Chain reaction
Caterer Middle East met up with the region’s leading chain-outlet operators to discuss expansion plans, tenant power and the effect of the downturn on the F&B industry
Taking part
Naveed Dowlatshahi, vice president, BinHendi Hospitality
Simon Penhaligan, director of restaurant operations, RMAL Hospitality
Antonio Bautista, president, Gourmet Gulf Company
Rob de Villiers, regional operations manager, The Meat Co and Ribs & Rumps
Louay Ghandour, deputy chief executive, Cravia
What impact has the downturn had on your brands and regional expansion pipelines?
Naveed Dowlatshahi: As a business we’re going through a phase of consolidation, not just in terms of opening outlets but other details, things we should really be doing anyway: looking at costs, man power, recruitment, training and so on.
I think at the peak of 2008 a lot of people got carried away because everyone was doing so well, so we lost track of the basics. Now everyone’s going back to basics because it’s a more competitive market; there isn’t as much footfall so everyone’s vying for a piece of the pie.
In terms of growth we’re being very choosy regarding where we open. It’s about whether a site is actually feasible; it’s no longer about ‘needing’ to be there, it’s about whether it will give us a return on investment.
Louay Ghandour: I agree; for us at Cravia we had massive expansion in 2008 — and we had always planned to do that then slow down with openings in 2009.
In the past we would not look at numbers in detail but that’s changed. For example, we’re looking at potential sites for Cinnabon. Previously we looked at the big malls, the big guys, but now that doesn’t make sense from a financial perspective, so we’re looking at smaller developments.
And at Zaatar w Zeit it’s all about delivery at the moment — a great business add-on to increase top-line sales without adding much on to the cost.
We know we have to minimise food costs, minimise waste and watch our cash flow because money is tight. We have to change our mindset too, because this wasn’t the case in 2008 — it was all spend spend spend, grow grow grow, but now it’s about checking every penny you spend.
Dowlatshahi: I think in 2008 everyone was chasing the locations, because if you didn’t get in you missed out and you’d fall behind. But now it’s become more realistic; now it’s a tenants’ market, not a landlords’ market anymore; the tables are turning.
Simon Penhaligan: That’s true, but I haven’t seen much impact with the rents yet; they’re still ridiculously high. If you look at apartments, for example, rents have dropped 15-25% but for restaurant locations, if you look at Emaar or Madinat, they still want to put the rent up.
Rob de Villiers: I think every location is different — Madinat Jumeirah has always been a great location for us. But I agree, if you look at other developments such as Dubai Mall, Souk Al Bahar, places in Abu Dhabi and even further afield, the landlords are really not amenable to any discussion about reductions in rent at this particular stage.
Antonio Bautista: They are warming up little by little, I think. But also a very important factor is that we do not have a systemised group of tenants like we do in other markets, where you sit down together and all discuss issues with the landlord.
De Villiers: It does depend on what units you’re going for though; from a Meat Company perspective, it’s a brand we want in certain key locations. Ribs & Rumps is a new brand in the region and we’re taking things slowly for the moment, although we’re getting lots of enquiries, from Saudi Arabia, Jordan, Lebanon and Kuwait.
We’re partly waiting on Dubai Mall, to see what happens with that outlet. It’s been a bit of a slow growth period in the mall itself; the footfall is definitely not what it should be.
Dowlatshahi: As far as Dubai Mall is concerned we have seen a trend where footfall is increasing. And I think once the cinema opens, and Sega Republic, it will be good.
Ghandour: I think you have to take a mall’s development on a case-by-case basis. We’ve got the MAF Group (Majid Al Futtaim Group) that has Deira City Centre and Mall of the Emirates. They will not negotiate on rents, because they know they have a waiting list and demand’s very high. Other smaller malls, not prime developers, might well negotiate — but still rents are going up in major malls.
I think we need to have a strategy or these malls will not budge. They will take each lease and increase it by 15% per year, because they feel they can do that and get away with it. I think as time goes on we need to have a tenants’ group so we can discuss this issue with one voice.
De Villiers: Our approach is to wait until the end of the year and just see how it goes. We’re not too worried — we had a similar problem last year when we were the first tenant to move into Souk Al Bahar about 15 months ago, but now that’s come together and The Meat Co has started to turn the corner. It’s a waiting game.
Ghandour: But I think the landlords have to recognise that it’s a partnership — it’s not about making money for one year and then forgetting about us. We are here for the long term, unless they want us to exit, which of course they don’t.
De Villiers: I think most of us have a five-year option on our leases; but if you look further afield, for example the UK market, Australia or Asia, it’s a 15-year lease, so you’ve got time in which to recoup and structure your investment. Here, you’ve got to do that over a third of the time and with the current rates they’re charging, it’s not a business model that works.
Given the current economic climate, must operators also be willing to compromise in some way?
Dowlatshahi: We’re definitely looking at smaller outlet footprints — for example, Japengo is typically 5000-6000ft²; we’re now looking at 4000ft² and below because it helps reduce the rent.
And for Café Havana we’re doing a much smaller footprint of about 1000ft² as opposed to 3000ft², because really you don’t need that large capacity anymore. It’s about turning the tables rather than having huge numbers of covers.
De Villiers: Speaking from a Meat Company perspective, we target iconic locations, such as Madinat Jumeirah and Souk Al Bahar.
The same is true in Abu Dhabi and those locations are part of a long-term plan, so we’re not dealing with the smaller developers at the moment, we’ve really only been dealing with the big names.
But I agree the answer is to get clever with the space you’re using and really make the most of it.
Dowlatshahi: Today it’s all about being cost-efficient and it’s amazing what you can do when you get down to the numbers and look in detail at where you can cut costs by being more efficient, not just going in and slashing spending.
Ghandour: I think all of us would admit that in 2008 the mood was really geared towards expansion. And by contrast this year the focus is on the details, so once the market does recover, we’re going to be in much better shape to make money.
Bautista: I think in general managing this kind of thing was not a priority; it was all about growth: growth took precedent over cost control.
You could see we were just focused on getting locations — it got to the stage where you were actually afraid that your competitor was going to come in and snap it up before you did.
So there was no arguing about the price, it was just about getting the location.
Penhaligan: From our side, I would beg to differ there; we were looking at the bottom line as well even back in 2006 and 2007. We were offered locations that we actually turned down and our expansion plans have been very measured.
Now, at the beginning of September, we will open a new hotel in Abu Dhabi which is managed by Fairmont and our second Frankie’s restaurant.
Ghandour: I think overall we’re much wiser as business people than we were in, say, 2002; we’ve seen growth in double digits over the past six or seven years, and I think when we expand we’re really going to do things right.
We’ll look at the location ten times; we’ll put in realistic numbers, not just go in and expect to break even right after it opens.
Dowlatshahi: The smaller players are the ones that will have problems, because they came in agreeing to pay ridiculous rents and inflated the market.
Penhaligan: I think all of us here are in it for the long term, but those people who came in without experience and drove up the rent prices, they’re the ones that are closing already. If you walk around some of the malls, you can see that outlets are starting to close.
De Villiers: Or on the verge — we get phone calls at least once a week from operators wanting to sell to us.
Dowlatshahi: We’re seeing the same thing. It’s a wake-up call to the developers as well, because they now really need to look at the retail mix in their malls and make sure they have the right one.