The Challenges of International Restaurant Expansion

International restaurant expansion comes with a host of challenges. Below, we explore those along with the most important players, current trends, and more.

International Restaurant Expansion

The restaurant industry gets it: Power Is Shifting East.  Growth in the domestic markets has dried up for many of the multi-billion dollar foodservice brands that still need to impress investors and Wall Street. Those who are interested in growth for its own sake might be foaming at the mouth but, as it turns out, are less capable of making the same leaps abroad as their big brothers and sisters.  

Who’s Tried

The world’s biggest and most successful casual dining restaurant company (Darden Restaurants) has been shy on international expansion.  Meanwhile, their current and former U.S. competitors are jumping the border like free agents from a faltering pro football team. A few have done well — notably Hard Rock (which sees better performance abroad than domestically). Meanwhile, Applebee’s, Chili’s, T.G.I. Friday’s, and others are finding it easier to make a way internationally than domestically.

We’re Exporting Our Worst Stuff

America’s outlet malls showcase what was hot yesterday. You’d be hard-pressed to find a fashion forecaster praising what’s in the outlet mall bins as what big trend will be on the horizon tomorrow (or even what’s “working” today.) Some of the biggest U.S. restaurant brands are, in a sense, those outlet brands. They might not be a hot commodity in the U.S., but investors overseas are clamoring for them.  There are a number of examples of major U.S. restaurant chains that I won’t impugn here; but suffice to say, while they are struggling to find significant recent wins on the domestic catwalk, they are finding great potential for their wares in international markets that lag years behind.

Infrastructure

The restaurant industry develops more slowly than other industries.  In America, in the 1950s, Eisenhower put investment toward infrastructure (roads, bridges, etc.). As a result, new communities and industries began popping up. The U.S. restaurant industry flourished, growing into what eventually became the world’s largest and most sophisticated restaurant industry. Average dollar spend was 25% or less in restaurants back then, but it grew to 50% — split equally with grocery stores — before eventually surpassing that number in 2016. Now, Americans spend approximately $54.857 billion in bars and restaurants and ($52.503 billion on groceries.

That same trend is showing up all over the world.  Saudi Arabia, for instance, is similar to the U.S. in the 1950s in term of restaurant spend — but demographics are changing even more swiftly, meaning Saudi will see in a decade what we saw in five decades. China?  Perhaps even faster.

Labor

In the U.S., the top cost centers are food and labor, averaging 30% each. That being said, we’re seeing some clients with labor costs as low as 10%. They are compressing one of the biggest cost centers and as a result yielding much higher profit margins abroad than domestically.  

Biggest Challenges for Restaurant Chains Growing Internationally:

1. Startup Budgets: Research, legal, focus of executive management (at the cost of other revenue pipelines and analyst expectations)

2. Political: Taxes, architecture, tariffs, lobbyists… the list goes one.

3. Supply Chain: This is one of the single biggest killers of casual dining success abroad: Sourcing, quality, instability, “gold standards”, etc.

4. Management: Trained unit level staff really hard to come by (meanwhile, local/hourly staff are more plentiful and happy/affordable)

5. Real Estate: Casual dining requires more space, parking, etc. than QSR (one of the reason you see more QSRs abroad than casual dining)

6. Food System: The modern-day food system has made processed foods easier/more affordable, due to their longer shelf-life, easier-to-transport nature, and lower costs

7. Scale: Applebee’s (largest casual dining, single-brand, chain in the world) has less than 5k units. Meanwhile, QSRs (like Subway’s 44k units, McDonald’s 36k units, Starbucks 24k units) are built for scale that casual dining chains weren’t built for. The grass seems to always be greener somewhere else. 

There are a number of significant restaurant chains outside the U.S. looking to break in to and succeed in the world’s largest and most competitive restaurant market. Similarly, there are a number of mature and sophisticated U.S.-based restaurant chains who have saturated markets here and are ready to break in to new markets abroad. When properly planned and executed, both can be a good strategy. America is more open and welcoming of authentic international brands and concepts than ever before. Likewise, international markets are now more fertile and accessible to U.S.-based restaurant brands. Hopefully this trend will lead to a great cross-pollination of ideas, concepts, restaurant prosperity and general industry evolution. 

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ABOUT AARON ALLEN & ASSOCIATES:

Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketing, branding, commercial due diligence for emerging restaurant chains and prestigious private equity firms. Aaron has personally lead boots-on-the-ground assignments in 68 countries. Collectively, his clients around the globe generate over $100 billion annually and span six continents and more than 100 countries. 

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One response to “The Challenges of International Restaurant Expansion”

  1. Pamela says:

    Find your articles facinating. We operate a 1st world joint in a 3rd world country, and I get so much from your blogs even here! Thank you!! Keep them coming!

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