Why Pinkberry went to Moscow and Chipotle will go to ParisApril 28, 2011: 5:00 AM ET
Chains are no longer saturating the U.S. market before setting up lucrative yet risky overseas outposts. In an increasingly smaller world, they just can't afford to wait.
By Beth Kowitt, writer-reporter
FORTUNE -- When McDonald's (MCD) opened its first location in Moscow in 1990, an endeavor that had been in the works for 14 years, the fast food giant had more than 10,000 locations to its name and had been a franchising company for 35 years. Meanwhile, the Berlin wall had only just come down.
Fast-forward about two decades to March 2011 when Pinkberry opened its first store in Russia's capital. The frozen yogurt chain that began in 2005 has about 100 stores, yet Muscovites might be wondering what took the chain so long to arrive. There's no question times have changed.
A global operation was once considered tenable only for big restaurant companies, which would often be well on their way to a fully developed U.S. market before looking far outside North America.
But now companies like Pinkberry are turning international earlier in their growth cycles as they face a saturated U.S. restaurant industry and more globalized demand. Pinkberry, which has stores in countries including Kuwait, Bahrain, Mexico, and Peru, plans to operate in at least 19 countries by the end of the year. In 2011, its 30 expected international store openings will match the number of openings anticipated in the entire U.S. Pinkberry declined to comment for this story, but has already posted pictures of the grand opening to its Facebook account.
"For many of these smaller companies," says Bernstein restaurant analyst Sara Senatore, "I do think they're considering how competitive the U.S. market is and the fact that the better part of the industry's growth story is behind it in the U.S."
In response, many chains are trying their hand in less developed markets. In 2010, 155 of the top chains that restaurant consultancy and research firm Technomic tracked had sales outside the U.S., up from 130 in 2005 and 109 in 2000. Not only are more companies going global, but more restaurants in general are in the competitive mix. Technomic tracked 350 chains in 2000, compared with 1,600 in 2010.
"There are just too many brand names," says Jinlin Zhao, a professor at Florida International University's school of hospitality and tourism management. "It makes people dizzy. In many cases the core concepts are the same." (In the frozen yogurt world, think Red Mango, Yogen Fruz, and Cherry on Top, just to name a few.)
American companies are also competing against an influx of chains from other countries that have staked out turf in the U.S., explains Darren Tristano of Technomic. Take Canadian chain Extreme Pita, Pollo Campero from Guatemala, and European imports like Pret A Manager and Wagamama. In other words, expanding overseas is really a two-way street.
While the U.S. restaurant industry has developed into a fierce battle over market share, getting into a new region early can be key for outmaneuvering the competitive set. Case in point for Pinkberry in Moscow, which The Moscow Times reported was the first frozen yogurt venue with a sit-down café setup in the city that is home to Lenin's Tomb.
Even companies that still have room for tremendous growth in the U.S. are trying to at least have a presence beyond the domestic market. Chipotle (CMG), with about 1,100 restaurants, still has plenty of opportunity to grow in the U.S. But the chain has already opened one location in Toronto and another in London. One or two of about 135 to 145 of its openings this year will be outside the U.S., including a location in Paris. Getting into these markets now is a way to introduce the brand to consumers and start developing relationships with suppliers, says Chipotle communications director Chris Arnold.
The greater global acceptance today of U.S. brands, along with an emerging and rapidly growing middle class in many of these markets, has resulted in a favorable environment for restaurant companies that want to become multinationals. But business partners and capital are also more readily available.
The Cheesecake Factory (CAKE) CEO David Overton says his casual dining operation had offers from potential partners for many years to take the company international. It wasn't until he found an operator he felt really knew what it was doing that he decided to go for it. Now he's entered into an agreement with M. H. Alshaya Co. to operate its chain in the Middle East, even though he still believes the Cheesecake Factory can double its size domestically. "The time was right," he explains.
But going global isn't without its risks. Carin Stutz, president of global business development for Brinker International (EAT), which operates dining chains including Chili's, says there are plenty of rewards that come with international expansion. But you also have to be aware of the risks. She gives a laundry list of this year's events as an example: economic crisis in Europe, a tremendous amount of unrest in the Middle East, an earthquake and tsunami in Japan. "You don't expect a lot of those catastrophic things all at once," she says.
Stutz says the biggest challenge is infrastructure and supply chain. Then you have to develop enough critical mass to make these investments pay off. Pinkberry may be at an advantage here. Starbucks (SBUX) CEO Howard Schultz is an investor in the yogurt chain through his private equity and venture capital firm Maveron and sits on the board, which has allowed Pinkberry to develop relationships with some of the coffee company's partners around the world.
But there are also plenty of risks beyond just an operations standpoint. "It's a diversion," says Burton Cohen, a professor at Northwestern University's Kellogg business school, who worked at McDonald's for 35 years. "It just sucks up enormous amounts of time and energy." That's not necessarily a problem when you're a large company that has significant resources, but it can be for a small operation that's in start-up mode. "In most countries when you're starting out you have to be prepared to lose money for a while," he adds. It seems that in the frozen yogurt business, that's a risk a company simply has to be willing to take.
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