US food franchises eye small bites of Gulf markets

North American brands combat high mall rents and intense competition to secure profits
US food franchises eye small bites of Gulf markets
(Image for illustrative purposes)
By Ed Attwood
Sun 30 Sep 2012 11:13 AM

American restaurant brands are taking a more measured approach to expansion in the Gulf, as saturation in the market and hefty mall rents take their toll on existing players.

Freshii, a health-conscious cafe concept that launched in Dubai three years ago, and which will have 80 outlets in seven countries by the end of this year, had originally planned to have five locations across the Gulf by the end of 2010.

However, the firm has opted to build out its local business at a slower rate, despite the fact that the existing outlet in Dubai is its highest-grossing location worldwide. It opened its second branch, in Dubai Healthcare City, in June.

“We think about development all the time - it is defined by real estate and we only go as fast as we can find great locations,” Freshii founder and CEO Matthew Corrin told Arabian Business. “And we’ve had a bunch of opportunities that didn’t make sense.

“The business model to operate within the malls is very unique. We think there’s a real opportunity for Freshii to be a successful brand within those malls, but the reality is that just because you are in a mall doesn’t mean you are going to do incredible business.”

Recent franchise launches in Dubai have included IHOP and the Cheesecake Factory, both operated by Kuwaiti brands giant M H Alshaya. Both locations have seen sizeable queues build up outside their outlets, helped by their positioning inside Dubai’s largest malls.

The Dubai Mall, the city’s biggest, saw 54m visitors pass through its doors in 2011. However, sky-high rents are causing many franchise holders to think twice. According to Jones Lang LaSalle, estimated prime retail rents in Dubai stood at AED5,400 (US$1,470) in the second quarter, and this figure is expected to grow through the rest of the year. Rents at the smaller malls are around half this amount.

“We’re dealing with the most expensive real estate in the entire region,” said Corrin. “The reality is that the best sites don’t turn over. There’s tonnes of American brands in those malls, which probably do very nice business, and which probably make no money or bleed money.”

“I’m not even guessing that – I know that to be a fact. We’ve looked at a bunch of locations, and there’s no shortage of demand. We could sign five new leases tomorrow in some of the highest foot-traffic areas of the region, but the business model is just not conducive for us to be there.”

Corrin said he had spoken with groups from Abu Dhabi, Bahrain and Dubai about further expansion in the Gulf, and indicated that the firm could have a “double digit” number of outlets in the region by 2015.

“What I’ve learnt is that bricks and mortar takes time - it’s a marathon, not a sprint,” Corrin added. “We’ve seen what happens when companies go too fast - they overdevelop and all of a sudden, half their store count closes.”

Another North American brand, Toronto-based gourmet burger joint Big Smoke Burger, announced in August that it would be opening an outlet in Kuwait within the next six months - its first outside its home continent.

The brand’s owner, Mustafa Yusuf, is also planning to take a slower approach to building out the concept.

“We’re not going to sell 15 units here, and ten units there just so we can say we have covered this market,” he said. “We’re handpicking our franchisees to ensure that our partners have the right fit.”

Big Smoke Burger’s local franchisee has the rights to open three units in Kuwait, but Yusuf said that the brand was also in talks with representatives in Dubai, Bahrain and Oman to open as many as 30 outlets by 2015.

“I think there’s still demand for the right sort of product,” he said. “Some brands went in pretty heavy at the beginning, and now they’re sort of scaling back. We’re not a big believer in saying ‘Dubai’s happening, let’s do 20 stores there’. That’s when saturation comes and you start to look like everybody else.”  

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