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Special Report: EP International Forum
“Up, up and away?”

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The word globalisation has been a focal point of business discussion for many years now, particularly with the emergence of the China and India as key players in the world economy. This has led many hospitality operators to explore international opportunities, particularly into emerging markets such as Dubai.

A survey conducted by HSBC last year showed that 80% of companies already trading internationally believed that they needed to do more to survive the recession, whilst 40% of companies not currently trading internationally believed that they needed to do so in order to survive the recession.

But what is the viability of such an endeavour?

The aim of this inaugural international forum was to raise the level of discussion on key issues which impact international development, including;

  • Which markets are attractive for international growth?
  • What is the best business model – corporate owned, franchise or joint venture?
  • What are the opportunities within the international hospitality market?

In an interesting debate, it became evident that the experience of operators in the international market varied dependant upon business type; that international travel patterns were shifting and that selected emerging markets have the potential to succeed.

The Guest Speakers…

Martin Francis, Senior Manager, Global and Corporate Franchising briefed the group on the HSBC’s experience of the international marketplace:

  • Whilst the West will see a fragile recovery, emerging markets present opportunities for development.
  • Within Europe, France, Germany and Poland are holding up, with Turkey predicted to grow this year.
  • It is important to be flexible when expanding internationally, as the need for local cohesion brings with it political, commercial and academic issues for consideration.
  • Investment in technology is very important, as is the privatisation of innovation.
  • Cost structures vary from country to country; you cannot over-estimate the size of the market. Local specifics mean that it can take longer to reach profit than expected.
  • The key is to have good resources and good partners, which is vital to be able to adapt the proposition when things inevitably go wrong.
  • Joint ventures can have difficulties over time. However, it may be appropriate to have a mix of corporate owned, franchised and joint ventures such as McDonalds
  • Franchise has less capital investment, is faster to set-up, partners have local knowledge and there is interest in sales growth/cost control.
  • The downside of franchising can be the size of the partners and competing objectives – so piloting is very important and a “sense of humanness” is required.

There is an old Chinese curse “May you live in interesting times” – but is this really a curse?

  • In Brazil more than 30 million consumers have entered the market and many want to own their own businesses.
  • In Poland unemployment has halved over recent years.
  • In China confidence is growing, foreign companies have entered the market via joint ventures – now resulting in WOFEs: wholly owned foreign enterprises.
  • It is essential to have the right partner in China – some provinces have c. 100 million people.
  • In the developed world innovation is vital.
  • Eating out trends in France are evolving; the market is open to tapas, Asian food etc, whilst food habits are changing; meal times are shortening, lunch is eaten more ‘on the run’ and businesses like Subway are entering the market.
  • Vietnam is open to new offers and brands.
  • It is not all about expansion into the Middle East; companies like Jumeirah are exporting their Noodle House concept to other parts of the world.

Peter Backman, Managing Director, Horizons briefed the group on relevant information and contextual issues within the eating out market:

  • The eating out market is worth £1.4 trillion worldwide
  • The US and Europe are roughly the same size at current exchange rates, but this is distorted by the strong Euro. The US is one-third of the worldwide market by volume.
  • Europeans spend on average £378 pp per annum, eating out of the home – this amount is higher in developed economies as countries like the Ukraine and Moldova have low average spend.
  • 12,500 meals are sold per second, equating to 40 billion per year.
  • There are 2,160,000 eating out establishments, so it is a large and complex market.
  • Markets have been operating on a very open basis in recent years - will this change?
  • The top five countries in Europe: (Germany, France, Italy, Spain and the UK) – equate to 77% of the market.
  • No company has more than 3.5% of the market and this company is McDonalds.

Why expand?

  • The US Commercial sector is worth £320 Billion, which is eight times the size of the UK. Quick service Restaurants account for 50% of the market, whilst full service is 37%.
  • There are 400 chains in the US, and just 22 of these are active in Europe, meaning that they trade with more than 5 outlets (not including Dunkin Donuts, Krispy Kreme, contract catering). So 22 chains have 16,000 outlets which equates to 1.4% of the market in Europe.
  • Internationalisation is easy when you are a market leader, such as McDonalds or KFC, but it is harder when a market niche is already filled elsewhere.

What to look for:

  • Beliefs, language, currency, legal system
  • International travellers, airports, hotels
  • Expats – such as Dubai

The current market

  • Consumers are not spending unless they have to
  • There is a drive for lower costs throughout the sector, and it is looking for value along the chain, from operators to distributors
  • A lot of Menu Engineering is taking place, resulting in reduced portion sizes in some instances to support price reductions.

Top 10 things in the way of international expansion:

1. Location
2. Money
3. Labour
4. Management skill
5. Competitive levels increasing, price reducing
6. Supply chain
7. Few large scale successful international businesses
8. Economies of scale are difficult to realise
9. Lack of focus
10. Infrastructure
11. Management Focus – need clarity of vision

The forum’s discussion….

Key points discussed within the group were:

Dubai and the rest of the Middle East

Perhaps inevitably, the Middle East was a focal for point for the group, with some operators high-lighting a difference in their experience,
particularly in relation to Dubai.

There was some agreement that Abu Dhabi was becoming an important market.

“We believe there are still opportunities in the Middle East; Dubai shopping malls are busy. However, Abu Dhabi has become an important market.”

“Our operations are performing well; I think that there is a lot of press hype. Dubai is too far developed now for it not to be successful. We believe the market could take another four sites.”

“We opened our third site in January and believe that the market has changed radically. Dubai’s hotel sector has suffered, mostly due the business travel decline.”

“Our business is not reliant on business travel in Dubai, the expat customer base is vital. However, I would also add that Abu Dhabi is becoming a very interesting opportunity for our business.”

The changing travel market

The group heard about the experience of one operator in the international travel market, who pointed out the following significant changes:

  • In Europe there is a clear pattern - strong airports still strong, smaller airports are not so good.
  • Four out of ten planes fly into Heathrow for a connection, marginal routes are falling away. You can no longer fly direct from Barcelona to Chicago and have to go via London.
  • Gatwick will not grow unless the routes are there.
  • First tier airports have lots of operators, but spend is declining.
  • Second tier airports are in double digit decline.
  • Third Tier airports are losing money and will not survive.
  • From an F&B perspective, some noticeable trends are that people are people are bringing their own food and experiments with the high end eating establishments are noticeably not working.
  • Plane Food by Gordon Ramsay recently announced a loss of £780k in its first year.
  • People are eating more quickly, as queues are longer. At one airport security checks involve patting each traveller down individually and F&B sales are down 30%.
  • Booking patterns are changing: they are happening later and people are looking for a deal.

International Expansion opportunities – the markets

There was some discussion on where potential opportunities for successful development could be, ranging from Brazil to Europe. The view appeared to be that in international markets had long-term potential, but that local customs and considerations needed to be a major factor in deciding where to expand.

“Brazil is growing its mid-market restaurant provision; the key is to find great partners. Hubs need to operate independently and locally.”

“Brazil is a virgin market for international operators; however, there are some superb local operators with international standards.”

“You do business very differently in Brazil, compared with the UK. It was the most difficult opening, but one with the most potential.”

“In Europe there are different labour costs, different employment patterns, but the EBITDA is similar – so you get there differently but with the same end result. Our top two markets are France and Spain.”

“Time versus reward is really important. When is the right time and place for your brand? India is very exciting but need to look at red tape, litigious nature and corruption, so is it worth it?”

“Ultimately the more we expand internationally and go through new borders, the more local and cultural issues become apparent.”

Photos by Suzanna Fields Photography

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