Finance | January 2016 | By Julie Knudson

Exchange Rate

As quick serves expand into foreign regions, the cost landscape also changes.
Top QSR chains finance global growth through new business funding.
Before expanding into the Middle East, Russo’s Restaurants conducted research trips to get a sense of the local economies. Russo’s Restaurants

When it launched its first restaurant in Mexico, BurgerFi learned the real-world costs behind international expansion. Expenses for site visits and long-distance communications were part of the package, but Corey Winograd, CEO of the North Palm Beach, Florida–based brand, says the costs were about more than just dollars.

“We’ve needed to allocate personnel to source, test, and verify products, and to ensure compliance with our BurgerFi brand standards,” Winograd says.

Like BurgerFi, more limited-service brands are setting their sights abroad when it comes to growth strategy. But international expansion can be a pricey endeavor.

Experts say the key to successfully controlling expenditures is to partner with a franchisee experienced in the new marketplace. BurgerFi selected EFIT SA DE CV for its growth into Mexico, and Winograd says that such a proven business partner can help offset the international costs.

Franchisees familiar with the local business environment will typically have the necessary people and processes already in place. They know how to form the right partnerships, source ingredients, set menu pricing, and develop a model for the brand that will be successful in a new country. In most cases, the franchisee route is the way a company enters new markets across the globe.

“Typically, when these brands are expanding overseas, it’s not a company-owned brand. It’s not Yum! China. It’s actually a franchisee that’s going to be developing the brand for them,” says Cristin O’Hara, managing director and head of the restaurant group at Bank of America Merrill Lynch.

Before Houston-based Russo’s Restaurants expanded into the Middle East, founder and CEO Anthony Russo visited local food shows in the region to get a feel for the restaurant environment. Russo says the time and travel costs associated with such research trips are a worthwhile investment.

Other upfront costs may not be as obvious during the early planning stages. Trademark registration, for example, must also be taken into consideration. Because others outside the brand could leverage an unprotected trademark, Russo recommends operators seek legal guidance early on.

When evaluating the funding requirements for growth outside the U.S., Russo says, brands must consider setting up the brand’s distribution network, filing paperwork, labeling, and exporting, among other costs that could vary depending on the country or size of the development. For its growth into the United Arab Emirates and Saudi Arabia, Russo’s partnered with Prime Hospitality, a firm well versed in the Middle East.

O’Hara says that many of the same factors used to determine domestic growth strategies will also exist when considering a possible entrance into a foreign market. There are, however, a few other issues to weigh.

“Brands need to focus on what it means for them with regard to taxes and foreign exchange, first and foremost,” she says. “Among other differences are that you’re going to have the repatriation of money going to the U.S., which can hurt, so you have to think about that.”

O’Hara stresses that understanding a country’s environment is also important, such as its GDP and the
stability of the government and its currencies.

Conducting a cost analysis for a foreign market may seem daunting, but a strong franchise partner can help.

“If you have a proven, dedicated operator as your franchisee in the international market, then when you do your analysis, you can confidently conclude that you’re not going to incur substantial costs,” Winograd says.

Franchise and brand development companies can draw on their experience—not just with supply chain or operational issues, but also with the nuances of the local economy—to support a successful launch.

Being realistic about how expenditures are likely to play out over the first few years is crucial. Russo says that knowing how other brands in the area are faring may help develop revenue expectations.

“Going into a brand new market, your first couple of years are not going to be profitable,” he says. “You have to have the capital set aside knowing that first.”

Many brands look to a strategy that includes launching multiple stores in the first few years to achieve adequate market penetration. Funding availability must be on par with this level of commitment.

Franchise partners with global expertise are increasingly sophisticated, and she says that some are starting to ask for minority investments because they “want a stake in the ground” for the U.S. market, O’Hara says.

Globalization is a factor in many industries, and foodservice is no exception. BurgerFi’s footprint across southern Florida gave the brand a front-row seat to the state’s international tourism, particularly from Latin America. The chain’s expansion south of the border—stores in Mexico will later be joined by locations in Panama—was spurred in part by customer feedback. Winograd says the brand wanted to choose a market based on the consumer.

O’Hara sees a great deal of growth potential for limited-service brands beyond the U.S. “The public markets love to see global companies these days,” O’Hara says. “There is also the ability to change your brand perception in a different market.”

For brands keen to cement or boost their reputation, international expansion may offer an opportunity to do just that.

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