A Smashburger in Kuwait? Here’s why it makes sense.
By ANGUS LOTEN
Over the past month, a Smashburger outlet in Denver has had some unusual help in the kitchen: a group of Kuwaiti entrepreneurs.
The burger flippers were prospective franchisees looking to open Smashburger outlets back home—and the fast-food chain hoped the hands-on experience would help them better serve customers.
Kuwait might seem a remote target for a franchise that’s not anywhere near the size of, say, McDonald’s. But Smashburger Chief Executive Dave Prokupek has big plans for international expansion—not only across the Middle East but also Asia and Central and South America.
Why? Those regions were largely unscathed by the recession, as well as being places where middle-class consumers have a growing appetite for American goods and services. “Western premium brands have done extraordinarily well in the Middle East and elsewhere,” Mr. Prokupek says.
It’s a Small World
Before the downturn, small U.S. franchises typically wouldn’t stray far from an original location. Now economic uncertainty at home, and in other Western economies, has prompted a growing number of franchises to look farther afield. They’re turning to markets in the developing world where credit continues to flow, franchise buyers face fewer barriers to financing, and American goods and services are in high demand.
A Magnolia Bakery outlet in Dubai—far from the small chain’s New York home
“Five years ago, few smaller brands would have considered these markets,” says William Edwards, CEO of Edwards Global Services, an Irvine, Calif., global franchise consulting firm. “The big challenge now is that in the U.S., it’s very difficult for new franchisees to get financing. Money is not a problem in emerging markets, and there’s a lot of demand.”
Steve Abrams, co-owner of Magnolia Bakery, is seeing that firsthand. Two months ago, the New York cupcake maker made famous by “Sex and the City” received state approval to sell franchises. Today, it’s fielding hundreds of queries from prospective owners across Asia, the Middle East and South America.
“We got requests from all over the world, but it’s heavily weighted to emerging economies,” says Mr. Abrams. He expects to close up to a half-dozen deals by the end of the year, citing interested buyers in Lebanon, Saudi Arabia, Kuwait, China, Thailand and Brazil.
In a recent survey by the International Franchise Association, nearly 85% of more than 150 U.S. franchisers—including chains with fewer than 50 locations in the U.S.—said they planned to start or accelerate international operations within the next few years. Like Magnolia, most were led by direct inquiries from abroad, the attractiveness of global markets and an opportunity to turn a profit.
“Younger and smaller franchise companies are jumping into the global market,” says Scott Lehr, vice president of international development at the IFA. “They’re looking at markets where it’s possible to grow sales in double digits. That’s pretty enticing.”
Knowing the Territory
Still, setting up global operations is a “big financial and operations commitment,” especially for smaller chains with limited resources, he says.
Smaller brands can face unexpected challenges in these regions, where a business system developed back home can be difficult to reproduce with limited infrastructure and an unfamiliar business culture.
“Nothing is easy in this,” says Mr. Edwards, whose firm has shepherded dozens of U.S. brands into foreign markets over the past decade.
For starters, franchisers can expect heavy training costs for franchisees and partners who know the local market but might be less familiar with the American approach to brand awareness or customer experience, Mr. Edwards says.
That’s what Pinkberry has discovered. In just six years, the California frozen-yogurt shop has grown from a single location to more than 175 stores in 17 countries—including Bahrain, Jordan and Peru.
Ron Graves, the company’s chief executive, says its business systems are stringently maintained through a full-time global team and a network of handpicked global partners who have experience working with U.S. brands and who share the company’s core values.
“We do our homework,” Mr. Graves says of the process of whittling down thousands of franchise applications to just a handful of capable partners who oversee dozens of outlets across a given region. “We’re not in the business of selling franchises, we’re in the business of finding partners,” he says.
Mr. Edwards says better communications systems and Web-based business applications are making it easier for franchisers to keep a close eye on far-flung operations. Still, he says it’s essential for companies to have boots on the ground in these regions to make sure that a brand is being successfully duplicated and maintained.
Smashburger’s Mr. Prokupek says after the Kuwaiti franchisees are finished training here, company officials will follow them back to the Middle East to oversee the new restaurant, which he expects to launch in late March.
“We want to hit the ground running,” Mr. Prokupek says.
Mr. Edwards, who isn’t affiliated with Smashburger, says that sort of exchange between smaller U.S. chains and international partners can be a boon for the global economy.
“What we’re really doing is exporting American business know-how,” he says. “And that’s exciting.”
Mr. Loten is a small-business reporter in The Wall Street Journal’s New York bureau. He can be reached at email@example.com.