The world is not enough

Big American restaurant chains have been hitting grand slams in the international arena, but a worldwide economic slowdown and a rising number of foreign foodservice competitors are threatening to shut out successful U.S.-brand expansions abroad.

McDonald’s, Burger King, Yum! Brands Inc., Domino’s Pizza and others almost routinely make quarterly and annual reports of worldwide sales and profits that meet or exceed projections by hefty margins. Some chains and analysts even project that the day is looming when some U.S. foodservice brands’ international operations will be the only highlights of corporate-earnings statements. Those doubters caution that offshore operations in developing countries can easily outperform core domestic markets that have matured and become saturated.

But as recessionary conditions dampen the engines of growth in the industrialized world’s leading nations, and as foreign restaurant chains grow sharper in competing with American brands worldwide, what had seemed a bright and limitless future for U.S. foodservice growth overseas has begun to look less glowing.

Despite the hundreds of millions of potential consumers and potential franchisees hungry for American foods and entrepreneurial opportunities in emerging economies like China, India, Russia, Brazil, Eastern Europe and even Mexico, worldwide inflation in food and energy costs, shaky and mistrusted banking systems, mounting unemployment worldwide, and maturing foreign-based restaurant chains with decades of competitive experience against U.S. operators threaten the international cakewalk the Americans have enjoyed.

Already in Sweden, for example, executives of the 40-year-old, 68-unit MAX burger chain—that 9-million-population nation’s second-largest restaurant system behind McDonald’s 230 outlets—say they’ve acquired five shuttered McDonald’s outlets and converted them to the MAX format in the past few years.

A McDonald’s international spokesperson strenuously disputed MAX’s claim, insisting that the Golden Arches are standing firm in Sweden and stressing that McDonald’s could face severe repercussions as a publicly held company if it were to overstate its health.

Nonetheless, Robert Bergfors, president of MAX, says even CNN reporters were drawn to cover the rare closing of a McDonald’s outlet recently.

In 2007, MAX reported systemwide sales of $194 million from 68 company stores. The chain now is exploring the possibility of franchising in the United States, Northern Africa, the Middle East and Europe.

Bergfors observes that, although Sweden is just now starting to feel the ripple effects of the economic troubles plaguing U.S. markets, companies like his don’t compete against the best chain operator in the world for 40 years without learning something.

Despite his nod to McDonald’s clout, Bergfors identified a common vulnerability that American and other foreign restaurant brands ultimately confront when competing in Sweden: understanding the local market’s customers.

“I admire and have the greatest respect for McDonald’s,” insists Bergfors, who compares his company’s operational posture, customer service execution and quality to the highly-regarded but ultraguarded American chain brand In-N-Out Burger, the iconic drive-thru chain based in Irvine, Calif.

“McDonald’s ability to implement and systematize high-level quality standards is something we have all learned from,” Bergfors says. “But I think consumers in Sweden changed a few years ago and wanted a higher-quality experience and product, and some American brands here have been slow to react to that change.”

Bergfors says he and his senior team still visit the United States at least four times a year for “inspiration tours,” visiting prominent industry gatherings like the National Restaurant Association trade show in Chicago and the MUFSO conference, to learn from American operators. No matter the menu segment it studies abroad, MAX can borrow ideas that make it a stronger competitor at home.

The brand is renowned in Sweden for a health-oriented menu image based on grass-fed-beef products. MAX eliminated trans fats voluntarily years ago and promotes a multi-pronged green consciousness that even includes devoting a percentage of profits to a program that plants trees in Africa.

In Japan, the 1,200-unit noodle and fast-food concept called Ajisen—which means “a thousand tastes”—is bullish about taking on American competitors, especially in China, where it believes it can reach a 1,000-store size in the next few years by exploiting what it considers a distinct advantage: traditional Asian culinary perfection.

With fewer than 300 stores in China currently, Ajisen is way behind KFC’s 2,200 branches in 450 mainland cities—the largest restaurant brand in China—and ranks third behind McDonald’s, which has about 900 mainland China outlets.

Then there’s AutoGrill, based in Milan, Italy, essentially an international chain of highway rest stop eateries and shops and an airport restaurant chain called Alpha. Those two brands generate about $2.5 billion in revenues from 704 locations in 40 countries, making them formidable rivals for any U.S. brand that might challenge them. Parent company AutoGrill SpA, founded in 1946, also owns the American contract concessionaire HMSHost Corp. of Bethesda, Md. The multiconcept, multisegment AutoGrill reported annual sales from all of its divisions of nearly $8 billion for 2007.

The Philippines also has a multiconcept, multisegment restaurant behemoth battling it out in Asia with American foodservice invaders. Manila-based Jollibee Foods, though just 30 years old, has 1,034 restaurants in four different brands that serve Asian-accented burgers and traditional Asian foods in 15 nations. Like most international restaurant competitors, Jollibee is looking forward to its greatest growth in China in the years to come.

Shadow Lau is an analyst with Elm King Securities in Hong Kong who follows Ajisen and a Chinese chain called Little Sheep, which has 760 units in Asia and the United States. Lau told China Business magazine last year that Asian brands may have an advantage over their American competitors in appreciating the regional culinary preferences among China’s 1.3 billion people, including 300 million now considered middle-class consumers.

Lau speculated that indigenous Asian chains’ advantage in China is that they tend not to do cookie-cutter operations and can regionalize their menus to cater to China’s several dozen distinct ethnic groups.

Even if that were true, however, other industry consultants and chains point out that American restaurant chains in China and India have nimble attributes of their own, reflected in their willingness and adeptness to adjust their menus to local tastes and customs, offering items that would never appear in North America.

Nevertheless, doubts about American brands’ future world dominance persist.

“One of the biggest questions is whether [Western brands] can localize,” Hong Kong-based analyst Lau told China Business. “Every region of China has different taste.”

But executives of Ajisen say Western brands in Asia have been good teachers and have fostered more disciplined development there. In an English-language transcript of remarks from a financial seminar earlier this year that was posted on Asia Times’ website, an Ajisen official was quoted as saying that the chain had learned a lot in 30 to 40 years of head-to-head competition with American restaurant brands.

Perhaps the biggest lesson, an Ajisen executive pointed out, is to not open stores where American brands are concentrating.

“We are acquainted with the catering culture and the taste of the customers in China,” Alan Zheng, chief financial officer of Ajisen, said at the time. “As such, we gradually penetrate towards second- or third-tier cities with strong growth potential.”

Some foreign chains facing competition from exported U.S. brandsAlthough most of these brands don’t now, and may never, operate in the United States, they represent decades-old operations that now must compete at home against U.S. brands and others from abroad.

Closer to home, in the hotbed of affluent Asian immigration that is Vancouver, British Columbia, Britt Innes, director of marketing for the 90-unit Joey’s restaurant chain, says Joey’s enjoys little to no competition from U.S. brands.

Joey’s is a 90-unit, upscale, full-service, global-menu concept. But like most Canadian foodservice operators, Joey’s pays taxes, principally toward Canada’s comprehensive programs for health care and education, that are higher as a percentage of sales than those paid by U.S. counterparts.

But whether an international operation is American-owned or foreign-based, fast food or posh fine dining, all brands with a multinational presence are confronting a global economic malaise that manifests itself both locally and on the world stage.

Blamed for the morass are America’s trade deficit and national debt; its subprime-mortgage fiasco, which is spreading internationally; a global slowing of tourism and business travel; and war and the threat of war in places with valuable resources. Add those factors to the unknowns of worldwide deforestation, pollution, human overpopulation and global warming and its potential worsening of seafood species depletion.

A report released in June by the International Monetary Fund portrayed the world’s economy as being at its weakest point since the terrorism attacks of 2001 and, on some measures, as bad as during the oil embargoes of the 1970s.

Projecting that the whole world’s rate of economic growth, including China’s and India’s, would fall this year from 5 percent to 4.1 percent, a top IMF economist wrote in the organization’s World Economic Outlook 2008: “The global economy is flattening, caught between sharply slowing consumer demand in many advanced economies and rising inflation everywhere.”

The dark side of globalization, the report added, is that no nation’s economy in the modern era is an isolated island unattached from the activities of the world. Just as parallel economic prosperity in China or Western Europe or America are interlinked and dependent on trade and investment, which helps to raise the living standards of distressed nations, so too does that interconnectedness undermine everything in bad times.

Meanwhile, consultants and trade experts say Europe, especially Western Europe, has long posed several noneconomic hurdles that have long frustrated American chains’ ambitions despite the region’s long established U.S. alliances. Major stumbling blocks over the years have come from Europe’s complex zoning laws that spike real estate and construction costs, socialized governments, heavy unionization, generous pro-employee labor laws, and a frequent consumer aversion to American brands as a rebuke of U.S. foreign policies.

Tim McIntyre, vice president of communications for Domino’s Pizza, which recently marked its 25th year of international expansion, says one way Domino’s integrates its brand into a foreign culture is by downplaying its American origin and presenting itself as a local entrepreneur’s startup.

“Our approach is different from others,” he says. “Whereas others come in as an American chain, we start with local businesspeople who create Domino’s from the ground up as a new, locally established chain.”

McIntyre says that of the 200 to 300 stores Domino’s opens each year, most are outside the United States. And of the 8,600 Domino’s worldwide, 41 percent, or 3,600, are franchised abroad.

But American operators appear as bullish as ever about overseas business, and restaurant industry consultants say they have every reason to remain so.

Paul Fetscher, a principal of Great American Brokerage, an international restaurant real estate consulting firm based in Long Beach, N.Y., says that neither the world economy nor the evolution of tougher foreign competition should pose major roadblocks to American foodservice brands.

Likening the Chinese market, for example, to the state of development of the U.S. market 50 years ago, Fetscher says he was impressed by a statistic he read recently that found that for all of the chain restaurants currently vying for position in China, collectively they only account for 1 percent of China’s commercial foodservice sales.

“Now you look at the United States, at how long it took chain restaurants to match the number of independent operators or their sales,” he says. “Fifty years maybe? Independent operators make up about 50 percent of foodservice sales in the U.S. But China certainly has the potential to offer vastly more chain opportunities than the U.S.”

He says that in Europe, just 2 percent of foodservice sales is conducted by chains.

Another reason why Fetscher is bullish on continued global growth is that American restaurant chain operators are aggressive advertisers, whose creativity is limited only by their budgets. In Asian nations, where radio remains the predominant electronic advertising medium, as more middle-class people buy televisions, U.S.-based foodservice chains will probably outspend their local rivals as they learn cultures and traditions to foster loyalty, he says.

“American restaurant companies know up front that they need to influence and impress,” he says. “We know that the most powerful electronic medium for doing that is television, and Americans do that quite well.

“So as Red Lobster proved [in Japan] so many years ago, to get a toehold in a foreign market as a new player to support your unit growth you invest your marketing dollars in television, because in the mind of the consumer, the locals aren’t doing it, because they never did it.”

However, Fetscher adds, “so much of this is dependent on finding the right local partner.”

Kevin Moll, president of Restaurant Consultants Inc. of Denver, whose 10 partners have more than 300 combined years of foodservice management and consulting experience, has worked with American brands to export their concepts overseas and help foreign brands penetrate the U.S. market.

Moll says that if he were advising a foreign restaurant chain operator whose market was being entered by an American brand, the first thing he’d recommend would be to “be cool and don’t roll over.”

Moll adds: “Although everyone knows that Americans are the best restaurant operators in the world, and by that I mean the U.S. is the standard-bearer for cleanliness, service, quality and experts in identifying a niche, they still have to breed loyalty, something the local operators already enjoy. So when the fascination with the new American concept fades, the local operator is on equal footing and has a unique chance to shore up its brand presence.”

Still, Moll contends that given the potential foodservice sales bounties in Asia, Europe and South America, local chain operators and American brands need not fear one another.

“It’s a huge, huge pie out there, and even after cutting up and divvying the slices, the fact of the matter is that people have to eat, and the consumer is the big winner,” he says. “Yeah, it is competitive in every country, but the well-positioned operators, be they an encroaching brand or a local operator, will succeed if they deliver a consistent, quality product with value.

“There are over 500 successful restaurants in Beijing that serve Peking duck as their main menu item. Talk about fragmentation. How can 500 distinct restaurants be successful in the same market with the same menu item? It’s [by] consistently executing a value proposition, and consumers don’t care if it’s a local or a foreign brand. The pie is big.”

More than 40-plus years since KFC pioneered the exportation of American restaurant brands—first to England, Canada and Japan, followed in 1987 by China—its parent company, Yum! Brands Inc., is keeping the floodgates of worldwide growth open.

For the end of 2007, Yum reported that it had 35,000 restaurants in 100 countries and territories, including Pizza Hut, Taco Bell and other brands.

In its three-nation China division alone, which includes Taiwan and Thailand, Yum reported a 2007 profit of $375 million, versus $20 million in 1998. In all, Yum has more than 2,700 restaurants in China, including KFCs, Pizza Huts and a growing chain of more than a dozen authentic Chinese cuisine restaurants called East Dawning that boast a U.S.-style quick-service operating format.

McDonald’s, for its part, sees no macroeconomic hindrances on the global front, said Heidi Barker, its senior director of media relations, international.

“I really do not think these issues apply to us,” she says. “We’re doing great.”

She notes that McDonald’s just finished its 63rd consecutive month of worldwide same-store sales gains and plans to open 1,000 new units this year, a 20-percent jump over 2007, with Europe set for 130 new outlets, 22 percent more than last year.