Brazil Fast Food Corporation

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Brazil Fast Food Corporation

Rua Voluntarios da Patria 89
Botafogo, Rio de Janeiro CEP 22.270-010
Brazil
Telephone: 55 (21) 2536-7500
Web site: http://www.bobs.com.br

Public Company
Incorporated: 1951 as Falkenburg Sorvetes Ltda.
Employees: 1,681
Sales: BRL 85.38 million ($29.14 million) (2004)
Stock Exchanges: OTB Bulletin Board
Ticker Symbol: BOBS
NAIC: 722211 Limited-Service Restaurants

Brazil Fast Food Corporation operates Bob's, the second largest fast-food chain in Brazil in number of locations and the chief competition for McDonald's, the leader, because of its American-style menu oriented toward hamburgers, hot dogs, french fries, and milkshakes. A strong franchising program has enabled Bob's to become a presence in major cities throughout Brazil, and it is almost ubiquitous in Rio de Janeiro and Sao Paulo. Nevertheless, Brazil Fast Food has had difficulty in turning a profit.

Introducing American-Style Food to Brazil: 1952–96

Active on the tournament circuit in the 1940s and 1950s, Bob Falkenburg was an American tennis player who won the 1948 men's singles title at Wimbledon and was later inducted in the National Lawn Tennis Hall of Fame. While playing in a tournament in Rio de Janeiro, he fell in love with the city and eventually settled there. In 1951 he introduced vanilla ice cream to Brazil, and the following year he opened the first Bob's on the famed Copacabana beachfront. Its prototypical U.S. treats, such as burgers, hot dogs, sundaes, and shakes, were virtually unknown in Brazil, and Bob's was immediately successful. It was followed by a half-dozen more in the better neighborhoods of the metropolitan area. These early Bob's were amply sized eateries whose neon, chrome, and glass represented the era's idea of modernity and attracted the Rio glitterati. There were 13 Bob's fast-food restaurants, all in the Rio area, in 1974, when Falkenburg sold the business, which was then Bob's Comestíveis S.A., to Maine-based food products company Libby McNeill & Libby and returned to the United States.

Libby, which was majority-owned by Nestlé S.A., was merged into Nestlé in 1976. Nestlé opened additional Bob's outlets, broadened the menu, and emphasized the cleanliness of the outlets and the quality of the products. By 1981 Bob's, the largest existing fast-food chain in Brazil, was a 29-unit operation with revenues of $20 million. But for the first time it was facing big-league competition in the form of McDonald's Corporation, which opened the first Brazilian unit of its eponymous chain in 1979. Although Bob's outlets had become counter-service units accommodating mainly teenagers, the new ones, starting in 1980, included table seating to attract family-oriented customers. Nestlé sold the business in 1987 to Bob's Industria e Comercio Ltda., whose affiliate was Vendex International N.V., a Dutch group. By mid-1990 there were 69 Bob's outlets, earning total revenue of $67 million a year.

Ten of these units were franchises, in keeping with a program put into effect by Bob's in 1984, when it still led McDonald's in number of units (but not in annual revenue). Brazil was the third-leading country in the world in franchisers in 1990, after the United States and Canada, and the concept was especially popular in the fast-food field, with franchises offered not only by McDonald's and Bob's but also by the operators of Pizza Hut, Big Boy Restaurants, Domino's Pizza, and Subway. By mid-1993 the total number of Bob's had reached 84. The chain was not performing well, however, and was expected to be sold to Burger King Corporation, a transaction that was never effected.

The Going Getting Tougher: 1996–2003

Bob's remained in Dutch hands until 1996, when it was sold for $19.2 million to Trinity Americas Inc., a U.S.-based company that had been formed in 1992 to invest in Latin America and had, in 1994, made an initial public offering of its equity securities, which raised net proceeds of $9.6 million on the NASDAQ. To raise more money for an expansion program, Trinity then sold about $10 million worth of its shares to new investors in a private transaction. It retained Vendex's Venbo Comercio de Alimentos Ltda. as its Brazilian subsidiary and changed its own name to Brazil Fast Food Corporation.

One of the new owner's investors was Peter van Voorst Vader, a former Royal Dutch Shell marketing director who became chief executive officer of Brazil Fast Food. He inherited an operation that had been losing money since at least 1994 and continued to lose money in each year through 2003. "We thought it would take three or four years to turn Bob's around," Vader told Jonathan Wheatley of Business Week in 2001. "It turns out it's taking a bit longer."

By 1997 the easy profits had been made in fast food, and the competing chains were locked into a kind of arms race that required them to open more branches simply to keep likely locations out of the reach of their rivals. McDonald's, for example, had 340 sites and was planning for almost 800 in the year 2000. The inevitable overcapacity meant that in many cases the chains had to lower their prices and/or expenses to continue competing. Bob's, for example, cut its costs 15 percent by renegotiating its contracts with its suppliers. Even worse, existing branches of a fast-food chain sometimes found themselves competing with new outlets of the same chain. "This is a business that only becomes lucrative for a large chain or small owner-operated enterprises of two or three branches," Vader told Marília Fontoura of the Brazilian business magazine Exame in 1997. "Medium-sized businesses have no future." In 1996 Bob's raised its number of outlets from 79 to 127, by means of acquisitions. "We are entering in each new shopping center that opens," he added.

By August 1999 the number of Bob's outlets had reached 173, of which 108 were franchised units. Vader also had the company units refurbished, added new items such as fried-chicken sticks to the menu, and economized by moving company headquarters from Rio's beachfront to a busy highway straddling the city limits and by allowing franchisees to purchase their ingredients directly from local suppliers. He negotiated a deal with Brazil's state-owned oil giant, Petrobras, to open 30 full-menu Bob's restaurants in a chain of convenience stores operated by Petrobras's service-station subsidiary. A Portuguese Bob's opened in 2001. But Brazil Fast Food continued to lose money, hampered by recurrent national economic crises. These problems forced out rivals such as Subway, KFC, and Arby's as MacDonald's continued to steamroller the competition, its number of Brazilian outlets passing 1,000 and its revenues outstripping Bob's by almost ten to one.

Latin Trade correspondent Thierry Ogier took a job at a Bob's in Sao Paulo for one day in 2000 to learn whether Brazilians could find a future in a local burger joint. With the real unemployment rate as high as 20 percent and nearly half the population under 20 years of age, any job looked good to many youngsters "even if it involves wearing a silly red tie, a blue and red baseball cap and an apron that says Bob's." "We make a standard product," he found, "but it takes 12 of us moving in harmony to do it well. . . . The key to the business is slicing tasks into well-defined, bite-sized pieces that just about anybody can master." The manager, only 23 but with seven years of experience at Bob's, was running the third best-selling unit in the chain. At the end of a long day, this outlet had sold nearly 2,000 burgers, taking in more than $4,500.

To keep from being obliterated by McDonald's, Bob's needed more money, which required more investment. In 2002 the Bomeny family, in collaboration with the Forza group, invested BRL 8 million in Brazil Fast Food, tripling their share of the company to about 60 percent. Thirty-three-year-old Ricardo Figueiredo Bomeny succeeded Vader as chief executive officer at the beginning of 2003. He renegotiated contract terms with some 40 suppliers and settled the short-term debt of BRL 8 million. Another BRL 16 million in taxes owed was to be paid over ten years. The arrangement with Petrobras—and a similar one with Shell—served as the model for an agreement with the Bompreço group to open branches in the group's northeastern Brazil supermarkets. Brazil Fast Food also formed a partnership with Blockbuster, Inc. for a joint drive-through location in Sao Paulo. The company even negotiated a deal to place Bob's outlets in the churches of an evangelical Christian group.

Other steps that Brazil Fast Food took in 2003 included promotional pricing outside of peak-traffic hours and training of its workers at a newly created school reminiscent of McDonald's "Hamburger University." Bomeny promised franchisees that, with more branches in existence, the company would be able to spend more money advertising the chain. Its problems continued, however, with Brazil Fast Food recording negative stockholders' equity in 2004 for the second consecutive year. The auditor's report noted that this, and negative working capital, "raises substantial doubt about its ability to continue as a going concern."

In 2004 Brazil Fast Food ended at least ten consecutive years of net losses by earning a small profit. At midyear eight officers and directors of the company owned 56 percent of the common stock. AIG Latin America Equity Partners, Ltda., a unit of American Insurance Group, Inc., owned 21 percent. Just before the end of the year, however, the latter sold about one-fourth of its shares to CCC Empreendimentos e Participaçoes and BigBurger Ltda., companies controlled respectively by Romulo Fonseca and José Ricardo Bousquet Bomeny, the chief executive's father.

Brazil Fast Food's plan for 2005 was to increase its points of sale to 500. Many of these would be compact—no more than 30 square meters (about 350 square feet), because, although these locations accounted for only 15 percent of all Bob's outlets, they were bringing in nearly a third of sales. The company also intended to open a franchised Bob's in Angola and was registering the Bob's name for possible use in Europe, the United States, and the other Mercosur countries of Argentina, Paraguay, and Uruguay.

Company Perspectives:

Our Mission: To satisfy our customers with the tastiest products on the market, with quality, in an agreeable atmosphere, always served by a motivated team, in keeping with the expectations of our investors.

Status in 2004 and Expectations for the Future

At the end of 2004 Brazil Fast Food had 388 points of sale in 23 states, including 98 kiosks and trailers. Of this number, the company owned and operated 63. The remaining 325 were franchises operated under the "Bob's" name. About 58 percent of the points of sale were in Rio de Janeiro and Sao Paulo, with the remainder widely spread throughout major cities in other parts of Brazil, with the exception of the franchised unit in Lisbon.

All Bob's outlets served a uniform menu of hamburgers, chicken burgers, hot dogs, sandwiches, french fries, soft drinks, juices, desserts, ice cream, and milkshakes. Selected points of sale also served coffee and/or beer. Outlets were generally open all year round, seven days a week, for lunch and dinner. Bob's was attempting to maintain the overall cost of its meals at levels competitive with prices offered by popular street snack bars known as "lanchonetes."

All restaurants in operation, excluding kiosks and movable trailers, were being built to company specifications as to exterior style and interior decor, and were substantially uniform in design and appearance. They were constructed on freestanding sites ranging from about 1,100 to 7,500 square feet. Most were located in downtown areas or shopping malls and were of a storefront type.

Despite the company's great number of franchised units, Brazil Fast Food's franchise income came to less than 10 percent of net operating revenues in 2004. In addition to royalty fees derived from a percentage on the sales of the stores operated by franchisees, the company received from these operators initial fees due at the signing of a new contract and funds that represented franchise contributions to finance corporate marketing investments. In 2005 Brazil Fast Food expected a potential franchisee to make a minimum investment of BRL 250,000 (about $100,000). The franchise fee was BRL 90,000 (about $35,000). The royalty rate was 5 percent of gross sales and the marketing fee 4 percent of gross sales. The franchising contract was for ten years. Brazil Fast Food provided a four-month training program for franchisees. Construction of the outlet generally began at the same time and took three to six months to complete.

Principal Subsidiaries

Venbo Comercio de Alimentos Ltda.

Key Dates:

1952:: An American tennis player, Bob Falkenburg, opens the first Bob's in Rio de Janeiro.
1974:: Falkenburg sells the existing 13 Bob's fast-food restaurants—all in the Rio area.
1981:: Bob's consists of 29 units doing $20 million a year in sales.
1984:: The company begins to franchise Bob's units.
1987:: Bob's owner, Nestlé S.A., sells the chain to a Dutch company.
1990:: The 69 Bob's outlets have combined annual sales of $67 million.
1996:: Bob's is sold to a company incorporated in the United States.
1999:: Of Bob's 173 outlets, 108 are franchised units.
2004:: Brazil Fast Food earns a small profit, ending at least a decade of annual net losses.
2004:: Some 325 of the company's 388 points of sales are franchised units under the Bob's name.