Franchising in Europe

When it comes to quick-service restaurants, it’s American brands that have established themselves outside their home country most successfully.

This could be explained by the fact that these high-profile quick-service American brands are backed by large corporations, whose mission and strategy is expansion. McDonald’s (NYSE:MCD) for example, now operates in more than 37 European countries. KFC (NYSE:YUM) has outlets in 29, and Burger King (NYSE:BKC) is established in 22 countries.

Very few European brands operate in more than five countries. Those that do tend to be in the coffee segment.

U.K.–based Caffè Ritazza, owned by the transport catering group SSP, has more than 360 outlets in 37 countries and is particularly strong in travel concessions. Central European brand coffeeheaven is strong in central and Eastern Europe, while the two Italian coffee brands Illycafé and Segafredo are also expanding rapidly.

Popular U.K–based ramen bar concept Wagamama is another exception. It’s simple, cost-efficient system-based approached has allowed it to be successfully rolled out in 14 countries worldwide.

That’s not to say that the quick-service sector isn’t a hugely important one in Europe. One third of meals bought through the foodservice sector in Europe come from local cafés, ethnic carry-outs, and street-side kiosks.

One reason for the expansion of American-grown fast-food concepts across Europe is franchising. Franchising in the U.K. is almost exclusively limited to about 12 U.S.–based fast-food brands. Most operate under a master franchise agreement. Only a handful, including McDonald’s, Burger King, KFC, and Pizza Hut, operate local franchises. Over the past 20 years the appeal of franchising in the U.K. has been limited by the fact that more than 80 percent of potential sites are within four hours of London, where headquarters tend to be located.

Subway’s Success

While franchisees have been able to secure bank loans in the past, the availability of funding is becoming more limited in the current economic climate. It remains easier for master franchises to raise funds for their own expansion. However, the U.K. has seen phenomenal growth from Subway, which has grown from less than 100 stores to more than 1,300 in five years through an aggressive franchise-only policy. Perhaps this company’s success will encourage others to follow suit?

The Winning Segment

Although the traditional pub sector is having the toughest time in the U.K. foodservice market, with outlets closing at an alarming rate of five per week, two quick-service segment that continue to be strong are Indian and Chinese food. These two cuisines are represented in 14,800 carry-out and full-service restaurants. British consumers spend a massive £787 million, or $1.59 billion USD, each year on Indian carry out alone.

In the U.K., Indian food occupies a niche similar to that of Tex-Mex food in the U.S.—it is loosely linked to a large ethnic minority, the food is easy to eat, tastes spicy, and is quickly served. The Indian restaurant sector has reached a slightly higher degree of maturity than the Chinese sector, though, with many going upmarket or offering home delivery.

But curiously there are no national Indian chains, despite active efforts by several entrepreneurs and experienced brand operators. While there are examples of entrepreneurs owning multiple outlets with individual names and no common branding, the biggest Indian restaurant chain is Aagrah with only 13 units in the north of England.

A real indicator of the success of Indian food in the U.K. is the transition it has made from the take away and delivery sector to ready meals on supermarket shelves—a sector now worth £2 billion ($2.95 billion USD).

Most importantly, Europe is a collection of markets at different stages of development. What works in one European country, might not work in another. So while the U.K. seems to be a hotbed of new ideas for restaurant and quick-service concepts—more recently new Thai, Japanese, and Chinese chains have emerged—these are often rolled out nationally, but are rarely taken beyond British shores.