Special Report: Abroad Jump

Investigating opportunities overseas takes much more than tuning into CNN daily.

By Mary Boltz Chapman, Editor-in-Chief -- Chain Leader, 5/1/2003

These are uncertain times, to be sure. The Iraq conflict, an elevated terrorist threat level and severe acute respiratory syndrome have people cautious about travel, particularly overseas. Now is the time to hunker down and concentrate on the home front. Right?

Wrong, say many chain restaurant operators who continue to turn to foreign shores for growth, citing saturation in the domestic market and changing trade relations.

But while the importance of global development continues to grow, it is a risky business. Operator success depends on substantial due diligence and the ability to form strategic partnerships with locals rich in market knowledge and resources.

For years American chains have operated successfully in parts of Asia, Europe and Latin America. But there are clear opportunities in emerging markets in Southeast Asia, China, Eastern Europe, Africa and the Middle East.

As a starting point for a journey overseas, following are the key issues involved in international growth.

Who Are Your Customers?
Just as companies analyze who lives and works in the areas in which they operate domestically, they need to do the same homework with global customers. And, just as in the States, demographics within a country, even within the large cites, can vary dramatically.

The education level, income and standard of living are important factors to determine if the potential audience can afford to eat out, if their tastes are sophisticated or if they need convenient meal solutions. Is the population large enough to bring in customers?

In many countries, the only people who can afford to dine out are those in the middle and upper classes. In China, for example, a growing middle class means a growing customer base. As other industries move into countries, as is happening in several of the emerging Eastern European markets, populations are shifting toward the larger cities for work, opening new opportunities to feed those populations.

In the Middle East, there are many young people who have studied in America. They’re well educated and already familiar with American brands.

Culture Club
Beyond the demographics, look at the culture of a potential market. Different cultures have different eating traditions. Some are based on religion, including diet restrictions, and others are just based on where and when the people eat—whether they sit down with their families or take a two-hour lunch.

A careful look at your brand will determine if it will fit another culture, or if it can stretch a little to fit. In certain religions, alcohol is not permitted, so some full-service operators will lose out on what is a large part of their domestic business. Food preparation in Islamic countries must meet halal standards, which creates significant manufacturing changes.

A 1996 NRA survey revealed that 80 percent of American chain operators adjust their menus to suit local tastes overseas. Baskin-Robbins in China offers flavors like green tea ice cream. McDonald’s serves lamb burgers in India. Subway added more fish products to the menu in Japan.

But chains don’t just alter their menus; they’ve had to adjust in other ways. Bennigan’s restaurants in Latin America are blessed by a Catholic priest before opening. At Quizno’s shops in Japan, the staff does a group cheer every morning. That’s typical in many restaurants in Japan, and it helps motivate the staff.

Culture and demographics play a role in recruiting employees, as well. But beyond researching just the number and quality of workers available, operators need to check into the local labor laws.

In many countries, the hours of operation are restricted, or the number of hours a person can work in a day are limited. In Bulgaria, for example, the law doesn’t allow overtime at all. And in some countries, unions are required, which the restaurant industry is not accustomed to in America.

Getting the Goods
One thing Americans are accustomed to is being able to get about any product any time we want it. But sourcing is tricky overseas, whether procuring goods locally or importing them. Factors to study include tariffs and restrictions on imports, possible quality and control problems with locally sourced goods, and food safety and security concerns.

Some domestic suppliers might be hesitant to work overseas. Some operators find it helps to work with a few supplier partners from the onset.

Every country has its own set of rules and restrictions regarding procurement. Some are very strict about importing products with genetically modified organisms or hormones. Others are so lax that the food supply is potentially dangerous.

And the paperwork is often complicated. To bring in food, including spices and additives, to Israel or the Palestinian Areas, approval is needed from both countries’ ministries of health. Although it’s a one-time process, it can take months.

Despite the obstacles, there are solutions. A local customs broker can help, and in some cases is required by law. When Applebee’s entered Germany and the Netherlands, it tried to import the photos it hangs in its units. The company had to pay a 25 percent import tax on art. A customs broker advised Applebee’s to declare the items as “wall hangings” instead of “art,” and the tax dropped into the single digits.

Local suppliers need to be checked out thoroughly. Visit the facilities to ensure the consistency, quality and safety of the food. In volatile markets, identifying at least two or three qualified vendors per product can be insurance against one of them failing.

Money Matters
Another important element to study when looking at other countries is market economics. The stability of a country’s currency, consumer spending, gross national product and what kind of industry is prominent all have to be considered.

In some areas there are strict monetary exchange restrictions and taxes, making it difficult and expensive—sometimes impossible—for overseas operators to pay their American franshisors’ royalties or profits.

The financiers in some countries are unwilling to give loans to local franchisees. Most Polish banks, for instance, don’t see franchising as a safe way to start a new business. In Venezuela, loan interest rates are very high, up to the mid-20s. If interested in those markets, consider whether you can help finance those franchisees.

In South Africa, on the other hand, financial institutions are more willing to support franchisees with loan guarantees, particularly in light of Black Economic Empowerment. The act gives opportunities to black individuals and companies, who had for so long been denied the same chances as whites.

Who’s in Charge?
The whole political system in South Africa had to change to make that shift possible, illustrating that the government plays a huge role in business.

In China, as another example, foreign companies have do deal with constant regulation changes. The country is governed by a relationship-oriented economy, with many connections that outsiders can’t see.

Eastern European countries like the Czech Republic, Poland and Hungary are becoming more attractive as they take steps to join the European Union.

To counter anti-American sentiment in some markets, chains already operating there are promoting the fact that the local restaurants are owned, operated and supplied by local people and businesses.

Government can help or hinder any element of the business infrastructure, including transportation, supply chains, the amount of corruption and fair trade, and communications.

As an example, for the last 10 years, Poland has been working to develop a commercial infrastructure by focusing on telecommunications, banking services, media and advertising. Panama privatized some of its utilities in the late ’90s and continues to invest in transportation and telecommunications.

But in Russia, government corruption and organized crime still hamper the free market.

Competitive Set
Entering a new market, domestically or globally, requires a study of the competitive landscape. Overseas, that includes other American chains, local restaurants and other dining outlets such as subsidized workplace lunchrooms.

Most overseas markets didn’t have restaurant chains until American companies like McDonald’s showed them how it works. So in some areas, mostly the more established markets, there are local chain restaurants as well as independents.

Ask for a Lawyer
As soon as investigation into a new market begins, register corporate logos and other brand identifiers. In some countries, there is little trademark protection.

Many regions simply require franshisors to file a disclosure document. Others require a complicated approval process. Laws may demand preference to local suppliers, minimum-term agreements, franchisee ownership and that the franshisor provide guidance and training.

Also, each country has its own set of rules about real estate, and they are not always transparent. Get an attorney with international experience to ensure local requirements are being met.

Getting To Know You
The person who is really the key to success is a local partner who knows the market and its ins and outs, and has resources and connections.

To start the search for a partner, gather references from the U.S. Department of Commerce or International Franchise Association, or go to international trade shows. Get referrals from embassies, consultants and attorneys, and seek advice from the franchisors of noncompeting chain concepts already located overseas.

Be sensitive to cultural differences, and be patient. Foreign deals are often years in the making and take a lot of negotiation and relationship building. But operators say the local partner can make the difference between success and failure in global markets.