King's global sales rose 5.1% to $10.3 billion that year.
While Burger King is now vowing to broaden its coverage, many industry watchers said it may be too late. "I've heard they are planning to close a number of restaurants in secondary cities, many aren't working out," Kaszynski said. However, he could not estimate how many of the 19 outlets Burger King has in secondary cities would shut down.
Despite a recent spree of openings, Burger King was forced to close its restaurant in Kielce earlier this year. Company spokesman Zbigniew Dabrowski did not rule out further closures in 2000. "I can't confirm" other outlets closing down, "but until now, Kielce is the only one which was closed due to a change in the company's strategy," he said.
For its part, McDonald's is not saying what it has in store for 2000. The company opened 35 new restaurants in 1999 alone, said Krzysztof Klapa, McDonald's spokesman in Poland. "Certainly this isn't the last word for this year and several sites are under construction," he said about the opening of the new Jasienica restaurant this week. "However, we won't achieve 200 (sites) this year."
Location, Location, Location
Fast food companies in Poland have followed a similar pattern of development as in the United States, with all companies vying for positions in the same location, said Janet Choynowski, president of Prime Property, a real estate company that found sites for Burger King and Domino's Pizza among others. She said that at the outset, most companies aimed for the high streets of major cities or resorted to greenfield investments in town centers.
Strangely enough, McDonald's was among the companies that had difficulty finding sites. The company eventually won out after a two-year dispute with local authorities in Krakow over the location of one restaurant by the city's barbican gate on ulica Florianska. City officials at the time were reported to be resistant to the idea of a McDonald's outlet on one of the city's oldest and most renowned streets.
"Construction wasn't easy, it was a 14th century building and the basement needed a lot of work," Klapa said. However, life has become much easier with the gradual refurbishment of Poland's infrastructure, particularly the rollout of gas stations. McDonald's, and others, have also benefited from the explosion in retail outlets and shopping centers over the past year and the rise in disposable income. Monthly disposable income rose from zl. 383.43 on average in 1996 to zl. 545.33 in the first nine months of 1999, according to the Central Statistical Office (GUS). "The real estate situation has cleared up for all of them," Choynowski said. "Shopping centers, petrol stations, when they first penetrated the market these options didn't exist."
To this end, fast food companies are now charmed with the many new shopping centers and malls that have opened their doors in the past year or so, both in Warsaw and around the country. Burger King opened its last three outlets in the M1 malls in Zabrze, Lodz and Marki, near Warsaw. And McDonald's has recently placed itself in Steen & Strom's Reduta and Targowek malls in Warsaw, as well as the Galeria Mokotow.
Jerzy Becz, development director of AmRest, which runs the KFC and Pizza Hut restaurant chains in Poland and the Czech Republic, said that bowling alleys and movie multiplexes are also top of the list in terms of location.
All of that, however, was preceded by the teaming up of fast-food chains with gas retailers, which first happened about four years ago when McDonald's agreed to work with Amoco (now BP-Amoco) and Burger King decided to cooperate with Conaco. Since then both chains have worked with other gas retailers. Dabrowski said that Burger King has outlets in stations owned by Norway's Statoil, while McDonald's has teamed up with Germany's Aral and Sweden's Preem.
"It was a good decision for both parties, and gave them ready traffic," Choynowski said. "The stations became more attractive with the food element."
And both companies have had real success with the drive-through concept 'McDrive' as McDonald's calls it or 'Drive-In' to Burger King. Klapa said these types of restaurants are the principal source of McDonald's revenue in Poland, but he would not reveal the company's sales or profit figures in the past few years.
Both Burger King and McDonald's are expanding further in this direction. More than 60% of McDonald's restaurants are 'McDrives' and 13 of Burger King's 16 new outlets last year were 'Drive-Ins.' Furthermore, both firms conduct extensive in-house market research on which consumers drive and which locations are suitable for buying food without leaving the car. "The traffic flows are 40-50% of the business," Kaszynski said.
Choosing the right location, however, isn't a sure thing. One example of that is the McDonald's and Burger King restaurants facing each other on Warsaw's Aleje Jerozolimskie. At the same time, frequently the competitors can be found a mere 100 meters away from each other on the highway.
"It's certainly not our goal to have our restaurants in the same places, and we don't choose our locations close to McDonald's," Dabrowski said.
But in such instances the competition can get ugly. Last week, McDonald's employees distributed leaflets for its current promotional campaign outside both ends of the Burger King restaurant on Aleje Jerozolimskie. "It's a trading area, Aleje Jerozolimskie is not owned by Burger King and so far no one's had a problem with this," Klapa said. "All companies do this, these are not anti-competitive activities against Burger King."
But they seem to be effective. McDonald's set up its second outlet in Kielce on the same stretch of road as the resident Burger King. Klapa said it took a mere year to send the competition packing. "Our second one was not so far from (Burger King), and they pulled out," he said. Last month, McDonald's opened its third burger joint in the city.
However, Dabrowski said that Burger King pulled out of Kielce altogether to focus on building restaurants by gas stations, and decided to forfeit its operation in Kielce's town center. "For sure the competition never helps, but it was based on our strategy."
Mc Mega Zlotys
But Burger King has added woes in trying to keep pace with McDonald's. McDonald's invested heavily from the outset to develop its name and reach, Choynowski said. "It has targeted Poland as a home market and is doing so out of a very deep corporate pocket," she said.
Burger King in contrast started business in Poland as a franchising group called International Fast Food Polska with the exclusive license for Burger King restaurants here. The company is aligned to Pizza King Polska which has an equivalent arrangement with the Domino's Pizza chain, and both companies are owned by a mother company in the United States, International Fast Food Corp.
But the arrangement means that while McDonald's can dig into its finances back home whenever it wishes to open a new burger joint, International Fast Food has to come up with the money itself. Choynowski said that the firm has tapped capital markets on the New York Stock Exchange to do so. But in addition, as a franchisee, it cannot grant a franchise to another party ready and willing to open a Burger King restaurant, AmRest's Becz said.
"It hinders the growth of the company, it's much harder to come up with the money if you're a franchisee," he said. He added that AmRest had been a franchisee until recently, before it merged with Tricon Global Restaurants, the owner of KFC, Pizza Hut and Taco Bell in the United States.
An internal struggle over how business should be handled in Poland also hampered Burger King. That conflict resulted in Burger King Corporation and International Fast Food Corporation taking each other to court.
"Some of the realities here didn't conform to the way the firm's business developed elsewhere," Choynowski said. Burger King executives in the United States "were interfering with its development here," and both companies sued each other.
While the legal actions were settled out of court, they resulted in a four-year gap in new restaurants here, allowing McDonald's to breeze past the competition. Despite the fact the row cost the company dearly, Burger King is putting a brave face on it. "The dispute was a long time ago, and now there are very good relationships between the corporation and the franchisee," Dabrowski said.
UnHappy meals
However, location and finances are not the only variables in the burger war. Industry watchers said that the lack of any viable local competition gave the international firms a head start with consumers. "There were no chains here and a shortage of available food in restaurants full stop, let alone anything with any quality control," Choynowski said.
Klapa said that McDonald's sees all food retailers as the competition, dividing them into big brands and local chains. "Burger King is one of our competitors, but so are KFC and Pizza Hut, and there are also local brands, quite often of good quality," he said, citing firms such as Mr. Beef and Pan Smak. In addition, he said that Poland's popular Vietnamese kiosks offer competitive prices to McDonald's. "The prices are very attractive, but people aren't going deeper into the quality of the food, and I won't discuss (the) hygiene (element)," he said.
For its part, Burger King is focused on one rival only. "For sure McDonald's is the competition, they're doing the same promotions as ours all the time," Dabrowski said.
He said that after Burger King ran a double hamburger promotion in January and February this year, McDonald's followed suit by offering a similar double hamburger and cheeseburger vehicle at the beginning of this month. He also said McDonald's has copied a Burger King promotion which allows customers to 'upgrade' their french fries and soft drinks for a comparatively small amount of money.
But it is also a question of pricing, and McDonald's has done its utmost to keep its prices as competitive as possible, Klapa said. Indicative of this is the fact that the company's flagship burger, the Big Mac, has remained the same price of zl. 5.50 for over a year now, while Burger King's Whopper retails for a more expensive zl. 7.20.
However, "there is no comparison between a Whopper and a Big Mac," Dabrowski said. "It's more expensive because it's bigger, there are fresh vegetables in it, there's a tomato, and the sandwich bun and the meat are bigger."
