COMMENTARY

Global checklist: 7 must-ask questions before planting flags outside your home country

March 14, 2017 | by Cherryh Cansler

It's a pretty safe assumption that most restaurateurs dream of taking their brands international, but making that dream a reality isn't so easy. Just because a concept takes off in one area doesn't mean it's meant to cross borders. Waiting too long, however, is also a huge mistake, said Joel Silverstein, founder and CEO of East/West Hospitality Group.

"The digital era moves information and ideas around the world exponentially faster than five to 10 years ago," he said. "Many of my clients who have delayed entry into international markets while building up their domestic businesses often find copycat concepts in key overseas markets once they decide to go global.

"They lose their first-mover status. Earlier is clearly better if you have the right concept with the right economics."

But how do you know if you have the "right concept with the right economics?" 

Here are seven questions to help you decide.

1. How is your consumer appeal?

While it may seem logical to wait to launch globally until you have a solid hold in your home country, many smaller concepts are already considering overseas expansion. LA's The Pie Hole, for example, recently opened in Japan, despite only having six units. Slapfish, an eight-unit seafood brand, is opening this year in London and also has plans to open in South Korea. Although their footprints are small, both brands have consumer appeal to spare, which is apparent by their social media buzz. They have thousands of followers.

"Most overseas franchisors view low unit count concepts as unproven and therefore high risk and tend to shy away from investing in these ideas," Silverstein said. “The exceptions are concepts with very high social media buzz."

The Pie Hole CEO Sean Brennan said in an interview with FastCasual that small brands should take the global leap as long as they are confident in their brand and culture and have good systems intact.

"In the volatile restaurant industry, you don't want to pass up a killer opportunity as it may never come again," he said. "The upside is worth the risk." 

Brennan has built his social following with frequent posts and special giveaways marketed to social followers.  

"Food Porn is a thing," he said. "People love to look at photos of tasty food, but also they feel heard on our social media. We answer questions and get feedback."

2. Is your economic model robust?

If a brand's store-level EBITDA margins are less than 20 percent in the USA for company-owned stores, going overseas is not a great idea, Silverstein said

"Overseas franchisees generally face higher interest rates for borrowing and higher rental costs than in the USA with shorter leases and almost no leasehold improvements by the landlord," he said. "They are looking for quicker cash paybacks in the two-to-three year range. If you cannot deliver a model with these metrics you are unlikely to build a scalable business."

3. Which markets should you consider?

U.S.-based chains should look first at their neighbors — Canada and Mexico, Silverstein said.

"These are the low-hanging fruit, which avoid expensive travel costs," he said. "Mexico is generally by far the best short-term market opportunity given close proximity to the USA and the popularity of U.S. brands."

While Mexico and Canada may be the easiest markets for American concepts to enter, Asia-Pacific is the largest and fastest-growing consumer foodservice market with over $1 trillion in value, Silverstein said. China, Japan and India combined are more than 70 percent of the region.

"High growth opportunities are China, India, Vietnam and Indonesia," he said.

Asia is working for The Pie Hole, said Brennan, who sifted through several Japanese offers before settling on his franchise partner there.

"(Japan) chose us," he said "There is a huge market for U.S./California brands in Japan, and the specialty coffee market is booming so it's a perfect fit for us. Plus, the Japanese love their sweets and anything that is specialty made. A majority of Japanese homes don't even have an oven and are very small, so they get their baked goods at restaurants."

Slapfish CEO Andrew Gruel, who said he is at the beginning of his international journey, said his decisions to open in the U.K. and in South Korea were driven by his partners in those global markets.

"We knew we were ready to scale once we started to franchise locally, but wanted to find partners who understood the international market into which we would expand," he said

4. Is the concept more suitable for emerging markets?

Affordability is a big issue to consider and this differs greatly by country, Silverstein said. In developed markets, for example, USA menu pricing is affordable and may even be on the low side. In emerging markets, however, these prices are not affordable to the broad middle class.

As a general rule, Silverstein said fast casual concepts with counter service should be priced in the $5 to $6 range, and full-service concepts can be scaled with guest checks under $10. Pizza Hut, for example, has more than 2,500 stores in Asia Pacific with the closest USA casual dining competitors barely over 120 locations each.

"The difference is menu affordability," Silverstein said.

5. Can you localize?

Importing ingredients and equipment is costly and drives up store-level investment and COGS, Silverstein said, who recommends that brands localize when possible.  

"If your model is heavy on USA equipment or ingredients and raw materials that cannot be sourced locally then this is likely to negatively impact financial returns," he said.

Anthony Russo, founder and CEO Russo’s Restaurants, a 47-location franchisor of the fast casual and casual dining brands Russo’s New York Pizzeria and Russo’s Coal-Fired Italian Kitchen, agreed.

Th chef has units in Dubai, Abu Dhabi and Sharjah in the United Arab Emirates and sources locally. Core ingredients — flour, cheese and sauce — come from the U.S., however.   

"It all depends on the product that you are offering," he said. "What's important is to customize your menu, but before you dive into global expansion, you need to look into exportation guidelines and their approval process first and what is the tax on certain goods."

Russo discovered, for example, that the Middle East's menu approval process took a year.

"If I had known this before, I could have started the approval process in advance," he said.

Brennan said the key is to be patient with cultural and communication misfires.

"Take the time to understand the local market before demanding your brand specs get implemented in totality," he said.

6. Are your trademarks registered?

Emerging concepts new to international franchising seldom understand the expense and time involved in trademark registration, Silverstein said.

"Many countries adopt a ‘first-to-use’ policy, which means that someone else can register your mark in a country without your approval and ask for substantial payment to sell back the registration at a later date," he said.

To avoid any issues, Silverstein recommends that brands register their names and logos in their top priority markets.

"This can be a very costly process so take care to determine which markets are most important to your long-term international franchising strategy," he said.

7. Are you a George Foreman or a Muhammad Ali?

Although there are a variety of global restaurant brands, only four enjoy ultimate widespread popularity and the ability to demand the highest fees.

"McDonald's, KFC, Pizza Hut and Starbucks are the George Foreman of consumer foodservice," Silverstein said. "They took the punches over many years and persevered in the ring to win consumers while suffering heavy operating losses in many cases. Emerging concepts must fight like Muhammad Ali, bobbing and weaving to find the profitable opportunities while managing their risks. In short, you must rely on agility to win markets not brute power."

This story is sponsored by ...

Taking Leading Restaurant Chains to Asia Pacific
We work with a variety of leading restaurant chains from the US, UK, Japan & Korea, even private equity firms & global consulting groups. Our work includes all sectors of the foodservice industry. See if your brand is ready for expansion to Asian markets. Learn more

 

Photo: iStock


Topics: Franchising & Growth



Cherryh Cansler
Before joining Networld Media Group as director of Editorial, where she oversees Networld Media Group's nine B2B publications, Cherryh Cansler served as Content Specialist at Barkley ad agency in Kansas City. Throughout her 17-year career as a journalist, she's written about a variety of topics, ranging from the restaurant industry and technology to health and fitness. Her byline has appeared in a number of newspapers, magazines and websites, including Forbes, The Kansas City Star and American Fitness magazine. She also serves as the managing editor for FastCasual.com. wwwView Cherryh Cansler's profile on LinkedIn

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