Shedding light on the Eastern European restaurant market

This article is part of NRN's first International Top 25 special report, a ranking of the 25 largest restaurant chains and companies, by worldwide sales, with headquarters outside of the U.S. and Canada. NRN partnered with business intelligence specialist Euromonitor International for this report, which is available in full only to Nation’s Restaurant News magazine subscribers in the August 20 issue. Subscribe here.

U.S.-based restaurant companies’ plans for Eastern European countries, particularly Russia, have made headlines in recent months, with McDonald’s and Burger King, among other chains, recently signing or expanding large franchising deals in the one-time capital of the Soviet Union.

“Russia is the leading opportunity within the emerging-market large countries, with the caveat that it is one of the toughest places in the world to do business,” according to Richard Snead, who is now the chief executive of Gatti’s Pizza but as the former chief executive of T.G.I. Friday’s helped Russian operator Rosinter Restaurants become the fifth largest Friday’s franchisee in the world.

Rosinter earlier this year said it would become the first franchisee of McDonald’s in Russia, where the Oak Brook, Ill.-based chain already has about 300 company-operated locations.

David C. Novak, executive chairman and chief executive of KFC, Pizza Hut and Taco Bell parent Yum! Brands Inc., in July told stock analysts that he and other members of the executive team would tour Russia this month. The announcement came during a call about second quarter results, when, according to a transcript from investor website SeekingAlpha.com, Novak noted that the Louisville, Ky.-based company was “especially pleased with our sales performance” in that country, where quarterly system sales growth of 44 percent, including 32-percent same-store sales growth, “give us even more confidence we can build a strong, profitable business in Russia.”

To shed some light on the Eastern European market, Nation’s Restaurant News this week spoke about the region with Michael Schaefer, head of global consumer foodservice research for London-based business-intelligence gatherer and disseminator Euromonitor International.

What are some off the major economic or structural issues in Eastern Europe right now that make it a good or bad expansion market for U.S.-based foodservice chains?

The major near-term issue would be the ongoing crisis in the Eurozone, which continues to have a major impact on those markets with significant exposure, like the Czech Republic or Hungary, both of which continue to see sluggish economic growth. For countries with larger internal markets and less dependence on trade with the Eurozone, the outlook is more positive. In the case of Poland and Russia, for instance, Gross Domestic Product is expected to average 3 percent to 4 percent annual growth in real terms over the next five years, which should keep incomes and foodservice demand growing.

A more long-term issue for the region is demographics. While Russia’s problems of an aging population and relatively low life expectancies (particularly for men) are well documented, to an extent this is an issue for the entire region. Despite lower average incomes, markets like Russia, the Czech Republic and Poland all have demographic profiles similar to markets like Germany or France, and are all expected to see the average age of their populations climb over the next ten years. While this doesn’t preclude continued foodservice demand growth, it certainly will affect strategy, with the heavily youth-focused advertising one sees in Asian or Latin American markets unlikely to prove as central in Eastern Europe.

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What Eastern European countries or markets are most attractive to U.S.-based chains looking to expand in that region, and why?

Poland and Russia both stand out in terms of size and growth potential. Together they account for almost half of total foodservice spending in the region, yet overall per-capita spending remains quite low. The independent restaurant sector is still relatively underdeveloped in both markets, so there is great opportunity for chained operators to expand the market and drive the further development of eating-out culture, particularly in Russia, where outside of Moscow and St. Petersburg the foodservice market remains quite underdeveloped.

Some U.S.-based chains, including McDonald’s, use nonconventional formats, such as limited-menu kiosks, in markets where the standard of living is rising but may not yet be at a point where large percentages of the population can afford regular meals in a conventional restaurants, such as some areas of India. Will that sort of strategy yield benefits in Eastern Europe?

I would say thus far the opposite has been true, with fast-food and even pizza-delivery chains successfully repositioning their concepts with a more upscale, eat-in focused approach. There is still very strong demand for unique eat-in experiences, particularly in markets like Russia, and I think that’s going to see the strongest growth going forward. There’s still a real lack of modern, local, independent casual-dining [concepts], even in cities like Moscow — though that is changing — and that will continue to create opportunities for a wide variety of concepts, from Italian to sushi to bar and grill. While there is also room for a lower-priced offer, particularly as we see expansion to smaller cities and localities where incomes might be lower, I would say an effective in-store experience will remain the strongest driver of sales as a local eating-out culture continues to evolve in many of these markets.

Do these fancier restaurants or adjusted service formats yield higher sales in Eastern Europe and other foreign markets, compared with U.S. locations? Or are they just the table stakes required to even compete in some other countries?

I would say particularly in Russia there is a great deal of interest in new forms of casual dining, because that’s where the biggest gap in the market exists. I wouldn’t necessarily say a fast-food or a pizza chain needs to always dramatically revamp their operations to capture that, but rather simply needs to be aware of the kinds of informal sit-down occasions they will be competing for. Even fast food is going to be less about on-the-go convenience than about experience, socializing, etc.

From what you’ve seen, in Eastern Europe, are American chains having greater success with the company-store or franchise development model?

I think it’s long been possible to succeed in Eastern Europe with a franchised model, with [multi-concept franchisee] AmRest in Poland probably the key example of that. But I would also say there has been a significant acceleration in franchising activity across the region over the last five years, above all in Russia, where the success of franchised concepts has encouraged still more new entrants. While obviously a primarily company-owned strategy can work, as it can anywhere, I’d say there is now much more of a critical mass of capable partners in the region than was the case, say, five years ago. Particularly in Russia, where nearly all of the new entrants in the last one or two years have done so with a franchised model, and many of them are thriving. Rather than one [business model] being superior to the other, I’d say the level of interest in franchising in Eastern Europe is as high as it has ever been, and is likely to remain the preferred model for American chains there going forward.

Contact Alan J. Liddle at alan.liddle@penton.com.
Follow him on Twitter: @AJ_NRN