FOREIGN FOOD FRANCHISES

It is the investment of local entrepreneurs

By SHABBIR H. KAZMI
Apr 17 - 23, 2006

Lately there has been a visible change in the food habit of the people in Pakistan. They are moving away from conventional dishes to fast food and Bar B Qs. Taking advantage of the paradigm shift, a number of globally known brands have entered Pakistan. The investment in these businesses is mostly made by the local entrepreneurs and expertise, including recipes and quality standards are specified by the brand holders. Most of the locals still believe that the investment has been made by brand holders, but the fact is that Pakistani entrepreneurs have to pay a handsome fee to the brand holders.

The concept of franchising is not new in Pakistan. The history goes as back as to early 1950's when soft drinks like Coca-Cola and Pepsi Cola were introduced by the local bottlers. But since then, barring a few areas like hotels, franchising remained dormant. It got a big boost in 1990's when the government opted for liberalization of various policies. With the gradual saturation of franchise opportunities worldwide, investors saw Pakistan as a major market, mostly untapped for the franchising business.

For example Pizza Hut established its first restaurant in Karachi in 1993. Since then it has increased its outlets and employs hundreds of people. KFC (Kentucky Fried Chicken) was introduced in the market by the Artal Group of Belgium and although a late entrant, it managed to establish several outlets in Karachi, Lahore in quick succession. In 1997, McDonald's entered the Pakistan market with an elaborate business plan. Now KFC and McDonald's enjoy the largest market share.

According to some analysts most of the franchises operating in Pakistan are of American origin. This could be attributed to the fact they franchising business is most common in the US and also that they made early entry. Moreover, they entered the market with a long-term commitment and provided full support to their local partners. Additionally their products are internationally known for quality and superior service. Even before KFC and McDonald's started their operations in Pakistan the two brand names were well-known in the urban areas of the country. According to a report, out of thirty seven franchising systems operating in Pakistan thirty-two are of American origin. This is due to their strong background in the franchising business.

While a number of world leading brands are available in the Pakistan most of the analysts are of the view that franchise market in the country is still in an embryonic stage. Whatever names are found in Pakistan most of these have less than ten years history. It is difficult to generalize the competitive situation. However, observations are that a newcomer in the food business has to face fierce competition from established local and foreign outlets. But competition from the local restaurants is also posing a serious challenge to the international chains. With lower overhead costs, the local outlets have the pricing advantage. Some of the well-known local restaurants have developed new themes in order to differentiate their product.

Establishment of a franchise presents no major problem for an investor, because the Government of Pakistan encourages foreign investment. Imports are welcomed by end-users and traders alike. There is also hardly any restriction on repatriation of investment as well as profit. Similarly there is no restriction on selection of area. However, cities like Karachi, Lahore, Rawalpindi, Islamabad and Faisalabad exhibits most of the investment. These cities also offer the best prospects for franchise companies. Most of the investment seems to have confined to Lahore and Karachi. The growth in these areas is attributed to a sizeable middle-class, which also has the capacity to pay for entertainment, including eating outside.

The largest number of such outlets is operating in Karachi. One of the reasons for proliferation of franchise outlets in Karachi is the population of the city, exceeding 15 million. The other and most pertinent reason is per capita income of citizens of Karachi. According to various estimates per capita income of Karachi ranges from 1,500 to 2,000 US dollars as against an average of 550 dollars for Pakistan. Yet another reason for the popularity of fast food is 'Home Delivery Scheme'. This allows the youngsters to get the items delivered at their homes and/or work places.

According to various estimates millions of rupees have been invested in these outlets. Most of these are located in areas where property prices are very high. Then comes the investment made in infrastructure (machinery, furniture, air-conditioning, telecommunication etc.). On top of this a lot of money is being spent on training of the personnel. Yet another positive impact of these outlets is on the confectionery, soft drinks and meat processing (particularly beef and chicken). Initially these outlets were importing beef and chicken but gradually local suppliers have emerged. These suppliers are not only help in import substitution but also improving quality being offered to domestic market. Another positive impact of the entry of the foreign franchises in Pakistan is that the overall outlook of local restaurants, quality and hygienic standard has improved. Till recently most of the local restaurants did not have air-conditioned halls.

Ironically, some of the outlets have been targeted by mobs. The general impression was that it was foreign investment and its targeting would be a loss of foreigners. However, the fact is that it is investment of local entrepreneurs and they also pay a fee. As such damaging or putting any asset on fire is too bad an attitude. This could only discourage the local investors and if they are shy no foreign investment would flow to Pakistan.

INFLATIONARY TRENDS* (% CHANGE)

YEAR

CPI

OVERALL INFLATION (HEADLINE INFLATION)

FOOD INFLATION

1990-91

12.7

1991-92

10.6

1992-93

9.8

1993-94

11.3

1994-95

13.0

1995-96

10.8

1996-97

11.8

1997-98

7.8

1998-99

5.7

1999-00

3.6

2000-01

4.4

2001-02

3.5

2002-03

3.1

2003-04

4.6

2004-05(July-Apr)

9.3

Average of 1990s

9.7

Average of 1990-97

11.4

Average of 1998-2000

5.7

Average of 2000-2005

4.9

* Source: Federal Bureau of Statistics