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International restaurant expansion comes with a host of challenges. With everything from supply chain and distribution to identifying the right products and pricing strategies, labor issues, to reworking all financial models and assumptions for the new operating market.
All functions at the corporate office (finance, accounting, legal, operations, marketing, HR, training, design, construction, etc.) have a role to play in expanding into a new international market and will have to make adaptations to ensure the greatest efficiency and efficacy of effort and allocation of resources.
Expansion can only move as quickly as supply lines can support it. This doesn’t just mean food product, but rather all of the materials and resources (both hard and soft) related to the opening and operating of new locations.
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 foodservice economy.
Average food 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. In 2017, Americans spent approximately $822.4b in bars and restaurants and $819.5b 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. India and China? Perhaps even faster.
International Restaurant Expansion Implications
Differences that impact effectively every cost line item with a cross-border expansion have to be evaluated with the implications specific to new geographies, with a sense of both historical and current conditions and forecasted changes (including labor laws and regulations, taxes and tariffs, supply chain, distribution, product availability, make/buy decisions, commissaries and centralized production, and so on).
International expansion could incur changes to design, decor, equipment and furnishings, and even adaptability of back office systems. Training materials may need to be in multiple languages and addressed with a cultural approach to how they are developed and deployed.
Organic 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.
Labor and Staffing
In developing countries that are often attractive for international expansion, there may be an under-skilled workforce – that, while enthusiastic and potentially available at a lower average cost than typically seen in an existing system, comes with other challenges.
Everything from recruiting and retention to the blending of local culture with corporate culture may have implications for staffing, organizational design, and be factors in how fast a chain can expand.
Franchisee & Franchisor Dynamics
In some geographies, there has been a rise of franchisees who are so large, and their representation of a system is so significant, that they can potentially pull more weight with franchisors. This can lead to an interesting dynamic between the parties.
For instance, technology may be developed at a corporate level often needs to be modified and adapted for regional best practices. Sometimes, franchisees may balk at the notion at some of these kinds of capitalized investments, which can be detrimental to sales and brand performance, both for the franchisee and franchisor.
Franchised versus Corporate International Growth
We’ve also seen instances where a large domestic system to the U.S. or the UK with the majority of its footprint in its home market looking to expand to move forward with franchise partners, rather than making a corporate investment.
While both parties, the franchisee and franchisor, did their due diligence when making the decision and selection, it’s not an uncommon case for there to be an underinvestment (potentially from both sides) that led to both parties potentially considering shutting down the operation, or at least not continuing to invest and expand on an agreed upon development schedule.
This can muddy the waters. What was responsible for the failure to meet expansion goals? Was it the concept that wasn’t well-received in the market, or the execution and support from the parent brand that was not well deployed?
We’ve seen this case most often with full-service brands. Because of some of the aforementioned challenges (availability of trained staff capable of the more involved full-service standards without the automization a systemization that’s more inherent to QSR concepts), they are inherently more complex when it comes to international expansion.
Maintaining Brand Standards
In some cases, the franchsiee in certain regions does such a great job of localizing a brand that they can move to claim more market share and a stronger brand relevance than the concept in its origin region.
For instance, Americans no longer think of Pizza Hut as a full-service restaurant experience; but, in the Middle East and Asia, the concept is viewed as more full-service than QSR in most instances.
This can become a bit of a challenge from a corporate brand and positioning standpoint. The adaptations to the inherent brand may have been part of what made the concepts more successful, but it’s also part of what makes it more difficult to ensure global brand standards are consistent with the intentions and perception both in and outside the markets.
The U.S. Is Exporting Its 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 and potential franchisees overseas are clamoring for them. There are a number of examples of major U.S. restaurant chains that we 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.
Opportunities of International Restaurant Expansion
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 into 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 Western restaurant brands.
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About Aaron Allen & Associates:
Aaron Allen & Associates works alongside senior executives of the world’s leading foodservice and hospitality companies to help identify, size, and seize opportunities to drive growth, optimize performance, and enhance enterprise value. Our clients span six continents and 100+ countries, collectively posting more than $200b in revenue. Across 2,000+ engagements, we’ve worked in nearly every geography, category, cuisine, segment, operating model, ownership type, and phase of the business lifecycle.