No such thing as quick money in UAE’s F&B business

Dubai: For anyone thinking of putting up money in the restaurant business in Dubai and expecting to see returns in three years, Phil Broad has a short reply — forget it.

“These people are living in Utopia if they believe in three-year returns,” said Broad, vice-president of the food and beverage division at Alghanim Industries, which operates the Wendy’s fast-food restaurant franchise.

“If you plan to open a concept in a certain way, train people in the right way and want the business built to last, you can never do it in three years.

“If you look at the investments needed to put into a QSR (quick-service restaurant), to build the kitchen and ship in the equipment — mostly from the US because that’s where the majority is made — and fabricate, it’s a lot of money.

“You could possibly aim for a three-year payback from coffee shops. Anybody can get into that business by buying a coffee machine — but not everybody can get into F&B hospitality.

“If someone still plans to do it, then he needs to come in with a five-year plan … and with an exit strategy in mind if things don’t work out. Because if it all goes wrong, you have to exit the locations before the leases are over. And that invites massive penalties.”

What is making life that much more challenging for F&B operators here is how rent leases are structured on their outlet locations. The degree of difficulty escalates with how short-term the leases are.

“I think you need to go in for more than a three- or a five-year lease, which is the standard in these markets,” said Broad. “In Europe, you can try and lease for 20 years. You need extended leases in the F&B business — It’s touch and go whether you even get a payback in three or five years. Yet, people think they can open, make their millions and retire.

“We are pushing for longer lease periods where we can. We could do 5+5 (initial five-year term and followed by a renewal for a further five). We always try for an automatic renewal.”

Broad has been scripting a turnaround story with the Wendy’s franchise which it had acquired from another business group just under three years ago. At the moment, it is looking for optimum exposure through high visibility locations such as at The Dubai Mall and a two-storey dining and drive-through location in Jumeirah.

“The problem when we acquired the franchise was that Wendy’s locations were pretty hidden,” said Broad. “If you had driven around Dubai, you wouldn’t have noticed those locations. We had to change that perception and we did that by putting it in locations within malls where people will see every it day. That gave the brand some sort of halo effect.

“Emaar would not even talk because Wendy’s had not been run particularly well. I think now we have the No. 1 slot in the food court (at The Dubai Mall). And they have seen what we have managed to do elsewhere in the city. They believe in us as a brand whereas before they just said ‘No’ to having us in there.”

Alghanim Industries’ rationale for the Wendy’s franchise was that it came with region-wide opportunities.

Earlier, it had bought out an existing Costa Coffee franchise, but that was just for the Kuwait territory.

“I would like to see some more M&A going on in the F&B market,” Broad said. “There are lots of small, independent operators who will really struggle if they don’t get scale. Only businesses that get scale will survive. You got to have scale and make sure the capital costs are well invested.

“Operators who think they can just open a new location and give customers great food and charge too much will go. But you could even get a whole group of one-off restaurants or coffee shops and create a good company out of that. We spend a lot of time on the cost base — getting it right is key.”

Even with the franchise acquisitions and investments in locations, there are some rules of engagement that Alghanim Industries will not sign up for.

“We certainly don’t want to be in that fine dining/upper casual dining category — and we are definitely not for collecting brands. We are not in the F&B business for bragging rights. There are still some nice looking retail foodie concepts we could aim for, but generally it will be in on-the-run-style food.”