Mideast Dining Means Darden-Led U.S. Chains Follow Money: Retail

Kareem al-Meadawy is the reason American restaurants are rushing into the Middle East.

The 30-year-old college administrator in Kuwait eats out twice a week and at least once a month at the Johnny Rockets hamburger chain. He wishes Fuddruckers would open a restaurant near him, and one of his favorite dishes is the steak with fried mushrooms at T.G.I. Friday’s.

“It has a nice diner-restaurant feel to it,” he said while eating at the Friday’s in the Avenues shopping center near Kuwait City. The mall also has a Chili’s Grill & Bar, an Applebee’s and a Ruby Tuesday.

In the next decade, American restaurant chains plan to open more than 250 locations in the Middle East, where growing populations and increasing wealth offer one of the best chances to expand outside of the saturated U.S. market.

“There’s been almost an explosion of interest in the region,” said Shonil Chande, a London-based food and drink analyst at Business Monitor International. American chains are coming to the Middle East because of the growing wealth of the middle class, which has “developed so quickly from energy over the last 10 years,” he said.

Friday’s, P.F. Chang’s China Bistro Inc. and Applebee’s, owned by DineEquity Inc. (DIN), are growing in the region by putting new spins on their usual gimmicks, while Smashburger and Darden Restaurants Inc. (DRI) are just getting started, braving the “Arab Spring” political turmoil to open locations in Egypt, Saudi Arabia and the United Arab Emirates.

Growing Market

In the U.A.E., the branded, table-service restaurant segment is worth about $600 million a year and may grow 30 percent to $780 million by 2015, according to Stefan Breg, founder of strategist Tribe Restaurant Creators in Abu Dhabi.

Friday’s, owned by closely held Carlson Cos., started doing business in Dubai in 1996 and has grown to 31 restaurants in the region. The company said last year it plans to open an additional 30 locations in the Middle East in the next five years.

The chain has honed its bill of fare to tout 100 percent Angus beef instead of pork, and orange-blast slushies as cocktail alternatives. The best seller: Texas-barbecue glazed beef ribs, served instead of Jack Daniel’s baby back pork ribs, Chief Operating Officer Ian Saunders said in a telephone interview.

Friday’s Ads

Friday’s has attempted to draw Middle Eastern diners with voiced-over television ads with Arabic wording and a VIP program that allows customers to skip to the front of the seating line.

Darden is using radio, print and Internet advertising, which are less expensive and more localized than TV, Chief Marketing Officer James Buettgen said in a telephone interview. The Orlando, Florida-based company also is using stock photos for ads to cut marketing costs until more stores open, he said.

Darden fell 1.2 percent to $47.30 at the close in New York. The shares have gained 1.9 percent this year, while the Bloomberg U.S. Full-Service Restaurant Index has dropped 3.4 percent during the same time.

The chains face challenges beyond political volatility. In some cases it’s hard to translate U.S. food to Middle Eastern tastes -- Chili’s learned that with country-fried steak -- and each country is different. Advertising should vary across the Middle East because of varied cultures, said Jane Kinninmont, a senior research fellow for the Middle East and North Africa at Chatham House research institute in London. In some countries, such as Saudi Arabia, women must be completely covered and wearing a head scarf in photos, she said.

Licensees, Royalties

At the same time, companies’ exposure is limited because they generally work with a licensee and collect royalties based on sales.

Darden, the biggest casual-dining operator in the U.S., opened its first Red Lobster in the Dubai Mall in July and will open two more restaurants in Kuwait City in 2012. Last year, the company committed to opening at least 60 Red Lobster, Olive Garden and LongHorn Steakhouse chains in the region in five years. Olive Garden is replacing pork with beef in its signature lasagna and sourcing non-alcoholic cooking wine, Buettgen said.

Smashburger in Kuwait

Smashburger, with about 120 locations in the U.S., will open its first international store in Kuwait next year. The Denver-based chain, where customers order at the counter and watch as the food is prepared, has agreed to open 37 stores in the Middle East and is getting rid of applewood-smoked bacon and making other menu tweaks.

A lot of other dining chains “wait to start to grow internationally until they’ve run out of room to grow” at home, Smashburger Chief Executive Officer David Prokupek said in an interview. “I don’t need to wait 10 or 15 years.”

Along with an altered menu, it often takes “over-the-top” service to please Middle East nations’ finicky diners, who are used to being doted on by maids and drivers, said Lee Wynne, a Dubai-based assistant general manager at Mubarak Al-Hassawi Restaurant Development Group.

At sit-down restaurants in the Middle East, doggie bags are packed in the kitchen -- customers are never asked to scrape leftovers into a take-home container themselves, he said. And servers never leave a bill at the table while people are still eating, he said.

Wynne, who has managed Chili’s and Fuddruckers stores in the region, has cut steak into half-inch pieces and sheared corn from the cob to please the pickiest of customers.

‘Hotel-Quality Service’

“They’re getting that hotel-quality service, almost, but they’re getting it in a family-friendly, non-alcoholic atmosphere, so they’re happy,” Wynne said. There have, of course, been some issues. Wynne said that at Chili’s, owned by Dallas-based Brinker International Inc. (EAT), the crunchy breading on country-fried steak baffled customers. Chili’s had to reprint menus after it moved the breaded meat to the catch-all favorites section, instead of the steak-specific part, he said.

While restaurants don’t break out figures for the Middle East, overseas sales are growing faster than sales in the U.S. at Brinker. Sales rose 3.5 percent at international locations open at least one year in fiscal 2011, compared with a decline of 1.3 percent at all restaurants system wide. Brinker also owns the Maggiano’s Little Italy brand.

Still, not every American chain is rushing into the Middle East. Five Guys Burgers and Fries CEO Jerry Murrell said in an interview that he worries about changing the chain’s menu and isn’t willing to compromise and sell things like chicken bacon.

“We’re just not ready,” he said. “I just don’t see how we could keep our product the same that far away right now.”

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editor responsible for this story: Kevin Orland at korland@bloomberg.net

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