A recent announcement by Bloomin’ Brands Inc. that it was closing 34 of its 110 company-operated Outback Steakhouse restaurants in “a mature and saturated” South Korea casual-dining market was not too surprising to some observers.
In explaining why the company was closing “under-performing” units, Bloomin’ Brands executives wrote in U.S. Securities and Exchange Commission filings: “In our South Korea market, higher levels of household debt have impacted discretionary consumer spending, particularly in the casual-dining environment.” They further stated, “We anticipate the restaurant closings in South Korea will promote a more efficient cost structure and allow us to maintain current levels of profitability in a continued declining market. “
“This is the typical boom-and-bust cycle there, as each brand tries to muscle out the other,” development executive Jean Jacquemetton said of the Outback closures in South Korea where he indicated there is a popular business belief that to be successful a chain must field more units than its competitors. “Both Fridays and Bennigan's did the same, if you take an historical look at the numbers.”
Jacquemetton is president of AmRest SAS and AmRest Gmbh, the French and German subsidiaries of multi-concept restaurant operator and franchisee AmRest Holdings SE of Wroclaw, Poland. He is also a veteran of international development programs for such U.S.-based chains as Chili’s, Outback and Fridays.
The degree to which restaurant chains might act to assert their leadership in the South Korea market may make it an extreme case, but Jacquemetton said it is not uncommon for American brands to come to dominate a foreign market over other U.S.-based competitors.
“Chili´s in Mexico is an example,” he said of the Dallas-based casual-dining chain, which, as of late November, had 105 units in that country.
I got in touch with Jacquemetton and Michael Schaefer, head of Euromonitor International’s foodservice and beverages research, for analysis of findings from Nation’s Restaurant News’ research tied to the annual International Top 25 report compiled by NRN in conjunction with Euromonitor.
Our research indicated that for the Top 25 U.S.-Canada-based chains ranked by worldwide system sales, the pace of aggregate new-store development in markets outside the U.S. or Canada far exceeded the rate of sales growth. We found that aggregate U.S.-Canada Top 25 international sales, or sales from outside the chains’ home countries, grew by 3.3 percent, to $109.1 billion, in the latest completed fiscal years, and by 5.3 percent, to $105.6 billion, in preceding years. That compared with growth in aggregate international units of 8.9 percent, to 87,741 units, and 8.4 percent, to 80,609 locations, in the latest and preceding years, respectively.
Those data suggested that any reasonable improvement in store-level performance at international locations could trigger a significant increase in aggregate sales among Top 25 U.S.-Canada brands, so I ran that hypothesis past Schaefer and Jacquemetton.
Three brands a big part of group sales lag
Noted Schaefer: “As far as the disconnect between group sales and unit expansion, I think your logic is basically correct, though part of it may be problems with aggregation. McDonald’s and Yum are so massive, and YUM’s sales in particular took such a beating in China over the last two years that that may actually be pulling things down, depending on what grouping you’re looking at.”
(That was a valid point, as a quick check of numbers revealed that when results from outside the United States for Yum’s KFC and Pizza Hut brands and McDonald’s were excluded from Top 25 group totals, latest-year international sales growth of 9.5 percent compared with unit growth of 12.4 percent, and preceding-year sales growth of 10.4 percent compared with an increase in units of 10.8 percent.)
Continued the Euromonitor rep, “The other question is whether that leap in per-store sales is coming, and I’m not so sure [it is].“
“I think markets like China and Brazil are only going to get more competitive, and as you expand further into second-tier cities and lower-income markets it gets harder and harder to drive average unit volumes in the near-term,” Schaefer said. “Plus, the big markets simply aren’t growing like they used to. Double-digit gross domestic product growth year after year is not really happening [any more] in the BRIC (Brazil, Russia, India and China) markets, nor in many of the Southeast Asian exporter markets.”
The same but different
“Basically, the same business dynamics are at work internationally as domestically, just with bigger swings,” Jacquemetton said. “If most of this new development is happening in one country or market, then it must mean that even with below average sales, the franchisee [or parent company] is making money or understands that once critical mass is achieved sales will increase substantially. This [belief] could coincide with having the ability to get on television, which typically will bump sales 10 percent, at least.”
Illustrating his point about the potential impact of television advertising on sales abroad, Jacquemetton recalled, “About three years ago, Outback in South Korea went on TV with a male superstar that had just finished his military service and basically had been out of the public eye for a couple of years. They did a steak promotion with new special sauces (with blueberry) that have particular health connotation in Korea. Sales increased in all 100 restaurants by, I kid you not, 100 percent for the duration of the commercial run.”
Also a consideration when opening abroad, the AmRest executive said, is that “internationally, generally, entire regions are impacted by downturns, as most countries´ economies are so interdependent that a downturn [in one] will impact all; the same can be said of an upturn.” He added, “It is not unusual to see regional sales drop 20 percent to 30 percent and then swing back the opposite way.”
What’s more, the seasoned operator said, elections in some other countries can have a greater impact on business than those in the United States and Canada.
A multi-pronged strategy for overseas success
“This is just part and parcel of doing business in uncertain socio-economic and political situations. When things are good, they are great and when they are bad, they are terrible,” Jacquemetton said even before the ruble crisis in Russia added tension in a market that had recently seen increased regulatory interest in U.S.-based McDonald's after the United States and Europe leveled economic sanctions against that country for its part in the Ukraine crisis.
“The moral of the story," he concluded, "is that if you go international, you need to spread your risks through geographic and economic diversity as well as through [a business-portfolio mix of] direct ownership, joint ventures and straight franchise.”