Industry focus: Fast food in the UAE

US fast food chains, looking to expand their geographical footprint, are being lured to the UAE by its glitzy shopping malls and insatiable appetite for fast food
By Claire Valdini
Sun 23 Dec 2012 10:13 AM

It’s a scene replicated across the GCC every day; a queue of people patiently wait in line to place their order. The glossy new menu features freshly brewed coffee, fried breakfasts and loaded pancakes. But these consumers don’t bother to look at the menu; they’ve been meeting friends and family for their all-American breakfast at IHOP for years.

This store, however, is on The Walk at Dubai’s Jumeirah Beach Residence. Further along this parade of beachside shops and restaurants a similar scene is being played out in the recently opened branch of Fat Burger. Walk a little further down the road and you’ll see Starbucks and Burger Fuel, to name but a few. The stretch of prime retail is not unique in Dubai but it is one of the clearest signs that the UAE is one of the hottest destinations for fast food brands looking to expand their global footprint.

“Anything American is more sought after than a brand that was born in say Eastern Europe, Asia or even locally,” says Zubair Razzaq, CEO of Dubai-based AWGAL Investments, which recently signed a deal to introduce the US burger chain Mooyah Burger to the UAE.

“These companies have a track record of perfecting their brand and food so while no investment is risk-free, knowing that it will be accepted by the local market makes it less risky,” he adds.

He’s not wrong. Demand for fast casual dining, which includes the more traditional fast food chains such as McDonald’s as well as the table service brands like IHOP,  is growing amid a rise in disposable income, extravagant shopping malls and a seemingly unquenchable appetite for Western food concepts.  The UAE’s fast casual dining sector is expected to grow from $6.4bn in 2011 to $8.7bn by 2015 with burger chains set to see the biggest increase, according to research firm Euromonitor.

At the forefront of this revolution are the American brands such as Smash Burger, Shake Shack and IHOP. US retailers are the world’s most global with 73 percent of all brands operating across their home market, Europe, Middle East and Africa and Asia Pacific, according to a recent study by global real estate consultants CBRE. The number one target market for American retailers outside of their home region is London followed by Dubai and Kuwait City, adds the report.

But it’s not just American concepts that are interested in the Middle East. Canadian-based coffee shop Tim Hortons and Freshii, together with operators as far as New Zealand, are all keen for a slice of the action. No matter where they are from, the one thing they have in common is that they are typically contacted by a local family-owned firm looking for franchise opportunities, says Matthew Corrin, founder and CEO of Freshii.

“The interest doesn’t often start with the American or European brands, it starts with the local group saying we want this brand, which is then followed by the brand saying the economics of Dubai sound really attractive,” says Corrin. “We are just reacting to sophisticated businessmen and women who are putting together incredible portfolios and want to include our retail concept within their portfolios,” he adds.

One of the most significant players is the Kuwait-based conglomerate MH Alshaya Co, which has introduced a plethora of new brands to the region in the last twelve months, including several food outlets. The retail giant, which manages or owns regional franchise rights for over 70 brands, recently opened local branches of IHOP, The Cheesecake Factory, Texas Roadhouse and Shake Shack, to name but a few. “Good brands can cross international borders,” a spokesperson for the company says.

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“If a brand is already a tested, popular concept back home, and its owners are committed to international expansion, it will tend to do well here provided its target market can be clearly defined and the franchise partner can deliver expert operational and support teams such as logistics, property, marketing and HR.”

But it’s not just the well-established family-owned firms that are vying for a slice of the action. Razzaq launched AWGAL Investments this year specifically to target the food and beverage section and is already in talks with several US-based franchises about opportunities in the UAE. Tabco Emirates, which plans to open 20 branches of Elevation Burger in UAE, was established earlier in the year to do just the same.

While fast food is clearly a popular choice, there is growing demand for branded table service restaurants such as the organic burger chain Elevation Burger, Mooyah Burger and Texas Roadhouse, all of which have either opened or plan to open in the near future.

The region’s growing obesity and diabetes rates — five of the ten countries where diabetes is most prevalent are located in the six-nation GCC according to the International Diabetes Federation — also makes it a target for healthy fast food concepts, says Corrin.

“[The Middle East] is by a long distance the most franchise momentum that we get in any region,” he explains. “The local retail market, at least with the American and European brands, is operated by just one or two very large groups… and they are now recognising for the first time that they are missing their healthy options,” he adds.

Franchises are being lured to the region by a number of factors, most notably Dubai’s extravagant shopping malls and the high disposable income of its residents. The combination makes the UAE an attractive market from which to gauge consumer demand and act as springboard from which to launch regional operations.

“Malls are open every day of the year, which is amongst the highest in the world, and the spending and the usage is very good so it looks from the outside to be a very good market for food and beverage concepts to come in,” says Nick Maclean of global real estate consultant CBRE Middle East.

“Because of the number of nationalities, the internationalisation of the Dubai market and the amount of travel that people who are resident here do, invariably the people living here have experienced those restaurants in their home markets, so one of the overriding factors when we talk to those retailers to try and persuade them to come here is the familiarity with the brand.”

“With an average regional GDP growth of around five percent versus flat or negative growth in Europe or the US… the region is promising for companies that are looking to maintain or build their revenues,” adds the Alshaya spokesperson. “We generally launch either in the UAE or Kuwait and then look to spread more widely across the region.  Both markets have a proven demand for well-established international retail brands, together with access to premium mall locations for us to choose from,” they add.

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High brand recognition was one of the biggest factors in Tabco Emirates’ decision to introduce Elevation Burger to the UAE, says CEO Khaled Ahmed Al Dhubaib. “The market really welcomes international brands; they trust the franchise because they’ve often tried in their home market so they know what they are getting. At the end of the day, we are investors so it’s less risk when it’s a franchise that you believe in,” he explains.

A well-travelled population means consumers are already familiar with many of the brands that Alshaya introduces to the market, adds the firm. “The region… has a growing young population who are relatively affluent and who shop on average six times per week. These people are well-educated and well-travelled so they know the US and love its brands, which are some of the most popular in the region.”

The high cost of renting retail space coupled with the fierce competition for prime locations makes partnering with one of the major family-run businesses an attractive option for most franchises. Prime rents for new leases in shopping malls in Dubai are currently priced at around AED4,500 ($1,225) per sq m per annum while occupancy rates in shopping centres such as Mall of the Emirates and Deira City Centre are around 90 percent, according to a recent report by CBRE.

The financial impact of sharing the cost is an additional bonus, adds McLean. “The concept of trading families means a dilution of risk for these brands. They are partnering with people that know these markets very well and have successful track record of introducing new brands into the region so that’s a much easier proposition for brands who are only operating in one or two markets,” he says.

“If an Alshaya, for instance, has 60 brands that they want to take into Dubai Mall then their negotiating position in terms of rents and costs are much greater than a single operator that wants to go in independently,” he adds.

High mall costs for some operators can limit expansion plans. When Freshii launched its DIFC restaurant two years ago, it said it planned to open five locations across the Gulf by the end of 2010 but now instead it will adopt a more measured approach to its expansion. “We have opportunities in both some of the malls and the airport and at the end of the day we are in the business of operating, not just opening,” explains Corrin.

“I know for certain that there are many operators that have opened in the airports who make no money. That exists all over the world, it’s not just a Dubai thing but I will say rents in Dubai are some of the highest I have ever seen — especially in the malls — so it changes the economic model and you need to accept that you need to have a different structure in those locations,” he adds.

Similarly, AWGAL Investments was offered the GCC franchise rights to Mooyah Burgers but opted to concentrate on the UAE, where it plans to open ten stores in five years, before expanding further across the region. “We had the option of other countries but we wanted to make sure that we develop [Mooyah] at its best. We want to treat it as a boutique operation, be personable to the brand and not lose sight of the customers,” says Razzaq.

Some observers even believe that rents in some malls are so high that some brands even lose money in the high-end locations, with these sites acting as a kind of loss-leader to keep brand recognition high. However, as long as the queues outside the outlets on Jumeirah Beach Residence continue to grow, new franchises are likely to carry on seeing the Gulf as a license to print money.

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