By Jeffrey T. Lewis And Rogerio Jelmayer
SÃO PAULO--Eager for a bigger slice of South America's largest
dining market, a slew of U.S. restaurant chains are expanding in
Brazil despite the country's moribund economy.
Subway, Dunkin' Donuts, Hooters, McDonald's, Johnny Rockets,
Outback and Domino's Pizza are among those opening new stores in
the midst of weak consumer spending and what is shaping up to be
Brazil's first economic contraction since 2009.
Banking on better times ahead, U.S. companies are taking
advantage of the down market to woo new franchisees, snag bargain
leases and expand while many local operators are pulling back. The
draw: a Brazilian middle class estimated at more than 100 million
people, many of whom love to eat out and have an affinity for U.S.
brands.
Brazil's economic difficulties "make it more challenging, but
it's also an opportunity," said Patrick Murtha, president of
Tampa-based Bloomin' Brands Inc.'s international division, which
runs the Outback steakhouse chain. "The Brazilian economy will
improve, and we'll be in a position to take advantage of that."
This year, Outback plans to open a dozen outlets in Brazil, the
most in any of its foreign markets. Bloomin' Brands currently has
64 Outbacks and one Abbraccio Cucina Italiana restaurant in Brazil,
all company-owned and accounting for a third of its international
presence.
Strong sales at its Outback unit helped Bloomin' Brands post
second-quarter profit of $32.2 million, up 22% from a year earlier.
Over the past year, its shares have risen about 31%.
Selling sirloin steaks in Brazil, one of the world's largest
beef producers, might appear to be like taking coal to Newcastle.
But Brazilians have developed a taste for U.S. restaurant chains,
in part because they increasingly travel to North America. The U.S.
is the No. 1 foreign destination for Brazilians, with nearly 2.3
million visiting in 2014, more than triple the tally for 2007,
according to U.S. government figures.
Elisama Lorenzo, 42 years old, said her children like the
novelty and perceived cachet of eating at American-style places.
They recently stopped for burgers at the newest Johnny Rockets
location in a São Paulo mall, where lunchtime waits at the
1950s-themed diner can reach an hour or more.
"I come to the American places because my daughters insist," Ms.
Lorenzo said.
Still, it takes more than a U.S. nameplate to be successful
abroad, says Charles Bruce, president and chief executive of Johnny
Rockets Group Inc. Owned by the private-equity firm Sun Capital
Management, the Aliso Viejo, Calif., chain operates in 27 foreign
markets, which are home to about 40% of the company's 340 stores.
Its Brazilian franchisee currently has nine locations, with three
more planned this year.
Mr. Bruce said Johnny Rockets looks for franchisees with retail
experience, real-estate acumen and the financial means to open
multiple units, which can cost anywhere from $500,000 to $750,000
each. Such operators tend to have the wherewithal to weather
economic downturns.
There can also be advantages to setting up a business during
tough times, such as those now bedeviling Brazil, a market known
for its high costs and red tape. Real estate, among the biggest
expenses, has become more affordable. And rising unemployment has
made hiring qualified workers easier.
"You'll probably get better employees, and they'll stick with
you," Mr. Bruce said.
The number of franchised food chains operating in Latin
America's biggest economy has almost doubled since 2009 to a total
of 685 chains at the end of 2014, according to the Brazilian
Association of Franchisees. The group couldn't provide a breakdown
by country of origin, but confirmed that the presence of U.S.
brands is growing.
Papa John's International Inc. was among the U.S. chains trying
to recruit operators at a recent franchise fair in São Paulo. The
Kentucky-based pizza chain already has stores in Chile and
Colombia. It is now looking to break into South America's largest
market, where pizza has long been a staple thanks to waves of
Italian immigrants.
"Brazil is a logical next step for us," said Michael Measells,
vice president of international business development for Papa
John's. "The pizza-eating demographic here is huge."
Still, a big market doesn't ensure success. Arcos Dorados
Holding Inc., which operates more than 2,100 McDonald's restaurants
in Latin America and the Caribbean, has struggled with a weakened
currency and declining foot traffic in Brazil, which accounts for
roughly half its sales. The Buenos Aires-based company recently
posted a $7 million profit for the second quarter, following losses
in both the year-earlier period and this year's first quarter.
Second-quarter revenue for its Brazil unit dropped 24%, hurt in
part by the depreciation of the Brazilian real.
Dunkin' Brands Group Inc. closed its doughnut shops in Brazil in
2005 because of problems with its franchising model and a weak
supply infrastructure, company officials said.
The doughnut chain returned this year with an ambitious plan to
open 150 stores in the next few years. It has retooled its
franchising and supply models, and it tweaked its menu to appeal to
Brazilian tastes.
Its first new store in Brazil's capital of Brasília has
attracted long lines of customers since it opened in May. Daiana
Kmiecik, 27, a congressional aide, braved the queue on a recent
afternoon. "It's my third time here, but they had run out of donuts
the other two times," she said. "I think I'll buy a box with a
dozen."
Paulo Trevisani contributed to this article.
Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com and Rogerio
Jelmayer at rogerio.jelmayer@wsj.com
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