Opportunities and Challenges Facing Middle East Restaurant Operators

Opportunities and Challenges Facing Middle East Restaurant Operators

The thriving metropolitan centers cropping up throughout the Middle East serve as a metaphor for the region at large: a marriage of both the ancient and the modern. Here, the world’s tallest tower sits just a stone’s throw from historic ruins and Holy sites, a reminder that the area’s astonishing growth was born from centuries of human survival.

Middle East restaurant operators are tasked with upholding the tenets of hospitality on which Arabic culture has been built. As if the dynamics of business in an emerging market weren’t enough, operators face an uphill battle when it comes to supply chain issues, labor costs, and nationalization. Determining how these challenges specifically affect a business, and addressing them appropriately, will boost the odds of improving company performance.

Below, nine of the toughest challenges facing restaurant operators in the Middle East:

1

LOW LABOR COSTS OFTEN LEAD TO UNDER-SKILLED EMPLOYEES

The Middle East restaurant market is a fast-growing industry. Yet it’s still fighting the perception that hospitality jobs are not a career path – at least not a viable and prestigious one. More often than not, the solution to the region’s high turnover and attrition is to hire expat employees at low costs. In other words, throwing more bodies at the problem. Why make the capital investment into a high-performance, commercial dishwashing machine, think some operators, when another expat employee could be hired for a significantly lower upfront expense? This sort of unsustainable approach results in an under-trained, under-skilled labor force — and not much else to show for it.

High-performing organizations require high-performing people. Without them, chains are left with a bloated payroll of single-tasking employees. To face labor challenges head-on, restaurant chains must move away from routine thinking and behavior.

That doesn’t necessarily equate to bonuses and raises, but to an infrastructure that aligns the performance measures and direction of workers. Building capabilities to measure real-time performance metrics for every position ensures a company can set — and properly track — its goals. The most effective incentives and performance metrics (of both individuals and functional areas) are based on a company’s broader goals and milestones.

2

NATIONALIZATION PROGRAMS COMPLICATE LABOR PLANS

Nationalization (quota-based labor programs like Saudization, Qatarization, etc.) is also a factor when it comes to labor planning. With more national employees (earning significantly higher salaries than expat workers) required to maintain operating status in the KSA, labor costs have grown even more problematic. New regulations aim to boost the number of skilled expatriate workers in the UAE, but Middle East operators still face challenges in attracting and retaining national talent.

It’s amusing (and astonishing) to see how creative some have been in trying to find ways around the laws. Instead of avoiding the realities, restaurant operators should focus on increasing efficiency to reduce bloated headcount.

Innovative solutions are integral to keep the modern workforce engaged, and offer team members a career path with ongoing development. Companies who cross-train, rather than fill a payroll with single-tasking employees, will improve productivity. 

The most important labor initiatives involve installing the proper metrics so workers know what great performance means. Employees aren’t inclined to repeat positive behaviors when their hard work goes unrecognized. Company leadership, on the other hand, run the risk of reputational damage by failing to recognize and empower their employees.

3

A LACK OF DEFINED BRAND STRATEGY & STANDARDS LEADS TO CONFUSION (AND WASTED EFFORT)

Branding is sometimes seen as an empty expense, rather than as an asset on the balance sheet. But faced with the struggle of articulating their brand effectively, many chains face an identity crisis (internally and externally). A business without a well-defined brand is kind of like a person with amnesia – not really sure where they’re going, or how they even got there. If employees can’t communicate it, ad agencies don’t get it, and journalists won’t write about it. And such companies are often forced to apply low-margin, brand-eroding discount promotional tactics to keep pulling in traffic.

A restaurant concept is much more than its unit economics and investment model. Similarly, a brand is much more than its jingle, color palette, logo, and typography. It’s the purpose, promise, personality and positioning that comprise the building blocks of the business.

Top executives must be able to clearly articulate that purpose before translating it into action throughout the entire organization. What is a chain promising its employees, guests, the media, and even potential investors? A strong brand is one with no gap between these promises and what guests and stakeholders actually experience.

Great ideas – and a brand is really an idea – spread. Before spending a Riyal on advertising, we would recommend gathering all key stakeholders to discuss the blend of passion and conviction necessary to define the brand’s sense of purpose. Then sculpt and forge that sense of purpose before making any changes to a product or a design.

4

COMPANIES BLEED PROFITABILITY THROUGH HIGH FOOD COSTS

The Middle East imports some $35 billion of food annually, which is set to double by 2035. It doesn’t help matters that the most food import-dependent region in the world suffers with an inadequate supply chain infrastructure for most foodservice operators. The success of every military campaign (and multinational restaurant expansion strategy, too) in history hinged on the ability to build an effective supply chain. Cut off the supply, and everything else collapses. Likewise, many operators in the GCC (and their desires to improve efficiency and profitability) are suffocating via broken links in the supply chain. As a result, they find themselves bleeding avoidable percentage points in lost profit.

In large systems, just a few ounces of waste can lead to tens of millions of dollars in lost profits. And without standardized recipes or inventory systems in place, many chains don’t even know what their theoretical food costs are. At the very least, operators should have solid answers to the 25 questions that can help lower their food costs. 

In the Middle East, there’s another significant factor contributing to food costs: wasted food. Providing guests with overwhelming portions might be hospitable, but it’s also wasteful and expensive for restaurants. Instead, chains should engineer more innovative approaches to ensure consistency and quality. Mixing Arabic hospitality and consumer preferences with Western back office systems and software will help establish food safety, sanitation, and lower food costs.

This is a business so interconnected that a break in one area will affect another. But those who focus solely lowering food costs won’t be able to save their way to success. After all, it’s difficult to maintain a high margin on low quality without sacrificing the guest experience. A chain that cuts corners now will likely pay for it later with guest attrition, competitive differentiation, and damage to its reputation.             

5

LACKING SYSTEMS AND STANDARDS AMPLIFIES INEFFICIENCIES

Operators running a restaurant without modern documented systems in place are pilots flying at night, without radar.  Without standards and review methods, they might know their general target, but they can’t determine how far off-course they might be. In the Middle East, as with other fast-growing, emerging foodservice markets, certain required standards and systems are profoundly lacking. Financial reports, like charts of accounts and profit & loss statements, don’t match up with industry best practices. Generic HACCP/ISO posters masquerade as “training” materials.

In an industry where most training programs consist of, “Watch this guy who’s done the job before” and “Let me know if you have any questions,” inefficiencies are multiplied. On a small scale, this may seem inconsequential. But it becomes more significant when the same systems (or lack thereof) are expanded to a multi-unit economic model.

The cost of an underdeveloped or non-existent training program are hidden throughout other lines on the P&L. Mistakes made when handling customer complaints could be shaving percentage points in top-line growth; voids and orders thrown away due to mistakes could be leading to higher food costs; low morale might be lessening productivity and damaging the guest experience. Without the proper tools, technology, and best practices in place, it’s difficult to determine where a business is being undermined.

Growing companies attract more opportunity than a stale and stagnant operation. The right standards can attract both prize investors and talented people.

6

COMPANIES UNDER-LEVERAGE DIGITAL POTENTIAL

From 3D printing to innovations in payment processing, technology is impacting the restaurant industry in several ways. Major investments into tech companies across the globe mean that new ways of doing business are on the horizon. Recent examples demonstrate that restaurant tech can transform how chains operate, manage staff, create value, and increase sales.

The Middle East, and KSA in particular, have some of the highest mobile penetration and video consumption rates in the world. Yet many are under-leveraging mobile, social, digital, web, PR and earned media efforts. This presents a significant opportunity for Middle East restaurants to utilize what has been learned and developed in the more competitive and mature foodservice industry of the Western world.

Meanwhile, other chains have expended so much effort they’ve lost sight of the tenets of hospitality. Restaurant companies are already investing billions globally to transform their business through digital means. But that shouldn’t mean losing sight of cleanliness, customer service, and food quality in the process.

7

ABSENTEE OWNERS REQUIRE A DIFFERENT STYLE OF INVOLVEMENT

Many owners in the region aren’t actively involved in their business. Spending just 5-10 hours per week on a business bringing in millions in revenue doesn’t add up. A CEO unfamiliar with the inner-workings of his company can’t feel the same level of pain (or pride) in its failings or accomplishments. Without KPIs, proper reporting, SOP (and so on – per the aforementioned), the dangers of ill-informed decisions are compounded.

One solution lies in bringing problems to the CEO, rather than vice versa. Growth is stymied when a founder does not relinquish control, but also doesn’t want to have to be involved with day-to-day operations. The founder is disconnected from the realities of the business and makes decisions without having all the facts. Rather than having a business fall into the “founder’s trap,” the founder can still inspire the team by letting others lead (within the parameters of a well-constructed corporate governance system).

8

FAMILY DYNAMICS OFFER THEIR OWN UNIQUE SET OF CHALLENGES

The dangerous treks through the Arabian deserts could not have been survived without careful and well-thought-out planning. Those who made the journey were often guided celestially. Some of these same principles apply to business, as well. Many restaurants in the Middle East are managed by impulse, rather than by strategy. It’s easy to lose focus without a clear, strategic purpose. Instead, companies need to establish their own North Star: something to strive toward and guide the company forward. This should inspire beyond profits and growth-for-the-sake-of-growth pursuits.

Family dynamics like favoritism often lead to organizations with no formalized plans or processes. In some cases, the up-and-coming generation – out of respect for their elders – find it difficult to challenge assumptions. Dismissing new, creative ideas could spell disaster for a chain in a quickly-evolving industry and market.

These challenges cannot be addressed without the full support, understanding, and buy-in of the company. We have found, through years of experience with our clients in the region, that it helps to have a third party. Someone with the right industry expertise can support observations with fact, rather than feeling. A professional third-party can strike the proper balance between honoring the history of the company and planning out its future.

9

A LACK OF WELL-DEFINED GOALS & PROPER PERFORMANCE MEASUREMENT LEADS TO A LACK OF ACCOUNTABILITY

It’s no great surprise that people often perform better when that performance is visible. Organizational health is bolstered by those who understand what is expected of them and take responsibility for delivering results. At restaurant chains, which usually depend on large, distributed workforces, fostering accountability is especially important.

Setting goals and quantifying someone’s performance gives them a better sense of satisfaction and the feeling they’ve achieved something. Without an understanding of a company’s values, it’s difficult for employees to support where the company is going.

To develop a clear set of goals, chains must start by identifying the issues with the greatest long-term potential. Even a malleable set of goals can serve as a solid tool for performance evaluations. By improving communication, buy-in, morale, and the tools needed to recognize and reward top contributors (based on merit, not favoritism), others will see a positive example to emulate.

Better tools for performance measurement and management help people feel secure about what they’re doing, and clear about how those on all levels of the organization need to be improving. Similarly, executive dashboards are beneficial across all levels of the organization — from the board and CEO who is looking five years out (and beyond) to the cashier who is thinking through the duties and responsibilities for his next shift.

* * * *

The goals that keep companies pushing, pulling and striving for excellence are those that are never fully achieved. It’s the process of iterative refinement — looking to the future, setting milestones — that keeps us all striving for perfection of purpose. Aligning the team, resources, emerging trends, and opportunities yields a perfect blend. In turn, restaurant operators in the Middle East can capitalize on these challenges, turn them into opportunities, and affect change within their organizations and the region as a whole.

ABOUT AARON ALLEN & ASSOCIATES:

Aaron Allen & Associates has worked extensively throughout the GCC with leading foodservice companies and prestigious private equity firms on a host of issues important to all hospitality businesses, specific to the culturally aware nuances of operating in the Middle East. For more on how we can help you achieve your most inspired ambitions, let’s start a conversation.

 

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