International Restaurant Expansion
The challenges and opportunities casual dining restaurant chains face when growing abroad

Here are a few notes I had prepared for a media interview with a major international news organization who was working on a story about casual dining restaurant chains growing in new international markets.  I thought it made for an interesting blog post and hope you agree.  There is much more I would like to expand on from the notes below and will try to get to it in future posts (send questions/comments – it’s great blog fuel).

International Restaurant Expansion:  The restaurant industry gets it now too – Power Is Shifting East.  Growth in the domestic markets has dried up for many of those big multi-billion dollar foodservice brands that still need to impress investors and Wall Street.  For those who are interested in just the growth potential for its own sake, well they are also foaming at the mouth, but as it turns out, are less capable of making the leaps abroad their big brothers and sisters are making.

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/former U.S. competitors are jumping the border like free agents from a faltering pro football team.  A few have done well, most namely Hard Rock (better performance abroad than domestically).  Meanwhile, Applebee’s, Chili’s, TGIFriday’s and others are finding it easier to make a way internationally than domestically.

We’re Exporting Our Worst Stuff – The outlet malls in America showcase what was hot yesterday.  You’d be hard-pressed to find a fashion forecaster praising what’s in the outlet mall bins when asked what will work tomorrow (much less what’s “working” today).  Some of the biggest U.S. restaurant brands are failing domestically but finding great fortunes in the ‘outlet mall bins of American franchise brands’ with their international expansion.  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 behind other industries.  In America, in the 1950’s, Eisenhower put the investment into infrastructure like roads.  As a result, new communities popped up, and industries and…on down the line.  If you look at the US restaurant industry for 200 years prior and then look from the 1950’s forward, that’s when we took off (the world’s largest and most sophisticated restaurant industry).  The average dollar spend was 25% or less in restaurants back then but now it is 50% – split equally with grocery stores.  That same trend is showing up all over the world.  Saudi Arabia, for example, is the USA in the 1950’s but it will do in a decade what it took us five decades to do.  China?  Perhaps even faster.

Labor – In the US, the top cost centers are food and labor.  They often average 30% each.  That 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…much more here.

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 more plentiful and happy/affordable)

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

6.       Food System – The modern day food system has made it easier/more affordable entry of processed foods (longer shelf-life, easier to transport, more yield, lower costs, more consistency for mega-chains, etc) and this is why you see more QSR’s abroad than casual dining chains (QSR’s are made for the food system of today, but casual dining is more a product of yesterday or tomorrow, but not today).

7.       Scale – Applebee’s (largest casual dining – single brand – chain in the world) has less than 5k units but QSR’s (like Subway = 33k units, McDonald’s 32k units, Starbucks 16k units) are built for scale the 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.  Likewise, 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.  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 more fertile and accessible to U.S.-based restaurant brands than ever before.  Hopefully this trend will lead to a great cross-pollination of ideas, concepts, restaurant prosperity and general industry evolution.

RESTAURANT CONSULTANT Aaron Allen