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Examining growth opportunities in Eastern Europe

Eastern Europe is calling to expansion-minded U.S.-based restaurant companies, and some of the biggest players are answering with enthusiasm despite the region’s relatively low per-capita spending on dining-out occasions.

“We’re especially pleased with our sales performance in Russia, with system sales growth of 44 percent, including 32-percent same-store-sales growth, which is the best in our business,”
David C. Novak, executive chairman and chief executive of KFC, Pizza Hut and Taco Bell parent Yum! Brands Inc., told stock analysts in July while discussing his company’s second-quarter results. “These results give us even more confidence we can build a strong, profitable business in Russia.”

Louisville, Ky.-based Yum ended fiscal 2011 with 174 restaurants in Russia — including 50 company and 110 franchised KFC locations and 14 franchised Pizza Hut units — that generated sales of about $338 million, or 2 percent of Yum! Restaurants International’s total $16.89 billion in annual sales, according to documents filed by the company.

Former T.G.I. Friday’s chief executive Richard Snead has referred to Russia as “the leading opportunity within the emerging-market large countries.” But, he added, “it is one of the toughest places in the world to do business.”

Snead is now the chief executive of Gatti’s Pizza of Austin, Texas, but in his days at Carrollton, Texas-based Friday’s he helped Russian operator Rosinter Restaurants become the bar-and-grill chain’s fifth largest franchisee in the world.

Rosinter earlier this year said it would become the first franchisee of McDonald’s in Russia, where the Oak Brook, Ill.-based chain ended fiscal 2011 with 310 company-operated locations. 

Miami-based Burger King, too, recently expanded a franchising deal in the country.

Nation’s Restaurant News asked Michael Schaefer, head of global consumer foodservice research for Euromonitor International, to shed some light on the Eastern European market.

NRN recently collaborated with the London-based research firm to create the International Top 25 report in the Aug. 20 issue, including data showing multiyear foodservice chain sales for Eastern Europe and subsets for Russia, Poland and other Eastern European countries. Those data show Russia and Poland to be experiencing above-average growth in chain foodservice sales.

Multicountry, per capita foodservice spending data also revealed the potential upside of the Eastern European market by highlighting the relatively low current spending levels for dining out among its residents. 

What are some of the major issues in Eastern Europe for U.S.-based chains to consider before expanding there?

The major near-term issue would be the ongoing crisis in the eurozone, which continues to have a major impact on those markets with significant exposure, like the Czech Republic or Hungary, both of which continue to see sluggish economic growth. For countries with larger internal markets and less dependence on trade with the eurozone, the outlook is more positive. In the case of Poland and Russia, for instance, gross domestic product is expected to average 3-percent to 4-percent annual growth in real terms over the next five years, which should keep incomes and foodservice demand growing.

A more long-term issue for the region is demographics. While Russia’s problems of an aging population and relatively low life expectancies [particularly for men] are well documented, to an extent this is an issue for the entire region. Despite lower average incomes, markets like Russia, the Czech Republic and Poland all have demographic profiles similar to markets like Germany or France and are all expected to see the average age of their populations climb over the next 10 years. While this doesn’t preclude continued foodservice-demand growth, it certainly will affect strategy, with the heavily youth-focused advertising one sees in Asian or Latin American markets unlikely to prove as central in Eastern Europe. 

What Eastern European countries or markets are most attractive
to U.S.-based chains looking to expand in that region, and why?

Poland and Russia both stand out in terms of size and growth potential. Together they account for almost half of total foodservice spending in the region, yet overall per capita spending remains quite low. The independent restaurant sector is still relatively underdeveloped in both markets, so there is great opportunity for chain operators to expand the market and drive the further development of eating-out culture, particularly in Russia, where outside of Moscow and St. Petersburg the foodservice market remains quite underdeveloped. 

Looking at the per capita spending numbers, is the relatively low spending in Poland, Romania, Russia and Ukraine a result of relatively low disposable income in those countries, or does it reflect an inadequate supply of restaurants?

I would say it has much more to do with an underdeveloped eating-out culture compared with other markets. Part of this goes back to the relative underdevelopment of service industries under communism. So when you compare the states of Eastern Europe with other countries at similar or lower levels of disposable income, you still often find a significant gap in terms of per capita spend. Hence, higher per capita spending in China vs. Russia or Poland despite lower per capita incomes overall. Particularly in Asia, we find that eating out is a much bigger part of traditional social life than it has been historically in Eastern Europe — though that’s changing — which fuels higher relative spending.

Some U.S.-based chains, including McDonald’s, use nonconventional formats such as limited-menu kiosks in markets where the standard of living is rising but may not yet be at a point where large percentages of the population can afford regular meals in conventional restaurants, such as some areas of India. Will that sort of strategy yield benefits in Eastern Europe?

I would say thus far the opposite has been true, with fast-food and even pizza-delivery chains successfully repositioning their concepts with a more upscale, eat-in-focused approach. There is still very strong demand for unique eat-in experiences, particularly in markets like Russia, and I think that’s going to see the strongest growth going forward. There’s still a real lack of modern, local, independent casual dining, even in cities like Moscow — though that is changing — and that will continue to create opportunities for a wide variety of concepts, from Italian to sushi to bar and grill. While there is also room for a lower-priced offer, particularly as we see expansion to smaller cities and localities where incomes might be lower, I would say an effective in-store experience will remain the strongest driver of sales as a local eating-out culture continues to evolve in many of these markets.  

Do fancier restaurants or adjusted-service formats yield higher sales in Eastern Europe and other foreign markets compared with U.S. locations, or are they just the table stakes required to even compete in some other countries?

I would say, particularly in Russia, there is a great deal of interest in new forms of casual dining because that’s where the biggest gap in the market exists. I wouldn’t necessarily say a fast-food or a pizza chain needs to always dramatically revamp their operations to capture that, but rather simply needs to be aware of the kinds of informal sit-down occasions they will be competing for. Even fast food is going to be less about on-the-go convenience than about experience, socializing, etc. 

From what you’ve seen, in Eastern Europe, are American chains having greater success with
the company-store or franchise-
development model?

I think it’s long been possible to succeed in Eastern Europe with a franchised model, with [multiconcept franchisee] AmRest in Poland probably the key example of that. But I would also say there has been a significant acceleration in franchising activity across the region over the last five years, above all in Russia, where the success of franchised concepts has encouraged still more new entrants. While obviously a primarily company-owned strategy can work, as it can anywhere, I’d say there is now much more of a critical mass of capable partners in the region than was the case, say, five years ago. Particularly in Russia, where nearly all of the new entrants in the last one or two years have done so with a franchised model, and many of them are thriving. Rather than one [business model] being superior to the other, I’d say the level of interest in franchising in Eastern Europe is as high as it has ever been, and [it] is likely to remain the preferred model for American chains there going forward. n

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TAGS: Franchising
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