- Dubai calling: Franchising opportunities in the gateway to the Middle East
Dubai is the most populous city in the United Arab Emirates (UAE) and the commercial capital of the Persian Gulf. Part of its success and appeal is its business-friendly climate.
There are no capital gains, personal income, sales or withholding taxes in the emirate. Instead, residents and businesses are taxed on consumption for the utilities and services they use. The local government also exercises no control over foreign exchange, allowing investors in foreign-owned businesses to repatriate 100% of their profits. Having the local currency, the UAE Dirham, pegged to the U.S. dollar is an added bonus that makes it easy for foreign investors to predict and track their expenses.
For these and other reasons, U.S. food and beverage franchisors are increasingly attracted to the Dubai market. Franchising has become a dominant business model there and successful franchisors can earn record profits, thanks also to the population density, a culture of dining out, and high numbers of tourists. Kelly Rodriguez, Restaurant practice leader at Grant Thornton US, says:
“We’ve seen increased interest from our client base in expanding into the UAE due to the business-friendly environment and a large population looking to expand its choices and tastes.”
It helps, too, that Dubai is a cultural melting pot — not only does it attract tourists from around the world, but 85% of its residents are expatriates. This means that just about any type of franchise can find a loyal following. Hisham Farouk, CEO of Grant Thornton UAE member firm, says: “Because palates are so varied here, everything will work.” The fact that half of the region’s residents are young — under the age of 25 — also appears to drive interest in Western food offerings.
In the fast food and convenience sector, which represents about 40% of the overall franchise market2, most brands cater to locals, with office workers and their families driving demand. Thanks to the tax-free zones, Microsoft, Dell, IBM, Siemens, CNN, Reuters, and many other Internet and media companies have large offices there. Subway has 60 stores in Dubai, and the city is one of the few places in the world where McDonald’s delivers.
There are also many casual dining and higher-end franchises that cater both to tourists and residents. And even though Dubai is culturally Muslim, bars and restaurants housed inside hotels are permitted to sell alcohol, so there are many such places to choose from. Franchises in other locations, such as malls, are often able to adapt. For example, The Cheesecake Factory developed an elaborate “mocktail” menu for its Dubai locations to replace its cocktail list.3 (This and other parts of the company’s strategy appear to have worked — Dubai is one of its most profitable locations worldwide.4)
Breaking in can be difficult
The downside of Dubai’s many attractive features — its population density, pro-business climate, and booming economy — is that it is a highly competitive place in which to do business. The keys to success for food and beverage franchisors, Farouk says, are “location, marketing, and consistency of quality.”
Good locations do not come cheap. Malls are desirable locations for fast food and casual dining because they have extremely high foot traffic among both tourists and residents; some even stay open 24 hours on key public holidays. But rents in malls can be very expensive (up to $200 per square foot), and some leasing companies also take a percentage of profits and command a surcharge.
For this reason, many U.S. franchisors partner with large franchising groups that operate several different brands and have the leverage needed to negotiate favorable rents. Farouk says, “You really need to find someone who has 10, 20, 30 brands to have economic weight to negotiate real estate prices.”
With the high startup costs, it can be hard for small franchisors to break into the Dubai market. But those that find a niche market and develop a strategic, incremental plan for growth can succeed, he says.
3 must-know facts about franchising in Dubai
1. Marketing and supply chain are key when luxury is the norm
Distinguishing your business from others is essential in a competitive market that is also known for exceeding consumer expectations. Though only 1,500 square miles in land mass, Dubai has seven-star hotels, the world’s tallest building and the world’s largest mall — with its own skating rink, aquarium and a Boeing flight simulator.
“[An aura of] luxury infuses everything here,” says Farouk. Delivering consistently high-quality products may require franchisors to adapt their business models, for example, by relying on local suppliers to ensure fresh ingredients are available. The Cheesecake Factory, which typically ships frozen cheesecakes to its franchisees, found this impractical for Dubai and instead sent a team there for six months to teach local franchisees how to produce their signature cheesecakes according to rigorous specifications.
Developing a marketing strategy targeted at key audiences is also crucial. The small UAE-based franchise Just Falafel succeeded in part through its low-cost marketing strategy — using Facebook to promote its brand and develop loyalty among its clientele.5 New entrants can also earn a following through Zomato, a Yelp-like restaurant listing service that is widely used in the UAE.
2. Local law and geography dictate the form of franchising
While there is no special legislation for franchising in the UAE, commercial laws require that only UAE citizens or corporations wholly owned by such citizens operate businesses there. (Companies operating in the tax-free zones are exempt from this regulation.) For this reason, franchising remains the preferred route of entry for international brands. The UAE government has backed the franchise model through the creation of business training programs and financing opportunities.
Franchisors expanding abroad often adopt master franchise agreements with their international partners in hopes that these arrangements will enable their brand to expand rapidly in a region. But this model doesn’t really work in Dubai, Farouk says, given its relatively small geography. If a single brand opens too many outlets, they will end up competing with each other and cannibalizing profits. “Instead,” comments Rodriguez, “revenue must be driven by maximizing retail sales, making it all the more important for franchisors to support their franchisees with training and other resources, and ensure controls are in place to oversee their work.”
3. Franchises must bend to meet the local market
International brands looking for success in Dubai must carefully evaluate the market dynamics and industry trends — and tailor their offerings to accommodate local preferences and expectations.
Franchises that fail to bend can sometimes break. For example, in recent years a large U.S. casual dining franchisor opened in Dubai, securing a prime location in the Dubai Mall. But the calculus of its existing business model — offering large quantities of its prime product at affordable prices — did not work in Dubai, where fresh versions are widely available but tend to be expensive. In order to offer low-priced options, the brand had to rely on frozen products. But this approach failed to win over customers in Dubai, where many in this region prefer to pay more for fresh food.
Such missteps can be hard to recover from. “The competition here is immense. You generally have only one chance to capture an audience, and if you miss it, someone who does a better job will take your place,” Farouk says. The penalty for failure is also severe. Landlords leasing space in expensive malls — where the vast majority of restaurants operate — have no incentive nor need to allow tenants to break the lease. “You have to pay its full cost,” he says.
Many problems stem from the fact that franchisors entering the market assume that because most customers in Dubai speak English, the U.S. model will work there. Instead, they need to be as flexible in modifying the menu as they would if they were expanding into China or Japan. “If not, you won’t succeed — even if you get the location and marketing approach right,” Farouk says.
A casual hamburger franchisor that succeeded tailored its approach — a fresh, healthier take on the typical fast-food burgers — to accommodate the many local residents of Southeast Asian ancestry who adhere to a vegetarian diet. The franchisor introduced three different types of veggie burgers — each made with a unique combination of fresh ingredients and packaged with all the accoutrements of the other burgers.
The need to go big
The opportunities Dubai presents, along with the UAE’s strong connections with some key financial and international markets, make this a region of choice for franchising. To be successful, franchisors will need to find prime locations and develop effective supply chain and marketing strategies to find success in this highly competitive marketplace.
Hisham Farouk is the CEO of Grant Thornton UAE
Kelly Rodriguez is a Partner and Restaurant Industry leader at Grant Thornton US
1 See http://www.doingbusiness.org/rankings for more information.
2 See http://www.dubaichamber.com/documents/Franchise%20in%20Dubai.pdffor more information.
3 See https://www.zomato.com/dubai/the-cheesecake-factory-dubai-mall/menu for more information.
4 See http://fortune.com/2013/02/12/m-h-alshaya-the-mystery-company-importing-americana-to-the-mideast/ for more information.
5 See http://www.entrepreneurmiddleeast.com/the-franchise-story-ceo-fadi-malas-on-just-falafels-lucrative-business-model/ for more information.