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8 potential pitfalls of international growth

Is international expansion a chain's golden ticket? Maybe—if restaurant operators know how to avoid these potential disasters.
Photograph: Shutterstock

The U.S. restaurant market has gotten as crowded as a subway train at rush hour, with operators looking to enter an oversaturated landscape by squeezing in wherever they can. Even as consumers continue to spend nearly half of their food and beverage dollars on restaurants, analysts say there are simply too many concepts around the country. It’s a road map for falling traffic, sluggish sales and, much like that overstuffed subway car, closing doors.

So it’s understandable why so many restaurant brands are looking abroad for expansion opportunities. Adding units within a market that potentially has less competition and less concentration? It’s like busting out of that packed train car onto a wide-open highway.

KFC, for example, is a 70-year-old brand, but it’s “at the height of its global expansion,” says Dyke Shipp, KFC Global’s chief development officer and chief people officer. Last year, the quick-service fried chicken chain opened 1,100 net new units globally. There are now KFCs in 139 countries, and in 2018, the company’s China business alone made up 27% of its systemwide sales. U.S. sales, by comparison, accounted for just 17%.

“We’re growing faster now than we’ve ever grown,” Shipp says.

But operators obviously can’t just transplant a restaurant concept to, say, Dubai and watch the money roll in. International expansion is a high-stakes gamble that must be entered into with extreme planning. There’s tremendous potential for business success overseas—with proper preparation. Here are some of the biggest roadblocks to international growth, with advice from operators large and small about how to swerve around them.

Challenge 1: Poor partner-picking

Selecting an international business partner may be the most crucial decision a restaurant operator makes when looking to grow outside of the U.S. Pick the wrong franchisee or on-site operator, and the business in one region of the world can crumble.

“You have to have an experienced restaurant operator, not just someone who’s an investor,” says Andy Wiederhorn, president and CEO of Fatburger parent company Fat Brands, which has operated internationally for 13 years. “If it’s just an investor, they must be partnered with an operator committed to run their business.” That commitment is typically won through financial incentives, such as business equity, Wiederhorn says.

Potential partners must be thoroughly vetted by looking at the books of their current operations and understanding their ability to grow a concept in a given market, says Chris Barish, co-founder of Black Tap Craft Burgers & Beer. More subjectively, operators need to ensure that their new business partner shares their goals for the brand, Barish says. “It has to be a like-minded vision, the same true believer mentality,” he says. “It’s not just somebody opening it because it’d be cool to have a restaurant.”

Black Tap has just 14 units currently, with locations in Geneva, Dubai, Kuwait, Abu Dhabi, Singapore and Bahrain. The chain has partnered with the Marina Bay Sands to grow in Singapore and has also signed licensing deals to expand in Europe and the Middle East. Barish expects to expand into Korea by mid-2020—the outcome of a business relationship that will have taken nearly a year-and-a-half to nurture, he says.

Finding the right international partner, he says, “can make it just as easy as opening up in Cincinnati.”

Challenge 2: Tweaking a concept too much—or too little

Not all restaurants have cross-continent appeal. Some concepts are simply not a fit in a given country; others could be a wild success with just a few tweaks. Successful international operators need to know what’s malleable about their concepts, as well as what is essential to a brand’s identity.

“A pitfall is assuming that a foreign market is similar to your own,” says Peter Backman, a U.K.-based consultant who advises companies looking to grow there. “I’ve heard, ‘You Brits are going to love burritos because we Americans do.’”

Understanding a new market by selecting an in-the-know partner (see Challenge No. 1), spending time on the ground and hiring local employees is key when deciding what, if anything, needs to be modified to suit local tastes and habits—without sacrificing a brand’s DNA.

As Black Tap moves into other countries, it takes an “80-20” approach to its menu while refusing to budge on its ’80s pop-’90s hip-hop decor and vibe, Barish says. “We keep 80% of our menu and then we do some regional things,” he says. For example, bison isn’t allowed to be served in Singapore, so the brand swapped in a lamb burger.

Barish also likes to bring managers and other restaurant leaders to the U.S. to see Black Tap and get a feel for its original operation. “They wear the same cool shirts we have here,” he says. “Bring the culture you create in your brand overseas, which keeps the authenticity.”

Challenge 3: Weak links in the supply chain

Navigating an international supply chain takes patience, planning and plenty of experience. Experienced operators suggest studying (or hiring an expert) in global markets to understand how different countries tax certain items. There can be wide disparities in the tax on something as small as a french fry from the U.S. versus one from Europe depending on the country of operation, Wiederhorn says.

What’s more, the supply chain needs to remain steady. “You can’t have starts and stops where you run out of things,” he says.

Barish recalls some supply chain disasters: a full order of ice cream that sat, melting, aboard a cargo ship. A shipping problem that left Black Tap Singapore without potato rolls for the burgers. “We had our corporate and local chefs go to a local baker and recreate the bun,” he says. “A few weeks later, we got the buns back.”

Barish and his team have gotten more supply chain-savvy since, though some hiccups are unavoidable.

“We’ve just learned to make sure we place orders far out,” he says. “We work with our distributors closer. We’ve solved most of those issues. We don’t want to make too many mistakes, or it can be costly.”

When Black Tap launched its Churro Choco Taco shake systemwide, for example, company leaders realized they couldn’t get some of the necessary ingredients in Geneva. So they adjusted the recipe and made some of the ingredients in-house. “We find similar products without compromising the product,” he says. “We would take something off the menu rather than compromise the aesthetics and the taste.”

Challenge 4: Lazy growth

For international expansion to make economic sense, there must be scale. Or, “You have to have multiple locations immediately,” Wiederhorn says.

“If you can’t get to 25 units in a really reasonable period of time, it’s hard to support a team in that region. It just doesn’t pay for it,” he says. And, as with some of these other best practices, ensuring scale hinges on properly vetting an international business partner (See No. 1).

Challenge 5: No flexibility in floor plan

Consumers in other parts of the world may interact with a brand differently than they do in the U.S. A concept needs to have a variety of store designs to meet those needs, says Shipp of KFC.

“It absolutely can’t be one size fits all,” he says. “We’re trying to make sure we have a portfolio of asset types. In many parts of the world, our business is a drive-thru business or a mall-based business. We’re learning from consumers that they want KFC in transport hubs or in really small towns or in expensive city centers.” A few months ago, KFC let its operators in South Africa, for example, combine a half-dozen recycled shipping containers to create a restaurant.

“It allows them to get into that trade zone,” he says. “We do give them latitude, within a framework. The Colonel has to look like The Colonel. But we give them flexibility on seating and particulars.”

Challenge 6: Underestimating local competition

Ideally, a savvy local operating partner can provide the business with insider intel on which competing concepts represent threats in the new trade area (again, see No. 1). Sometimes, though, the drive to expand will be strong enough to ignore the competition and forge ahead. And sometimes, an upstart will arrive and try to topple the existing U.S. chain.

Take the case of Starbucks versus Luckin Coffee in China. Starbucks has been strategically growing in China for two decades. Luckin was founded in 2017 and is already valued at more than $2 billion, with a steadily growing unit count that’s enough to make Starbucks worry. The Seattle-based coffee giant is accelerating its unit growth in China, beefing up its executive team there and looking for ways to differentiate itself in the market as it battles its rival.

Challenge 7: Failing to figure out training

Bringing a U.S. restaurant concept to a new country adds some complications to staff training. An operator might want to send international employees to the U.S. to learn the brand’s style and more. But that can be stymied by travel restrictions.

“Not everybody has a U.S. passport,” Wiederhorn says. “A U.S. passport gets you into every country. If you have a Lebanese or Egyptian passport, it’s not as easy to move between those countries, and the visa process can be complex. There’s no silver bullet to it.”

Patience and flexibility are essential, he says. “You may end up having to send your whole team elsewhere” for training, he says.

Language, too, can become a barrier in both training and operations, Barish says. “I would make sure the head chef and the head manager would be English-speaking,” he says. As the two main people in charge of the restaurant, he says it’s crucial that they speak the home language of the brand and corporate team.

Challenge 8: Nobody wants a piece of the concept

It’s impossible to sell a restaurant brand to global investors if it isn’t an air-tight concept. Before operators let ambition lead the way, they must make sure their books are in order so potential partners in other countries will be interested, Shipp says.

“Make sure the business model is one franchisees would want to invest behind,” he says. “There are lots of instances where franchisees have a curiosity about planting one of a type of brand in their country. We’re much more interested in those franchisees who will develop our brand at scale. So we spend a lot of time on that business model.”

That means assessing the company from a cash-payback model. “Three to four years of cash payback normally attracts franchised capital,” Shipp says. “We make sure we’re able to do that.”

When it comes to global expansion, it’s a balancing act of risk versus reward. But vetting a solid international business partner, planning for supply chain interruptions and ensuring a solid existing business can add up to substantial growth for an ambitious restaurant chain. “There’s a lot of work that goes into it,” Barish says. “It’s hard. But the whole business is hard.”

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