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How and Why Restaurants are Expanding Abroad

14 Apr 2010 - The world's largest restaurant company, Oak Brook, Ill.-based McDonald's Corp., reported that its same-store sales rose 5.2% in Europe in 2009, double what its U.S. units could muster.

The world's largest restaurant company, Oak Brook, Ill.-based McDonald's Corp., reported that its same-store sales rose 5.2% in Europe in 2009, double what its U.S. units could muster. Louisville, Ky.-based Yum! Brands said that it opened 500 stores in China last year alone. Denver-based Chipotle announced that it will open its first overseas location in London this year, and several high-profile chefs—including Daniel Boulud, Mario Batali and Wolfgang Puck—are planning their initial outposts outside the United States.

Couple all that news with a recent report from Port Washington, N.Y.-based market researcher NPD Group that customer traffic at U.S. restaurants declined 3% in 2009 while the total number of U.S. restaurants dipped by 0.3%, and it makes sense to conclude that when it comes to expansion plans, the place to be is anywhere but here.

In a no-growth domestic marketplace, stealing share from competitors is the only way to grow, and that's tough. But foreign markets can be difficult, too, as McDonald's discovered in Iceland. The collapse of that nation's economic underpinnings forced the Golden Arches to shut down all of its units there.
That's one reason why running from domestic turmoil into the arms of overseas markets isn't always the wisest move.

“From a shareholder's point of view, ideally, you'd like to be invested in a company that can have very good expansion opportunities both in the U.S. and overseas,” says Mark Kalinowski, director of equity research for restaurants at Janney Montgomery Scott in New York City. “Of course, that's a lot easier said than done. Just because your concept works well in the U.S. does not mean it's positioned well for international growth.”

Kalinowski concedes, however, that restaurant chains' desire to spread outside the United States has been strengthened by elements of the economic downturn. Limited access to capital by U.S. franchisees is a definite problem. Chains want to show Wall Street that their networks continue to broaden, and if domestic new-store openings are difficult, ramped-up overseas expansion helps keep the tally growing. But that kind of motivation isn't the wisest reason to venture abroad, Kalinowski says.

For companies that decide international expansion is the best business choice, several key factors—including finding the right partners overseas, striking a menu balance between local tastes and brand staples, and understanding cultural nuances—can mean the difference between failure and success.

Primacy of Partnerships
The weakness of the U.S. market isn't all that is driving the shift toward accelerated development abroad. The international marketplace has changed in the last two decades, says Brad Houser, executive vice president-international at Minneapolis-based Dairy Queen, which has been franchising overseas for more than 50 years.

“Because of the Internet and how people travel now, the world has gotten to be a much smaller place,” Houser says. The Western-style franchise business model is better and more widely understood in developing countries than it was two decades ago. However, that doesn't mean every growing country has adopted Western franchise laws.

“The laws may change from when you first go into a country,” Houser says. “You have to stay on top of things because restrictions can be different this year [than in past years]. Just because you did things this way five years ago doesn't necessarily mean you can do it the same way this year.”

For that and other reasons, what hasn't changed in international franchising is the importance of finding the right partner with whom to do business in a foreign market.

“We prefer to find partners who have other [restaurant] brands because they understand franchising,” Houser says. “They usually have infrastructure that they can leverage or expand upon. And typically if it's a strong partner, they have in-country connections, capital and access to resources to help you.” Culver City, Calif.-based burger chain The Counter has only 21 domestic locations but has overseas units in Dundrum, Ireland, and Crows Nest, Australia. Why? Because the right partners came forward, says founder Jeff Weinstein. He'd like to do more international openings but says finding those perfect partners is difficult.

Why the Appetite for Expansion?

Foodservice is recovering faster in many European Union countries than in the United States, making overseas expansion that much more appealing to many U.S. brands. (The data below compares Q3 2009 with Q3 2008.)

“Our international strategy has been to identify partners with experience and who understand the brand and are philosophically aligned with us,” he says.

Think Globally, Act Locally
Dairy Queen has more than 650 units outside the United States, and this year it will open its first stores in Macau and Egypt. The chain will take Dairy Queen's ice-cream-centric stores to Macao, while Egypt will get the DQ Grill & Chill concept.

Although both markets get the signature Blizzard, Dairy Queen will make menu adjustments to meet local preferences. That means no bacon on burgers in largely Muslim Egypt. For Macau, DQ will use green tea as a base for some beverages and is testing oolong tea.

The rise of the Internet has had an impact on menu localization, too, Houser says. Consumers in Egypt, for example, may know what's on a DQ Grill & Chill menu in Atlanta and expect to see those items.

“There's always a fine balance to hit,” Houser says. “If you don't react and provide something tailored to local taste preferences, you're doing yourself a disservice. But you can go too far the other way, where you're offering all localized items, and then you're doing a disservice to your brand.”

American brands that become too localized lose some of their Western allure and risk becoming too much like native restaurant concepts, diluting a key edge against local competitors.

On the other hand, another new reality is that the international clamor for American food has lessened. A Nielsen Global Online Consumer Survey in 52 countries conducted in October 2008 found 27% of participants saying their first choice in cuisines is their local food. Italian and Chinese each were the first choice of 14%, while American food was in fourth place at 9%. That's significant because “type of cuisine” is the primary restaurant-choice consideration for 33% of respondents to the survey. Price is second at 21%.

Innovation Abroad
Dairy Queen is researching market opportunities in India, where it has no stores. The country's population of more than 1 billion would seem to make it an obvious target. But culture and household income also are important factors in determining how well the brand would translate. In India, Houser says, the idea of eating outside the home is gaining acceptance slowly.

This fact helps explain why pizza concepts that offer delivery have been more successful in India relative to other American restaurant imports. Earlier this year, Ann Arbor, Mich.-based Domino's Pizza opened its 9,000th and 9,001st stores simultaneously in New Delhi, India, and New Orleans. The New Delhi opening was the chain's 300th in India—a country, Domino's says, in which it pioneered the idea of home delivery. Domino's franchise partner plans to add 65 more India units this year.

Yum! Brands operates 153 Pizza Huts in 34 Indian cities and 49 KFCs in 11 markets. “By 2015, we expect to have at least 1,000 restaurants in India, up from just over 200 today,” said Niren Chaudhary, managing director for Yum's Indian operations, in a release announcing the opening of the company's 13,000th international store (in New Delhi). “The number of people who can afford our food will reach 200 million people within five years, and we are very excited about serving Pizza Hut, KFC and soon Taco Bell to them.” In fact, India's first Taco Bell opened in Bengaluru in mid-March.

McDonald's 180 outlets in India are split between two joint-venture partners. For a nation that is overwhelmingly vegetarian, McDonald's has developed some well-known local items such as the chicken Maharaja Mac. It opened its first Indian drive-thru in 1996 and began home delivery in 2004. Last month, McDonald's debuted online ordering for home delivery in India.

In Shanghai, McDonald's opened China's first drive-thru of any kind four years ago. Gaining approval for the store required several attempts to make local officials understand the drive-thru concept, and initially many Chinese drive-thru customers took their orders inside the restaurant or ate in their cars.

'The Time Has Come'
Yum!, with its decision to take Taco Bell to India, is one of several foodservice companies making its first international forays. Minneapolis-based Buffalo Wild Wings recently said it is considering options for expansion outside the United States. In anticipation of the move, it broadened marketing chief Kathy Benning's title to executive vice president of global marketing and brand development. The title of operations chief Judy Shoulak also was globalized.

Denver-based Chipotle expects to open in London in May because “we simply believe the time is right to begin looking at Europe,” says communications director Chris Arnold. “Getting a toehold in Europe now allows us to introduce the Chipotle brand and begin to build the infrastructure we will need to grow in European markets.”

It's not just chains that are shedding past hesitancies and opening far from home. Wolfgang Puck will open CUT at Marina Bay Sands hotel-casino in Singapore (see sidebar); Los Angeles chef David Myers plans two concepts in Tokyo (see sidebar); and Daniel Boulud will open in Singapore and London in the next year. Danny Meyer's New York City-based Union Square Hospitality Group will take its Shake Shack concept to the Persian Gulf and possibly to the banks of the Thames.

All of these plans echo the sentiment of Orlando-based Darden Restaurants CEO Clarence Otis, who told analysts during a February earnings call that the company is exploring the possibility of international joint ventures. In explanation, Otis said simply, “We think the time has come.”

By Scott Hume, Special to R & I - Restaurants & Institutions, April 1, 2010

Source: Restaurants & Institutions - http://www.rimag.com/

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