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Waiter: Pile On the Flapjacks but Hold the Bacon

On any given day of the week, an International House of Pancakes restaurant is cooking up stacks of flapjacks along with eggs, bacon and sausage. But in the Middle East, it’s a different story, because the chain must substitute its pork with Halal, or Islamic-certified turkey hams, veal sausages and beef bacon in its breakfast meals. “With that whole Middle Eastern economy and how they view things American, it’s an understatement to say that they love IHOP,” said Julia Stewart, chief executive of DineEquity Inc., the Glendale parent of the breakfast chain. DineEquity has opened eight IHOP locations in the Middle East since 2012, with plans to open a total of 40 by the end of 2017. Also its Applebee’s brand will add onto its 40 existing locations in the region by opening about five stores annually over the next several years. Then there’s Cheesecake Factory Inc. of Calabasas, another local, publicly traded restaurant chain that is making a footprint in the region. Other chains opening stores there include Starbucks Corp., Yum Brands Inc.’s KFC, Denny’s and Brinker International’s Chili’s. Indeed, a fascination with America, coupled with a growing middle class, and low startup and operational costs explains why a slew of popular U.S. restaurateurs are expanding there. “The Middle East is the new frontier for global expansion. Opening a new business there is easier for these brands that have oversaturated the U.S.,” said California Restaurant Association spokeswoman Angie Pappas. “They have a strong coffee, mall and shopping culture there. Brands that do well in malls here are likely to expand there.” ‘Volcano sauce’ DineEquity’s earliest presence in the Middle East stems from its acquisition of Applebee’s in 2007; the casual dining chain had already entered the region in 2000. Today, it has locations in Qatar, Kuwait and United Arab Emirates (UAE), with its largest presence in Saudi Arabia with 15 stores. “Many of the other brands are still in the early stages of international growth. That’s put us way ahead of the others,” said Daniel del Olmo, a DineEquity executive overseeing the international expansion. IHOP is among the recent arrivals into the area. It opened its first of eight locations in August 2012 in the Mall of the Emirates in Dubai, UAE and has an agreement with M. H. Alshaya Co. to open a total of 40 stores. Alshaya is one of the largest franchisees in the region. It has deals with more than 70 major companies, including Cheesecake Factory, H&M and Victoria’s Secret who have entered the Middle East. DineEquity, as of the end of last year, was about 99 percent franchised. So it already has experience with a U.S. business model that assists franchisees while letting them run the restaurants. “This helps us understand what our business partners overseas want,” del Olmo said. “In the Middle East, they have these multi-billion dollar malls. People want to shop and dine when it’s 120 degrees outside. They all want to be inside an air-conditioned environment.” Much like in the U.S., Applebee’s and IHOP franchisees abroad bring their own financing for restaurant development, while DineEquity helps with site planning, training, operations, supply chain and marketing. Del Olmo was appointed to his position last December and just returned from his second visit to the Middle East where he met with franchise partners, including Alshaya. “Every single country is different, with cultures, market realities and approaches on how to execute relationships,” he said. “It’s all about relationships.” Alshaya declined comment for this story, but the company has paved the way for franchisors as they try to navigate the complex cultural peculiarities, legal systems and bureaucracies in the region. The company specifically helps companies manage human resources, lease and buy property, work out their supply chain and accounting, as well as customer service and other functions, according to the company website. “We’re working well together, and they’ve got a very strong commitment to grow for us IHOP in the Middle East,” Stewart said. Alshaya helped DineEquity on menu development and locating new sites, del Olmo said. For instance, although IHOP does not serve alcohol, Applebee’s had to remove all liquor from its menu. As substitutes, Applebee’s sells fresh juices and places an emphasis on seafood to accommodate the flavor palette of choice in that region. Applebee’s also created a “volcano sauce” exclusively for the Middle East. “It is a proprietary sauce that gives a spicy, tangy taste, and the Middle Eastern audience seems to appreciate it,” del Olmo said. Operational adjustments by the chains include the stipulation that Saudi Arabia requires all male staffing, and restaurants are required to have separate family and singles seating areas with separate entrances. And although it’s known for its breakfasts, IHOP is actually more popular during lunch and dinner hours in the Middle East. Most people don’t dine out for breakfast, del Olmo explained, and most malls and mini-malls don’t open until about 10 a.m. Jerry Prendergast, restaurant consultant and founder of Prendergast & Associates in Culver City, said the Middle East represents a huge market for American products. For food providers, the region has a high disposable income with people who eat out frequently. “There’s a lot of money to be spent,” he said. “The government has issues with pork and alcohol, and you have to change your menu to fit Islamic food laws, but a lot of people are willing to do it. You can’t look at a billion people and say, ‘We’re not going to be part of that market.’” Cheesecake Factory opened the doors to its first store about 15 minutes away from IHOP in the very same month at the Dubai Mall, making its debut into any international territory. It later opened a second location in Dubai last year at the Mall of the Emirates next door to the famous Ski Dubai slope inside the mall. The 22,800-square-foot storefront seats 526 guests, making it the world’s largest Cheesecake Factory. The chain has so far opened four locations in the Middle East, making its most recent venture into Saudi Arabia last December. The other location is in Kuwait, and all are situated within malls. Aside from its largest in Dubai, Cheesecake’s other stores are somewhat comparable to the size of U.S. stores, although they skew on the larger scale seating 300 to 475 guests. The company has not revealed how many locations it plans to open in the region, but it stated its agreement with Alshaya also provides for development in Bahrain and Qatar, as well as North Africa, Russia, Turkey and Europe. Its latest earnings report stated that the chain could open as many as three to five new locations within the Middle East and Mexico this year. Cheesecake declined a request for an interview. It is unclear how much profit DineEquity and Cheesecake Factory make in the Middle East, because in quarterly filings the companies don’t break down their operations geographically. But restaurant economist John A. Gordon with Pacific Management Consulting Group in San Diego thinks the chains are doing very well financially. Cheesecake’s sales at individual restaurants there could either be at or could top the $15 million minimum for a U.S. outlet. The same goes for Applebee’s and IHOP outlets, though they gross much less, closer to $2 million. He also pointed out that although many U.S. restaurants are expanding in the region, the competition is much less than in the U.S., giving existing outlets a nearly captive market. “There’s an opportunity to make a lot of money,” he said. “You need to have strong franchisees. That’s the bottom line.”

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