The biggest names in the U.S. restaurant industry are by now well acquainted with foreign markets. The two largest (by market capitalization), McDonald’s (MCD) and Yum! Brands (YUM) both generate more than half of their revenues outside the U.S. In each case, this international flavor has contributed greatly to the bottom line. In recent years, the latter, in particular, has relied on growth overseas, especially in China, to offset weakness at home.
Beyond the fast-food behemoths, many U.S. restaurant companies are relative homebodies, operating exclusively or primarily in domestic markets. An increasing number, though, are now looking to make international markets a bigger part of their business.
These efforts come at a time when restaurant operators are scaling back their domestic expansion plans. Brinker (EAT), for instance, has essentially halted development at home, where it already operates or franchises 1,300 Chili’s restaurants. The cautiousness at Brinker and at some other chains is likely cyclical, to a degree. The recent recession and continuing weakness in the job market are no doubt making consumers less willing to spend their dollars on dining out. More concerning from a long-term perspective, a shrinking pool of attractive new locations may well be an issue for the industry, especially for more established chains such as Chili’s.
Even now, though, many companies are showing an eagerness to build their brands overseas. Over the next several years, Brinker aims to more than double the number of its international restaurants. Emerging markets, in particular, are on the radar of many management teams. Large populations and relatively limited competition from local brands make the appeal understandable. Moreover, in countries such as India and China, the rapid economic development enjoyed in recent years is providing more consumers with the disposable income to splurge on such after relatively minor indulgences as a restaurant meal.
While there are many examples of consumers embracing American brands overseas, there are still barriers to overcome for restaurant operators. The challenges of taking a popular local restaurant from Florida to India, for instance, are still greater than making the jump from Florida to Ohio.
Cultural differences are still a potential stumbling block. In international markets, the most successful U.S. restaurant chains are fast food concepts. Family- and casual-dining chains, while having their share of success, have yet to make a major impact. For fast-food providers, value and convenience are typically top priorities. These attributes likely translate more easily across cultures than ambiance and flavor, which are typically a bigger part of the equation at family- and casual-dining chains. The relatively higher prices at these restaurants also figure to be a bigger issue in emerging markets, where the middle class is relatively small compared with the overall population.
Meanwhile, start-up and infrastructure costs are likely to be a drag on profits while a chain is establishing a foothold in a new market. Another challenge is finding talented leadership to oversee operations, identify attractive locations for growth, and navigate local bureaucratic and legal obstacles. Not surprisingly, then, many companies opt to team up with indigenous franchisees that can handle these tasks. Notably, Yum’s Chinese operations are largely company-owned, though the company leans heavily on franchisees in most of its other foreign markets.
Importantly, investors looking for an appetizing growth stock in the restaurant industry don’t necessarily have to look overseas. In fact, the importance of overseas opportunities will likely be inversely related to a company’s prospects at home. Notably, many of the sector’s fastest growing companies over the past five years, including Panera (PNRA), Chipotle (CMG), and BJ’s Restaurants (BJRI), have relied largely on building out their U.S. operations to expand their top lines. Between 2006 and the start of this year, for instance, Chipotle increased its store base by about 65%, to almost 1,000, by opening restaurants in such states Ohio and Virginia. The chain is beginning to set its sights overseas, but it is only now beginning to put down roots there. For example, Chiptotle recently opened its first restaurant in England, and management is scouting out locations on the Continent for additional units.