Slow Times for a Fast-Food Pioneer

Bob's suffers because of a slumping economy and a giant rival

If you want to find out how Brazil's turbulent economy is affecting small business--and if you want a really good burger and shake--just stop in at one of the numerous Bob's franchises that dot the big-city boulevards. You might even run into the boss of Bob's, a Dutchman named Peter van Voorst Vader, who is nothing if not candid. "We thought it would take three or four years to turn Bob's around," says Vader, who together with a group of investors acquired the chain in 1996. "It turns out it's taking a bit longer."

The story of Bob's, Brazil's second-biggest fast-food chain after McDonald's Corp. (MCD ), is emblematic of both the promise and peril of Brazil. The idea of a fast-growing chain in a fast-growing country is so alluring that Vader has managed to sell shares in Bob's parent company, Brazil Fast Food Corp., on the Nasdaq in the U.S. But one thing after another has clobbered Bob's. Fallout from the Russian debt default, the devaluation of the real, and now a pressing electricity shortage--all have conspired to delay the arrival of predictable growth in Brazil. "All we needed was some stability to make a big success," says Vader. Instead, he is struggling to overcome the latest setbacks. And the stock price? At $2.16 a share, it is off 33% from its January high.

At least Bob's has survived in a market that has defeated even established players such as KFC Corp. and Subway. Founded in 1952 by U.S. tennis champion Bob Falkenburg, Bob's boasted a 27-year lead on McDonald's in Brazil. Yet after Falkenburg cashed out in 1974, the chain went through a succession of owners and was floundering when Vader, a former manager at Royal Dutch/Shell, took it over.

Vader started cleaning up the restaurants and courting new franchisees. To cut costs, he allowed franchisees to buy ingredients directly from local suppliers. He used his capital from the Nasdaq offering to more than double the number of locations to 241. And he stayed with Bob's basic fare--burgers, fries, and local delights like banana and cheese sandwiches--while sprucing up the menu with new items like fried chicken sticks. To save money, Vader moved headquarters from Rio de Janeiro's swanky beachfront to a busy highway on the city limits. That's helped turn an operating loss of $8.6 million in 1996 into a slight operating profit last year. Yet, partly because of exchange-rate fluctuations, Bob's posted a net loss of $1.7 million in 2000.

Franchisees have been impressed enough by Vader's efforts to stick with him. Celio Salles, who opened his first Bob's franchise in Florianopolis, in southern Brazil, in 1992, saw Bob's go through neglect and decline under its previous owner, Dutch group Vendex. "What kept us going was a very solid brand and a very good product," he says. Salles now has five restaurants and plans to open three more.

Bob's franchisees have also had to contend with a formidable competitor. Mighty McDonald's Corp. has had the muscle to carve out a major presence. With $716 million in sales in Brazil last year and a total of 1,150 outlets, McDonald's now dwarfs Bob's, which logged in less than $79 million in sales.

A STUMBLE. Still, in January it looked as if Bob's was finally about to hit its stride. The chain's sales rose 22.3% in the first quarter from a year ago. But the economy has since stumbled into another of its seemingly endless crises. A power crunch will likely hold growth back to below 3% this year, dimming consumer demand. "The second quarter hasn't been so good," admits Vader, who still vows Bob's will break even this year.

Vader's formula for riding out the tough times: keep on growing. "This is an operation that depends on scale," he says. Vader is aiming for 500 outlets in four years, and he hopes to raise more money on the stock market. But he knows the difficulties: "Raising capital is still the hardest part of the job." Staying in business in Brazil's roller-coaster economy isn't easy, either.

By Jonathan Wheatley in Rio de Janeiro

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