Retailers And Restaurants Look To Asia For Franchise Growth
The growing economies in China and India present opportunities for retail and restaurant chains.
Richard L. Lackey and Jaana Luik

Lackey

In recent years, retail and restaurant chains in the United States have faced spiraling land and construction costs, escalating rental rates and strong competition in many sectors. Savvy retailers and restaurants have begun to look at the emerging international markets for their expansion programs.

As we have truly become a global community, the opportunities for international development have become more and more appealing — and more varied. For example, Dubai, which was a fishing village 50 years ago, is now a mega tourist destination, a haven for luxury living, a regional financial center and it is in the midst of such a boom that it’s estimated that 24 percent of the world’s large construction cranes have been deployed there. Then there is Panama. It is the world’s second-largest off-shore banking center (with branches of more than 150 international banks) and home to the Panama Canal — and it is also in the midst of an explosive building boom, with 176 major buildings currently under construction (including the two tallest buildings in Latin America) and another 66 being planned at this time. Even the smaller countries, like Estonia, are making such incredible strides in their countries’ economic development that they have become the envy of Europe.

Luik

Whether we look at the Middle East, Central America, Europe or elsewhere, there are abundant opportunities for the right concepts. But nothing can compare to what is happening in Asia today! Markets we would have dismissed as being totally without merit for expansion potential a few short years ago are attracting retailers and restaurants in every category. Vietnam’s retail sales rose by 20 percent from 2004 to 2005. Three of the world’s largest malls are in the Philippines. Gap and Banana Republic have plans to open 40 stores each in Korea over the next 3 years, and French retailer Carrefour will invest $150 million to open additional mega stores in Thailand, where it now operates 24 stores.

Seldom in this century have we seen the opportunities for retail and restaurant growth as we are seeing now in China and India. China has the world’s fastest growing economy (10.7 percent GDP growth in 2006), followed closely by India (9.1 percent GDP growth in 2006). In fact, this recent growth has fueled the massive construction that has caused China to be responsible for more than 50 percent of the world’s consumption of concrete, as well as 29 percent of the iron ore and steel consumption, 33 percent of the tin and coal consumption, and 23 percent of aluminum consumption.

In China and India, the rapid growth of the middle classes — with their youthful demographics, steadily rising per capita income, an availability of credit, and changing preferences and cultural shifts — has driven the demand for a new variety of consumer products and services previously unavailable. Many of these consumers now have cars. In fact, China has become the world’s second biggest vehicle market with 7.2 million cars sold last year. These consumers are looking for places to shop and play — and it is not going to be in the old traditional shopping districts.

This phenomenon of the emerging middle class has spawned a demand for significantly more destination shopping centers. According to a report by Deutsche Bank, India alone could see 600 new centers by 2010 — with 30 of them over 1 million square feet of space. But, the incredible news regarding Asia’s shopping centers is that China is going to be home to seven out of the 10 largest malls in the world. The upcoming South China Mall in Dongguan is expected to be the world’s largest shopping center with 11 million square feet of space. Beijing’s Golden Resources Shopping Mall, the world’s second largest, has 6 million square feet of space and it takes nearly 2 days to fully explore the entire mall. According to the experts, these mega malls become one-stop destinations and entertainment areas unto themselves.

The middle classes for China and India are estimated at 100 million to 300 million people in each country. The demand for Western consumer goods, services and foods for the middle classes, with their increasing buying power, is waiting to be met. Retailers and restaurant chains around the world are making their expansion plans for entry. On the retail side, all price points and most categories appear to have a market so far. However, a few of the luxury retailers appear to have overestimated the size of their particular market. As might be expected, at this time, the vast majority of restaurant expansion is that of the quick service or fast casual.

Those retail and restaurant chains that choose to take the international route with their expansion programs often experience higher per-unit sales and profits in their international units over their domestic ones. But with those vast opportunities come problems, particularly in the emerging growth countries. Both China and India are suffering from poor infrastructure and struggling to keep up with growth. In many of the major urban areas of both China and India, crime is on the rise, roads are clogged (the number of cars have doubled in China since 2003), and pollution is reaching dangerous levels. India — with some of the most restrictive labor laws in the world, insufficient electricity to meet current demand, inadequate drinking water (reportedly available for less than 3 hours a day in Bangalore) and with very little modern construction equipment — has made large-scale expansion for retailers and restaurants even more of an obstacle than one faces in China.

Obviously, these obstacles are being adequately anticipated and addressed by those major retail and restaurant chains that have already established themselves in China and India. However the actual strategies for expansion vary markedly. Take, for example, two of the world’s largest food operators. Yum! Brands (with more than 2,500 stores in the two markets) is apparently moving ahead full steam. On the other hand, McDonald’s China Vice President Gary Rosen recently said, “We’re taking it very slowly,” in reference to the company’s expansion in China.

Rosen’s caution is becoming more commonplace as retailers and restaurants are discovering the vast potential for international expansion. These franchises are examining this potential but they realize that opening in another part of the world is not the same as simply opening another unit in the States. The markets around the world vary greatly, so due diligence is certainly the order of the day. There should be an attitude of cautious optimism.

Richard L. Lackey is chairman of Lackey Cos. LLC, chairman of the Council of International Restaurant Real Estate Brokers Ltd. (CIRB) and publishes “The Lackey-Waddell Report,” a monthly commentary on the international restaurant marketplace. Jaana Luik is executive vice president of Lackey Cos. LLC. The Lackey Companies LLC is an international restaurant real estate brokerage and consulting firm with offices in Palm Beach, Florida, and London.