Recession bites

In lean times, fast food chains rack up fat profits. AB finds more about Gulf's most woes-resilient businesses.
By Joanne Bladd
Sun 08 Mar 2009 04:00 AM

In lean times, fast food companies rack up fat profits. Arabian Business learns the tricks behind the trade from the Gulf's most recession-resilient businesses.

Dressed in a suit and tie and carrying a briefcase, Paul Holmes isn't your average McDonald's regular. Yet here he is, during a Monday lunch hour, sitting in a Dubai branch of the burger chain and devouring a cheeseburger and large fries.

Two tables down another city-type is drinking a McCafé espresso which, priced at AED5 ($1.30), is less than half the cost of a Starbucks coffee. As the downturn bites, the chain's low costs are luring in a new wave of fans who, as the tagline says, are lovin' it.

The credit crunch has made financial losers of many companies, but it has also produced some winners. Fast food does well in slow times and, even in the current downturn where all bets are off, many junk food brands are coming out on top.

McDonalds is the poster brand for recession-resilient business. The fast food juggernaut posted a net profit of $4.3bn for 2008, up 80 percent on the previous year's $2.3bn. Across the Middle East the chain's income spiked by 33 percent, with same-store sales up nine percent for the year.

Even in the fourth quarter when the downturn hit, sales held steady reports Rafic Fakih, managing director of Emirates Fast Food Co., which runs 61 McDonald's restaurants across the UAE. Proof, were it needed, that the firm is on a roll.

Over at Baskin Robbins, the Gulf's biggest ice cream player, sales are up 26 percent. The chain sold $101m ice cream products last year, up from $80m the previous year, and scored record sales in January.

"We're expecting good growth this year, roughly another 22 to 25 percent minimum, and we're looking at opening another 45 to 50 stores across the GCC," reveals Manoj Loya, general manager of Galadari Ice Cream Co., which owns the GCC franchise for the brand.

Walid Hajj, CEO of Cravia, which holds the brands Cinnabon, Seattle's Best Coffee, Zaatar W Zeit and now Roadster Diner in the UAE, describes 2008 as: "A record year, by top line, bottom line, store growth, everything. And we're still positive so far in 2009."

What's good for fast food is good for the economy too. Cravia employs some 1,000 staff, while McDonalds employs more than 1,300 in the UAE alone and uses - almost exclusively - local suppliers.

It shouldn't be surprising. In the last decade, the fastest thing about the fast food industry has been its growth. But that's not to say some brands haven't faltered. For example, judging by its 2009 second quarter results, Burger King has fallen off its throne. Always the bridesmaid to McDonald's bride, the chain posted profits of $44m, down 10 percent on the same period last year.

Kuwait's Americana Group, the biggest fast food operator in the Middle East with KFC, Pizza Hut and Hardee's in its portfolio, saw its full-year profits dive 36 percent last year. Net income dropped to KD35m ($122m), from KD55m ($186m) in 2007, likely pulled down by the number of mid-market casual dining chains Americana runs.

"Managing in any recession is difficult, and managing through this one is particularly hard as it differs from earlier downturns in multiple ways," says Marzouk El Kharafi, chairman of the group. "Consumers are migrating south to the brands that will offer greater value for their dollar at a guilt-free ticket price."

Many fast food chains will face a fork in the road this year. The global downturn is so bitter than even no-frills dining will feel the pinch if conditions don't improve, and some smaller brands may not survive. Tourist figures, which comprise a key part of footfall, are already on the slide, says McDonald's Fakih. "Even we might not see the same growth this year."

Dunkin Donuts is forecasting five percent growth for its UAE franchise; a dramatic drop from the 25 percent increase it's grown used to over the last three years.

Appetite for destructionThe path to world domination doesn't run smooth. Along the way, fast food giants have been attacked for their fatty foods, their marketing methods, animal welfare standards - and the list goes on. McDonalds, as the largest chain by market share and influence, has faced the bulk of the backlash, namely in Eric Schlosser's 2001 exposé of the industry, ‘Fast Food Nation'.

The book racked up 1.4 million in sales and provided food for thought on everything from the contents of a strawberry milkshake - 59 chemicals and no fruit, apparently - to meat packing conditions.

It also laid the groundwork for Morgan Spurlock's hit 2004 documentary ‘Super Size Me', which went head-to-head with the golden arches. In it, Spurlock ate nothing but McDonald's food for a month, accepting a ‘supersize' portion whenever it was offered. Thirty days later, he had gained 24.5lb (11kg), high blood pressure and had a liver "turning to pâté".

The industry has bitten back, answering their nutritional critics by phasing out trans-fats and loading their menus with healthier items. McDonalds has also fronted a campaign urging customers to take more exercise. The results? Negligible. But the industry can no longer be wholly blamed for public porkiness.

According to UAE general manager David Rodgers, January's sales were barely positive. Despite this, the chain is forging ahead with plans to open at least another 10 outlets this year. "We're not slowing down - we're doing what everyone else is; watching very carefully what we spend," Rodgers says.

Still, fast food joints are better equipped than most to handle a downturn. As lean, mean, feeding machines, their business model is ideal for the pared-down climate.

The basic premise - churning out fast, cheap and filling food to a high volume of customers - translates to a smart buy for cash-strapped consumers, while the glut of outlets means temptation is everywhere. Galadari's Loya puts it best: "We're in every nook and cranny, every mall, high street and neighbourhood. And we don't break the bank." There are 220 Baskin Robbins stores in Saudi alone.

The stripped-back approach doesn't end with the cheap menus. As cash-based businesses, fast food chains have stayed nimble, largely escaping the liquidity freeze that has paralysed other markets. "Businesses go bankrupt not because they are losing money but because they don't have cash," Cravia's Hajj says. "I don't have receivables. No one owes me money. We are a cash business and that has kept us solid."

Also keeping the gravy train on track is the fact that American brands, unlike their mother country, seem to have worldwide appeal. From Sweden to Singapore, neon emblems such as the golden arches and Colonel Sanders litter every main street.

This popularity is partly down to the avalanche of marketing campaigns carried out by the top names - some 96 percent of American kids recognise Ronald McDonald. Only Santa Claus rates higher - but Cravia's Hajj chalks it up to the export of culture.

"Take Starbucks; they aren't selling coffee, they're selling a lifestyle," he says. "In this region people aren't even coffee drinkers by nature. These brands have actually changed their habits. The Western names have a reputation and consumers respond to that."

Menu prices, dotted as they are with value meals and combo deals, are another key strength in the downturn. Burger chains may be cheap as chips, but leading the price wars is Mexican food outlet Taco Bell.

The chain shuttered its Saudi outlets in the 90s, but ventured back into the Middle Eastern market last year, opening a kiosk in Dubai Mall. Prices start at AED3 ($0.8) for a beef taco, with a fries and drink combo available for an extra AED6 ($1.6).

A family of four could eat for less than AED40 ($11). Across the aisle at McDonald's and Burger King, the cheapest meal deals are AED14 ($3.8) and AED15 ($4) respectively. What's bad for the waistline, it seems, is still good for the wallet.

So eating out is in. But at least one group is still not buying. Nutritionists have long been the loudest critics of the industry, laying the blame for the global obesity epidemic squarely at the door of junk food peddlers.

Restaurants have tried to duck the fire by unveiling ‘lite' and ‘lean' menu items - memorably including the puny 4.8oz McLean burger that flopped from McDonald's menus in 1994, despite a mammoth advertising campaign - and phasing out the controversial ‘supersize' options.

But these have proved largely futile gestures, felled by consumers who say yes to health foods on surveys, but then yes to more fries at the counter.

"When people have a choice between a juicy, greasy burger and a salad, they're gonna take the burger," says James Painter, a long time researcher of the fast food industry. "People eat for taste first, and then nutrition is fourth or fifth down their list."

Painter, who is chair of family and consumer sciences as Eastern Illinois University, US, is baffled at the vilification of junk food firms, and worries that people may have missed the point. "It's odd that we as consumers don't realise that these people aren't out for our health," he muses. "Their number one goal is to separate the consumer from their money."

As one trick behind the trade, meal deals are an unbeatable way of doing so. When prompted by servers, consumers find it near impossible to turn down a bigger fries and drink; a steal at just $0.5, though the baseline cost is a fraction of that.

Fat health costs add upFast food may be cheap, but when it comes to waistlines there is no such thing as a free lunch.

The Middle East is in the grip of an obesity epidemic. At last count, the UAE, Saudi Arabia and Kuwait all ranked in the top ten of the world's fattest countries and lead the field in type 2 diabetes incidence. And it's not just the health costs.

Collectively, America's fatties cost their nation $127bn annually. Each obese person racks up an added $1,614 on their health bill each year. Translate that to Saudi, where a reported 75 percent of the 23 million-strong local population is obese, and the annual tab is $28m. In the UAE, the bill is $7.9m - enough to buy around 1.3 million Big King XXL burgers.

"The value myth is a great sales tool," says Painter. "They can add a Coke on for six cents and still charge you 30 cents, and make money. It looks so good, but it's a profit driver for restaurants that people can't resist."

Despite the downturn, it's business as usual for fast food chains, which are focused on rooting out new reasons to lure customers into their stores. Their latest target is the coffee crowd. With Starbucks serving lattes at around $4 a pop, it hasn't taken restaurants long to wake up and smell the coffee.

"Beverages overall are more profitable," says Rodgers. In the States, 60 percent of Dunkin' Donut's business is drinks. "Our coffee business [in the UAE] has grown from less than 15 percent to more than 25 percent in four years. We're half the price of the competition."

The McCafé concept, which has been rolled out in a several UAE outlets, also dramatically undercuts Costa and Starbucks. But the firm is more interested in staking out the latest fast food battleground - breakfast. In the US and Europe, the breakfast trade is growing three times faster than the rest of the fast food industry.

Fakih is gradually converting his city stores to 24 hour outlets (its Jumeirah restaurant will be the first) and plans to introduce a breakfast menu around April.

Dunkin' Donuts is on the same page. Its bestselling coffee and two doughnuts combo is a hit with early eaters, and the chain is introducing a new range of snack products in the next few months to "have more options for people," Rodgers says.

Brands are also drawing a circle around casual diners, in a bid to mop up any customers trading down in the recession. Outlets have been spruced up. Gone are the plastic panels and fluorescent strip lights that sent customers, rabbit-in-headlights style, scurrying out the door as soon as possible. Chains now have a plusher, warmer look, to encourage consumers to stay and spend. "We've paid more attention to interior design," reveals Fakih. "We use more natural colour, more wood panelling."

The recession has bought fast food chains some wiggle room. A silver lining in the financial black cloud has been a drop in food prices. With huge employee numbers, firms are also benefiting from softer rental costs. Cravia has seen staff rents in the UAE drop by some 40 percent in five months. "So far, the only impact we've seen is positive," Hajj says.

Rodgers is keen to see the trend extend to the region's notoriously high mall rents.

"In terms of growing the business, it's a good opportunity if rents get softer. If one or two chains are struggling, there might be more opportunities and retail space."

A shakeout of the market could also pave the way for a local brand to gain global recognition. Currently, the top ten fast food chains are all Western names but an emptier playing field could help Arab stores shine. Michel Hughes from The Brand Union Middle East has pegged Zaatar W Zeit as one to watch.

"They have something incredibly impactful in terms of a brand. It has the appeal of being Arabic, but it's friendly across the board. It doesn't try to be American."

So this time next year, could Zaatar be jostling for a space on US high streets? Hughes thinks yes. "It has the potential to go global. Its something different and you can build on that.

Stocks and stomachsJunk food sales may be sizzling now, but as the chill of the recession sets in consumers may swap eating out for eating in. Food trends mirror the economy and across the US and Europe, supermarkets have been the chief winners as customers turn to home cooking to beat the cost crunch.

The UAE won't be far behind, according to a report by research firm Business Monitor International. The UAE Food and Drink Report, released earlier this year, predicted an 80 percent surge in grocery sales over the next five years.

A poll by arabianbusiness.com already shows the tide may be turning. More than half of respondents said they were opting for home-cooked food over meals out because it was cheaper. More than 14 percent, however, admitted visiting fast food outlets more frequently for their low prices.

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