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American restaurant chains have reigned, but some European innovators are gaining ground.
Laura Cameron and Tony McAuley, CFO Europe Magazine
November 5, 2007
Lounging at a linen-covered table, watching the crowd reflected in the engraved mirrors at Paris' exquisite art deco brasserie Le Boeuf sur le Toit, one could hardly feel further removed from the hectic Big Mac queues amid the formed plastic tables of "McDo's" around the corner at 140 Champs Elysée. The famous Le Boeuf, which began trading in 1922, takes its name from a ballet that was composed at one of its tables by Darius Milhaud. A young Pablo Picasso and Maurice Chevalier, an actor and prototype French roué, attended Le Boeuf's opening, as pianist Jean Wiéner played Gershwin, accompanied by Milhaud and Jean Cocteau on percussion.
Yet, swathed as Le Boeuf is in the Parisian culinary tradition, the brasserie these days is also part of France's fastest-growing restaurant chains, a distinctly American concept. Groupe Flo, who's revenue grew 12% last year to €349m, and Ebitda twice that rate to €38m, also owns Bofinger (best known for its stunning beaux arts glass ceiling), La Coupole (a Hemingway favourite in the 1920s) and more than a dozen other classic brasseries throughout France. It is trying to pull off what has, so far, proved elusive: to stay true to European cuisine values while adopting some of the strategies and techniques pioneered, to great effect, by American fast-food chains since the 1950s and scaling it internationally.
To achieve this, Groupe Flo is pursuing a fairly complex brand portfolio approach. Apart from the flagship brasseries, it has a growing list of restaurant brands covering various mid-level price brackets. These include the Bistro Romain group; the family-targeted Hippopotamus chain (its largest segment, with 2006 sales accounting for about 45% of the group's total); the cheaper Tablapizza outlets bought last year; and this summer's acquisition, the Maitre Kanter taverns, bought from Kronenbourg, a subsidiary of British brewer Scottish & Newcastle.
Groupe Flo's CFO, Fabrice Malassagne, describes the company's business concept as being "the leader [in each price category] in France and to be a platform of brands." The Flo price points range from an average of around €18 a head at a Tablapizza through to around €30 at Hippopotamus, Bistro Romain and Maitre Kanter, and €50 at the top brasseries.
As with any chain, the central marketing idea is that the umbrella brand stands for a level of product and service quality, but with the various price points offering customers a choice. The Flo group will be pursuing the "choice" idea in a literal, geographic way this year, Malassagne says. "We intend to open new restaurants close to one another," he explains, and by clustering different restaurant brands, "we will be able to share some of the fixed costs [as well as] the distribution costs."
Such streamlining opportunities, combined with Flo's accelerating growth throughout its portfolio, should improve financial performance, according to Sarah Emsellem, a stock analyst at broker Natixis, who follows the company. "[Flo] is improving its control of the restaurant-opening process, enabling it to lift margins more rapidly," she says. "For example, the Hippopotamus restaurants opened in 2005 generated an Ebitda margin of 18.8% in the first-half of 2007, while those opened in 2006 are already generating a margin of 16.6%." Emsellem is predicting compound annual sales growth of 15.6% through to 2009 — not including any future acquisitions — bringing it to nearly €540m, with Ebitda CAGR of 23%, to €71m. The improved profitability comes as the higher margin segments — Hippopotamus and Maitre Kanter — grow faster than the other chains.
Flo's objective is to increase scale across the brand portfolio. But to put this in context consider McDonald's numbers. Not only does it dwarf Flo globally, with 2006 system-wide sales of $57 billion (€40 billion), but it also does so regionally with €12 billion European sales, and nationally in France with €3 billion sales. Despite the culture-war perception suggested by incidents such as the 1999 attack on a French McDonald's by anti-globalisation agitator José Bové, France has long been one of McDonald's largest and fastest growing markets. That kind of scale — sales in France alone last year of 60,000 tonnes of fries, 32,000 tonnes of beef patties, 12,000 tonnes of chicken and 600m buns — brings enormous economies of scale and is difficult for competitors to match.
The Stomach's the Market
It's not for want of trying, but Europeans have mostly failed to get their chain concepts established beyond their national, or regional, base. Why? "Because Europe has had a different attitude to food generally, and food service is mostly done only on a national basis," says Peter Backman, managing director of Horizons, a London-based food industry consultancy. "US companies, on the other hand, say 'They might be different countries but if you've got the right model, you can steamroller it everywhere.'"
However, not all American efforts have panned out. Arby's, an American chain specialising in gigantic hot beef sandwiches, and Wendy's, a burger rival to McDonald's on its home turf, have been among the serial failures in Europe. But the fact that European chains have only challenged American operators in their home countries is, Backman reckons, "a failure of will on the part of European companies and their management."
The contrast in management attitudes was neatly demonstrated to Pierre-Antoine Raberin, international managing director of Groupe Holder, a Lille-based chain retailing high-end baked goods, including the Paul and Ladurée brands, at a meeting he had recently with McDonald's France CEO, Jean-Pierre Petit. Raberin, who has expanded the chain to the UK, Florida in the US, and elsewhere, recounts that when he told Petit that he didn't see the two companies as competitors, Petit countered that McDonald's "sees the market as a person's stomach" — if someone fills up by 20% on a Paul croissant, Petit said, then McDonald's has lost a fifth of its potential sales to that customer.
C'est la Vie Française
Aggressive expansion through both franchised and fully owned outlets certainly has been a major weapon for McDonald's, opening outlets in France, for example, at a rate of about 40 a year.
That's not the kind of pace that high-end concepts aim for. Groupe Holder began its American expansion two years ago with a licence to open 100 outlets over ten years, putting Lebanese-born Vladimir Alfa, who has a family connection to Groupe Holder's owners, in charge. Starting in the swankier neighbourhoods in and around Miami, it has so far opened three Paul shops, with another two on the way. When the aim is "to embody the art of living in the French manner," as Alfa has described the Paul concept, the speedy and highly adaptable approach of some of the bigger chains may not be feasible.
McDonald's has, after learning from experience, become more adaptable. "Although we have an American heritage, we are quite local in the execution of our strategies," says Linda Buckley, CFO of McDonald's Europe. (For a full interview with Buckley, see "On the Record.") As she notes, "More than two-thirds of our restaurants are owned and operated by independent locals and our country management is primarily local." None more so than France, where McDonald's, after a sputtering start in the 1970s, found the right partner in the mid-1980s. Despite the obvious cultural challenges, France has become McDonald's single most profitable country with nearly 1,100 outlets, and local adaptations such as sales of beer. Indeed, Buckley's boss, Denis Hennequin, was promoted to head of Europe two years ago after a long stint running France.
Apart from rapid expansion and franchising, another obvious area for Europeans to emulate is supply chain innovation and the exploitation of scale, though this is a much greater challenge when a chain is focused on high-end products, with different consumer segments. Unlike many fast-food chains, Flo's restaurants don't distribute pre-made meals from a central warehouse. But, Malassagne says, the group jointly owns a company called Convergence Achats with Euro Disney, where Flo also operates concession outlets. The purchasing outfit is responsible for sourcing raw goods, negotiating prices and then submitting samples to a Flo technical director, who selects the product to be used in the restaurants. Products are monitored via a database that kitchens use to order directly from the supplier, enabling restaurants to make small orders of fresh food, but also to exploit group volume rebates.
Similarly, Groupe Holder centrally purchases and processes in bulk. All dough, for example, is manufactured in Lille and then distributed to the stores where it is baked behind the counter. There are contracts with 300 farmers who together harvest 14,000 tonnes of Camp Rèmy winter wheat each year, and seven mills in northern France that grind Paul's wheat into flour before it's made into dough and sent to bakeries everywhere from Miami to Tokyo.
Redefining the Doughnut
A less obvious recent area of innovation by US chains is in financial reengineering. Over the past two years, for example, chains including Dunkin Donuts (now Dunkin Brands, including the Baskin Robbins ice cream chain), IHOP (a pancake chain) and Domino's Pizza have raised billions of dollars by securitising their franchise royalty receipts. Morgan Stanley analyst Mark Wiltamuth points out that issuers of such royalty-backed bonds have secured $6 to $8 in financing for every $1 of franchise royalty at interest rates around 5.25% to 5.6%, significantly improved return on equity and given more balance sheet flexibility.
In the case of Dunkin Brands, its business model was radically redefined. "It basically went through significant restructuring of its business operations to set up for securitisation, essentially putting all cash-flow-generating assets in bankruptcy remote special purpose entities," according to Standard & Poor's analyst Eric Hedman. "Dunkin has become, effectively, a brand management company."
In Europe, however, structural issues have tended to stymie innovation. Backman of Horizons says that the pace of consolidation is accelerating for both the two main categories — those that try to emulate the big US brands and the multi-brand operators. But, if anything, this is holding back development. For example, Europe's largest "me too" burger chain, the Franco-Belgian Quick chain, brought in former Groupe Flo chief Jean-Paul Brayer as a fixer in 2002. Last year, Quick was bought for €730m by French state-owned lender CDC's private equity arm, but it's not yet clear whether the new owners will pursue Quick's expansion in markets such as North Africa, or change direction.
In Greece, the dominant American-style burger chain, Goody's (see "Local Hero" at the end of this article), was bought in 2000 by Greek food conglomerate Vivartia, which in September was taken over by Marfin, a financial conglomerate. A spokesman for Vivartia said plans to further expand Goody's into neighbouring countries, such as Bulgaria, are on hold until after the transition, which included the departure of the CFO and other top managers.
Meanwhile, €4 billion Autogrill of Italy dominates the travel-concession business in Europe, with a 53% market share, according to Horizons. ("But not because it has a good product," Backman reckons.) Among its brands are little known Ciao, Coté France, Spizzico, Acafé, as well as franchises for Burger King, Pizza Hut and others located at airports, railway stations and other travel hubs. Nonetheless, Autogrill's performance has picked up since the arrival of CFO Alberto de Vecchi in 2006 (see "Quelle Qualité" at the end of this article), as acquisitions accelerated, including a move into in-flight food, a mostly unbranded market de Vecchi says is worth €7 billion.
But those referencing McDonald's might note its attitude shift on brand diversification. As Buckley points out, "We do not have a portfolio approach. McDonald's has had a minority stake in Pret-a-Manger [a UK sandwich chain] for many years. However, we have eliminated other brands over the past two years — Chipotle and Boston Market. We strongly believe the best way to generate value for shareholders is by focusing on our core McDonald's business."
It's that ruthless focus that has seen McDonald's relentless rise, even in the face of anti-globalisation protests, even amid Europe's growing "slow food" movement and even in France, home of the elegant brasserie.
Laura Cameron is an intern and Tony McAuley is deputy editor at CFO Europe.