International restaurant expansion has mostly been pursued with the franchise model and with mixed results.
Firstly, QSR chains went abroad.
Later, casual dining operators saw and chased the appeal of international expansion but did so far less effectively due to the model and approach.
Challenges to foodservice franchisors:
- Wide divide in terms of operator sophistication and wherewithal
- Massive fluctuations in labor and supply chain considerations
- Navigating cultural norms, regulatory considerations, geopolitical standards (multiplicity)
- Try pushing a Prince to maintain development agreements (threats won’t work)
- Development can’t move faster than qualified franchisees can organize/ raise capital
Opportunities for foodservice franchisors:
- The bulk of restaurant industry growth will spring from emerging and frontier markets
- The best margins to be found anywhere are in underdeveloped markets
Today, more than two-thirds of the footprint of multi-national operators is derived from outside their home market.
So, how can you accelerate growth in emerging and frontier markets?
Brand Development and Refranchising to Accelerate International Restaurant Expansion
Basic Strategy Outline for Brand Development
Debt: Many of those that thrived during COVID are in a good position to get a significant portion of the capital needed to seed new markets in the form of debt (and interest rates are still low). Additionally, the debt play is non-dilutive for equity holders.
Team: Blend the best of your brand with highly vetted local/regional talent in the development market. This is an area in which outside help (global expertise building multinational executive teams) pays off.
Sell it: Once the market is built out, it is sold —leaving the local/regional team in place. At this moment, the debt is paid back from the sale.
The bulk of all foodservice industry growth over the next five years will come from international markets.
Since 2005 we have advised dozens of multi-national operators and industry suppliers on growth strategy related to cross-border expansion, brand translation and adaptation to foreign markets, and where to play and how to win.
What’s the Advantage of Going into New Markets as an Operator?
The main thrust of such a strategy is that it is far easier to sell (“refranchise”) a business worth hundreds of millions to a highly qualified new owner than it is to find an operator that is willing to pioneer a market. In other words, it is easier to sell/refranchise a market than to find a buyer for country rights — and eliminates the risk of someone buying rights and then squatting on them, not hitting development agreement targets. Additionally, this strategy for international restaurant expansion:
Facilitates competing with incumbents: The advantage of this approach is that it would allow foreign brands to build teams to compete with leading, established local players and demonstrate they can win in a head-to-head matchup.
Faster Growth: Rather than a country taking a decade to build out (with development agreements that may or may not get executed), capital is deployed into building out a country with an exceptional management team and covering key geographies.
Get a higher valuation at exit: The growth pace can be controlled and accelerated, which would achieve a far higher valuation multiple than a local franchisee that sits on the brand’s rights or doesn’t want to commit CAPEX for several openings taking place in a short stretch of time. A higher multiple results in a higher enterprise value at exit (more than paying off the debt).
Cross-Border M&A: Chains Can Accelerate International Restaurant Expansion by Buying Up a Footprint
Cross-border M&A represents about 30% of the global deal activity and foodservice is no exception. Everybody is looking for worth and the idea of buying a footprint in a new market — either to leverage a local brand or to swap flags, can be very attractive to accelerate international restaurant expansion, especially for large chains.
If you’re on the buy-side, cross-border M&A starts with a plan answering:
- How much sales do you want outside the domestic country?
- What geographies can support this? (market size vs. saturation trade-off)
- Who are the players there? Who could be bought? Would it be worth keeping their brand or swapping it with ours (paying for the real estate)?
The Opportunity of Global Brand Development
International markets offer plenty of opportunity for chains to expand and claim market share, whether they be Western brands looking to create (or grow) a global footprint to complement their domestic presence or systems from other regions hoping to claim more food spend both domestically and abroad.
The above strategy for going into new markets as an operator is an exceptional strategy for growing a global brand on an accelerated path.
As global foodservice advisors, we’ve seen a lot of international restaurant expansion via cross-border M&A activity over the last decade (and many deals that are off the market). The bigger the deal the easiest it is to find investors interested. Having a partner to identify targets, make the connection, initiate discussions, and get things through is key to avoid over-burdening the current systems.
Learn More About Global Foodservice Markets
Trusted advisors who can help to recognize where the growth potential is highest and what markets are best suited for each brand is key for investors and operators alike.