Issue 3, 2017. June-July

   

FINDING A NICHE AMONG THE KHACHAPURI: THE SUCCESS OF FOREIGN FAST FOOD IN GEORGIA

In a country where local cuisine is a matter of national pride, one might expect that foreign brands would fail in impressing Georgian food aficionados. But major American brands-McDonald's, KFC, Wendy's, Subway, Dunkin' Donuts and others- are reporting 15-20 % annual growth and, amid growing competition, keep expanding. Investor.ge looks at how local companies obtain and maintain a license from world-known brands-and how they are finding a niche in Georgia's rich food culture.

Maia Edilashvili-Biermann

When McDonald's debuted in the Georgian capital in 1999, Tbilisi residents were ostensibly more interested in a stable electricity supply than a Big Mac.

But those famous Golden Arches-Georgia's first international fast food franchise-found success.

Unlikely Break

The timing was lucky: Georgia fit into a corporate plan to expand McDonald's internationally.

"At that time, McDonald's had a plan to expand to all countries, up to the Great Wall of China. We were lucky to get that chance. On the other hand, Armenia still has yet to get its first McDonald's and Kazakhstan opened its first McDonald's only last year," Tengiz Kapanadze, managing director at McDonald's Georgia, recalled in an interview with Investor.ge.

Before being allowed to open the first McDonald's in Tbilisi, we had to attend training sessions in various countries for two years, Kapanadze recalls. "The first restaurant on Rustaveli Avenue was opened by 13 managers, plus an expat operations consultant was assigned to oversee the process. A year and a half later, we were told that McDonald's Georgia could continue independently," he said.

Now McDonald's Georgia has 11 restaurants, plus a logistics center, and employs approximately 930 people, with an average age of 20-22 years. "At our office, 70% of employees holding senior positions are former employees," Kapanadze said. The 20-person management team is running the whole business, which enjoys a 60 million lari annual turnover (approximately $26 million).

International Standards, Local Tastes

After McDonald's broke into the market, Georgians developed a taste for hamburgers and French fries-and fast food menus started to adapt to Georgia.

Georgia's Wissol Group has gone the furthest in terms of localizing fast food offerings. The company, which owns petrol and supermarket chains as well, has introduced khachapuri and lobiani to the menu at its Dunkin' Donuts franchises.

It has also brought Wendy's to Georgia.

From the beginning, Wissol Group tried to make it clear for Georgian consumers that their restaurants would not be about fast food, but rather a chain of American restaurants, Soso Pkhakadze, President and Chairman of Wissol Board of Directors, told Investor.ge.

He noted that they decided to try two of the most famous Georgian dishes-khachapuri and lobiani-on the menu for three days as a test at Dunkin' Donuts."It turned out that Dunkin' khachapuri has become our number one best seller and Dunkin' lobiani is number two," Pkhakadze noted. He underlines that it was a bold decision, as Georgian customers all know how a great khachapuri and lobiani should taste.

The company also started to localize the products they use in both their Wendy's and Dunkin' Donuts restaurants, including the beef, chicken, bread and ice cream.

Pkhakadze considers this to be the biggest breakthrough. "We have replaced approximately $10 million worth of imports with local production," he said, naming this as the company's biggest achievement in the restaurant industry.

The only product that they still import is potatoes, he said, which they need to make French fries. They are looking for a way to source that locally as well, he added. "People are very happy when they hear that we have only Georgian-produced stuff," he said.

Questions of Quality and Quantity

But not all franchise arrangements allow for so much latitude.

KFC Georgia CEO Zurab Neparidze told Investor.ge that when opening a new outlet, everything from its location to design details such as the color and shape of the restaurant's letters, needs to be agreed upon with the KFC regional office.

"The kitchen equipment has to be produced by companies approved by KFC," he said.

That can limit what restaurants can tweak in their menus.

"Our menu follows guidelines set for the former CIS and Eastern Europe," Neparidze noted. "However, every two or three months, we have a French week or Italian week, when certain ingredients change to highlight flavors typical of those countries."

For KFC, one solution has been to interest the parent company in adding Georgian items to the global offerings.

The head office has shown interest in local food, particularly sauces, Neparidze said. "Tkemali sauce might be introduced as a variety of KFC sauces in the future. Just like KFC has French or Italian weeks throughout its worldwide network, they may organize a Georgian week too," he said.

Quality and quantity is also an issue for international franchises.

"Based on quality-control issues and international standards, we are limited in this regard. Everything needs to be coming from suppliers approved by McDonald's headquarters," Kapanadze of McDonald's Georgia said. "However, sometimes we take ingredients from two countries and make a single product."

KFC Georgia's Neparidze also admits that depending on regions, the taste of a product can be tweaked. For example, the biggest bestseller of KFC, chicken wings, is little less spicy in Georgia than it would be in any of the Western European chains.

He noted, however, that while KFC Georgia cannot use local chicken since it does not match KFC standards, they can purchase other Georgian products to use as ingredients in their restaurants.

Subway Georgia has an authorized supplier, which imports products from Europe.

Locally, they buy only vegetables because they need to be fresh and Georgian vegetables are tastier than those that are imported, Givi Ordenidze, Subway's Development Agent in Georgia, said.

McDonald's has also found a way to engage with the local market: this year they opened a Georgian logistics center.

Kapanadze explained that even though imported products are costlier, McDonald's Georgia cannot buy products locally due to international food safety standards. "If you take our burgers, each box has its code, allowing one to find out the origins of that meat within two hours: from which farm the cow/pig comes from and what was their food," he says.

Their food supply mainly comes from Germany, Holland and England. The opening of the logistics center allows McDonald's Georgia to be integrated into the brand's international logistics system and, if need be, they can supply other countries such as Azerbaijan, Armenia or Kazakhstan.

They can also change the menu based on local habits, like Georgians' long fasting periods. "Accordingly, we already have certain products to offer during times of fasting, but we would like to increase this list," KFC's Neparidze said.

Room for Growth

The mix of foreign and local appears to be working for all the major food franchise brands in Georgia.

"On average, each of our restaurants contributes half a million lari ($206,000) to the state budget annually, gives jobs to around 60 young people and produces 20 managers, at a minimum, with international qualifications," Kapanadze of McDonald's Georgia said.

Since it was founded, McDonald's Georgia has contributed 57 million lari ($23 million) to the state budget and invested 59.5 million lari in its business. This year, apart from plans to open a new restaurant in Gallery Tbilisi, a shopping mall under construction on Rustaveli Avenue, McDonald's will open a new restaurant in the western Georgian city of Kutaisi. The company expects to report 20-22% annual growth this year.

Wissol Group is similarly enthusiastic about the future: in the first four months of 2017, sales have grown by 14% at Dunkin' Donuts and by 15% at Wendy's. "We have localized our supply as of December and we attribute this growth to this important achievement," Pkhakadze said.

Currently, there are eight Wendy's restaurants in Georgia and all of them are profitable, according to Pkhakadze. There are 17 Dunkin' Donuts restaurants and 85% of them are profitable. Six new restaurants are under construction, he said, and by the end of 2017, there will be a total of 31 restaurants from both chains in the country.

Subway Georgia is also optimistic. "This year we have 15% growth compared to last year, on average, which makes us one of the leaders in our network in central and eastern Europe," Subway's Givi Ordenidze said.