International Restaurant Franchising

FRANCHISING


U.S. Restaurants Push Abroad
By RICHARD GIBSON

Perhaps nowhere is the Americanization of the planet more evident than in the restaurant world.

There's an Applebee's in Athens; a Papa John's pizzeria in Karachi, Pakistan; two Ruby Tuesdays in Bucharest; a Denny's in Christchurch, New Zealand; a Chili's Grill & Bar on a riverboat on the Egyptian Nile. And always there are the seemingly ubiquitous outposts of McDonald's, Domino's and KFCs that keep popping up, like tourists on holiday, wherever one goes.

As the restaurant industry in the U.S. turns increasingly dour, major brands are turning their attention abroad, where business remains relatively robust and growing middle classes are creating large pools of consumers eager to taste affordable American-style fare.

Not only do the companies encounter less competition there than in the U.S., but newly arrived brands also typically enjoy a novelty aura that attracts the curious. Finally, many franchisers sell operating rights to local businesspeople, who assume responsibility for the restaurants day to day and send royalty payments back to the chains' home offices, often giving the corporate owners a superior return on their investment.

"Trends continue to be in our favor," says McDonald's Corp. President Ralph Alvarez. "We're growing [abroad] because demand exceeds our supply."

Many investors in McDonald's and multi-fast-food giant Yum Brands Inc. are holding those stocks precisely because of the perceived opportunities overseas.

This year, Burger King, McDonald's and Papa John's International Inc. are among chains intending to open more restaurants abroad than at home. And in laying out plans for combining Wendy's International Inc. with its Arby's sandwich business, Triarc Cos. said it sees substantial possibilities abroad, where both brands have relatively few outlets.

YUM, which owns Pizza Hut, Taco Bell and Long John Silver's, along with KFC, estimates that within 10 years 70% of its profits will come from outside the U.S. Today, about 55% does.

The company is a stellar example of how to cook up overseas potential. China, a market it entered 21 years ago, today delivers about 25% of the company's annual profits. Its KFC brand has more than 2,000 locations in 500 cities across the Chinese mainland, with restaurants that not only serve chicken but also congee soup and fried dough at breakfast. (McDonald's, which followed KFC to China, has fewer than half that number.) Yum is even venturing into the coals-to-Newcastle business of selling its version of Chinese food to the Chinese.

With 15,000 of its 35,000 restaurants outside the U.S., Yum continues to seek out new markets. KFC soon will enter Nigeria, its 106th country. Next year Yum plans to test the popularity of its best-selling domestic brand, Taco Bell, in India.

Casual-dining operators also are trekking abroad in search of profits. Chili's parent, Brinker International Inc., which says its long-term vision is to become the "dominant, global casual-dining restaurant portfolio company," last year signed development agreements to expand in Australia, Canada, Ecuador, Honduras, Peru, Portugal, South Korea and Turkey.

As in the U.S., McDonald's says, finding the right location is the company's biggest challenge abroad. Prime real-estate targets are increasingly in suburbs ringing the cities of Europe, Asia and Latin America. The world's largest hamburger chain, McDonald's has more than 17,500, or about 56% of its restaurants, outside the U.S.

While McDonald's Mr. Alvarez says that "we're not looking for new countries" to enter, archrival Burger King has been doing just that. In fiscal 2007, the No. 2 company in hamburger restaurants behind McDonald's went into Japan, Poland, Egypt and Indonesia. In the past two years it has opened 34 restaurants in 14 cities in Brazil alone.

Another dominant U.S. player abroad is Domino's Pizza Inc., with some 3,500 stores, or about 40% of its total, outside the U.S. That 25-year overseas presence recently helped offset disappointing domestic results; in the last quarter, international comparable sales -- free from the intense competition that has roiled the U.S. pizza market -- rose 8.8% from a year ago while Domino's domestic business experienced a 5.2% drop.

Some restaurateurs modify their menus to cater to local tastes. In some parts of Asia, for instance, McDonald's serves rice burgers: shredded beef between rice patties. Customers in the Netherlands can order a deep-fried patty of beef ragout. In India, its Big Mac -- called the Maharaja Mac -- is made with chicken rather than beef. But, says Mr. Alvarez, "our core menu is still what you know in the U.S. People come to McDonald's because they want an American product."

Overseas success isn't a sure bet. Papa John's stumbled on its first foreign sojourn, when it entered Mexico in 1998. "We didn't have our act together," says David Flanery, president of the pizza company's international operations. "We had the wrong franchise partner."

As a result, the company eventually closed most of its 40-or-so stores there, found new local operators, revised its support structure and started over. Today, the Louisville-based firm has pizzerias in 28 countries.

Despite the allure, some big U.S. restaurateurs haven't ventured outside North America. They include Cheesecake Factory Inc., Jack In The Box Inc., Panera Bread Co., CBRL Group's Cracker Barrel Old Country Store chain and Darden Restaurants Inc.. Each has indicated it sees significant growth at home.

"We periodically look at international expansion to understand where opportunities exist," says Darden spokesman Rich Jeffers. "However, given the momentum that we have at our existing businesses and given the potential that we have with LongHorn [steakhouse], Bahama Breeze, Capital Grille and Seasons 52, we believe that our focus on domestic opportunity will consume most of our time over the next few years." Darden does operate a smattering of Olive Garden and Red Lobster restaurants in Canada.

Write to Richard Gibson at dick.gibson@dowjones.com