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The fast-food industry
The possibility of market saturation and a scarcity of premier locations arent putting a damper on fast-food chains local expansion plans.
BY TAINA ROSA of Caribbean Business
July 28, 2005
Puerto Ricos appetite for convenience
With sales reaching over $1 billion, the island's fast-food industry is satisfying the local market's changing lifestyles
The fast-food industry has come a long way since such chains as Tastee Freeze and Big Boy began appearing on the island in the late 1950s and early 1960s. Since then, the number of chains has multiplied aggressively, demonstrating Puerto Rico is an attractive market. As a whole, 2,000 fast-food restaurants in Puerto Rico are estimated to rake in $1 billion to $1.3 billion a year in revenue, according to industry sources. Studies also have shown 77% of locals visit fast-food restaurants often.
The composition of the market also has evolved over the past half-century. While hamburger chains always have represented the majority of fast-food stores, sandwich stores are about to beat them. In between are fast-food chains focused on Mexican food, pizza, and chicken, all of which are seeing stable growth. As a result, the local fast-food industry has become an important supplier of mostly part-time jobs. As of May, there were 37,500 jobs in fast-food restaurants.
Still, business in fast foods has seen its share of challenges, causing some chains to expand, shrink, and then make a comeback over time, while others have either grown continuously for decades or fizzled completely after a few years. The main challenges are adapting to demographic changes, population growth, a reduced quantity of good locations, and evolving according to consumer lifestyles and eating habits.
Fast-food-growth rhythm slower, but positive
Although some chains arent growing at the pace they used to some 10 years ago, fast-food industry players still are expanding. A February 1996 CARIBBEAN BUSINESS article revealed, for instance, the average Puerto Rico household visited a fast-food restaurant 5.7 days a week.
Then, in 2001, studies began showing a downward trend. That year's issue of an annual study called "Radiografía del Consumidor" (Consumer X-ray, commissioned by the Chamber of Food Industry Marketing & Distribution) showed 74% of the population visited any type of restaurant three times a week, with 78% of visitors its to fast-food restaurants. This means that in five years, visits to fast-food restaurants went from 5.7 times weekly to only three.
The studys 2005 issue revealed that only 27% of locals surveyed said they eat at a fast-food restaurant more than once a week; 34% said they go once a week. The 2005 study, which research firm AC Nielsen performed in April, also found 77% of the 400 people surveyed (all over age 20) visit fast-food restaurants often. By comparison, only 43% said they visited full-service restaurants often.
Most fast-food-chain executives CARIBBEAN BUSINESS interviewed said expansion plans are alive and well, despite various store closings for some chains.
For instance, McDonalds, which had 123 stores in 2001, saw that number drop to 112 in 2003, making a slight jump to 114 this year. Marketing Manager Millie Vergara said the company has a 30% market share within the fast-food industry and revealed McDonalds plans to open five to 10 stores in the Caribbean region by the end of 2006. Typically, the investment to open a new McDonalds restaurant ranges from about $500,000 to $1 million.
Vergara also revealed the chain expects market share to increase by 10% before the end of the year. "Year-to-date sales are up by 12% compared to 2004, which puts [us] in a very good position to increase sales by 15% in 2005," she added.
Burger King, the largest local hamburger chain with 168 restaurants, had 158 stores in 2001 and 166 in 2002. "We are building three more restaurants at a cost of about $1 million each," explained Luis Arenas, chairman of Caribbean Restaurants (the local Burger King licensee). "They will be at Inter American Universitys Bayamón campus [and in] Camuy and Ciales. Afterward, we will build restaurants in Salinas and southern Caguas," he added.
Arenas also explained Burger King sales increase an average of 3% to 4% each year. "The only exception was 2001, and that was because of 9/11."
He also disclosed, "There were a few years we began opening more than 12 to 14 stores each year, but later discovered that was just crazy. We learned that if we expanded that aggressively, we would only end up diluting our own sales. Such a rate of growth also didnt allow us the necessary time to properly train our staff."
Gil Craig, chief executive officer for Taco Maker, indicated the chain will open its 90th local store this month. "We have made plans through our 110th store, with current and new operators, [and] should open our 100th by the end of 2006," he said. In 2001, Taco Maker had 76 stores and, in 2003, the number grew to 84. The average investment needed to open a Taco Maker ranges from $150,000 to $400,000, he said.
Wendco of Puerto Rico Inc., Wendys local operator, had 37 restaurants in 2001, 51 in 2003, and now operates 57 stores, with more on the way.
The company, the fifth-largest restaurant-franchise operator on the island, has plans to open some 12 stores by the end of 2006, explained Carmen Adriana Pérez, marketing director.
KFC, Pizza Hut, and Taco Bell, operated by local company Encanto Restaurants, still have no definitive store openings planned for this year. "In October 2004, Yum Restaurants [then known locally as Tricon] decided to refranchise Puerto Rico and Encanto Restaurants emerged as the local operator for the three brands," said Héctor Jiménez, Encanto marketing vice president.
He added, "When Yum decided to refranchise its brands, expansion on the island was halted until [the company was sold], so the new operator could decide on store openings. Now, we are still in the process of evaluating the market to see which brands we will expand and how."
In 2003, Taco Bell had 31 stores, Pizza Hut had 60, and KFC had 94. With the three brands united, Encanto is the islands second-largest restaurant-franchise operator, as reported in the 2005 CARIBBEAN BUSINESS Book of Lists.
Subway is definitely the fastest-growing chain on the island in terms of store openings. It plans to open another 30 to 36 stores in Puerto Rico before the end of the year, about 15 more than in 2004, when the chain opened 20 locations. Area Developer Lyle Swanson, who became the local developer in 1995, said 200 local stores are to be operational by August. Under his guidance, the company has become the largest chain in terms of store count in only 10 years.
The company, which in August will celebrate 20 years of business in Puerto Rico and 40 in the States, has seen its sales double since 2001, although Swanson couldnt disclose exact sales figures. He did reveal, however, that Subways best-selling store in the world is in the islands San Juan metropolitan area. "Our same-store sales also have been growing consistently for the past decade," he added (CB June 16).
Swanson indicated an investment of $90,000 to $180,000 is required to open each Subway, making it one of the most affordable local fast-food franchises.
The road to success can get bumpy
Many fast-food chains that are very successful nowadays have had their share of ups and downs. Some, like McDonalds and Subway, have been able to recover and are now among the top players in the industry.
Subway first entered the local market in 1985 but, according to industry sources, poor supervision of store operations caused the parent company to decide not to open new stores.
Then, in 1995, Swanson became Subways development agent for Puerto Rico and took over local operations, which then consisted of only four stores (in Isla Verde, Hato Rey, Condado, and Barceloneta). In 10 years, he increased the number of Subway stores from four to almost 200, making it the fast-food chain with the most outlets in Puerto Rico.
Swanson said that in 1997, he began opening more than 20 stores a year. This year, he is aiming for more than 30 new stores. "We want to develop the market so we can keep the competition away," he told CARIBBEAN BUSINESS. Swanson owns some 50 local Subways, while about 45 franchisees own the rest.
McDonalds, which first entered the local market in 1967, also has seen its share of roadblocks along the way. The franchisee in charge of developing the local market back then, Puerto Rico Franchising Group, was able to open 10 stores.
However, industry sources said labor problems arose in 1974 when another franchisee took over the local market. Allegedly, until then, all McDonalds employees were unionized, but the new franchisee didnt agree with labor unions and all but one store in Ponce closed.
McDonalds comeback occurred in 1981 with yet another franchisee and, sources say, nonunionized labor. "In 1981, Puerto Rican entrepreneur Luis Moyett opened a restaurant in San Juans Caparra sector, the first to open under a new franchisee," Vergara explained. "Today, we have 11 franchisees [which the company also refers to as owner-operators] that operate 47 restaurants," she added. The remaining 67 restaurants are company-owned.
In addition, in 1993, McDonalds established its regional office for Central America & the Caribbean in San Juans Cupey sector, solidifying its local presence. Today, it is Puerto Ricos third-largest restaurant-franchise operator, as reported in the 2005 CARIBBEAN BUSINESS Book of Lists.
Contrary to Subway and McDonalds, other chains werent lucky enough to be able to make a comeback. Some of the chains that fizzled during the past decade are International House of Pancakes, Grandys, Checkers, and Hardees. Nevertheless, the local market continues to have its appeal, and CARIBBEAN BUSINESS learned a few of the fast-food chains that have come and gone are planning to re-enter the island as this story is being written. They didnt want to be identified since negotiations for locations are in progress.
Changes in demographics spur new strategies
The elderly constitute the fastest-growing demographic group and the rate of fast-food-store openings is faster than the islands birth rate. Data from the U.S. Census Bureau shows that in 1960 people age 0-15 years were 42.7% of the islands population. By comparison, figures for 2004 revealed the 0-15 age bracket had dropped to 22.4%. The birth rate in Puerto Rico went from 18.9 births per thousand in 1990 to 13.7 per thousand in 2002.
These demographic changes have caused fast foods, which once focused their advertising efforts on younger consumers, to shift to a more "all-ages" approach. McDonalds, whose advertising traditionally has targeted mostly children, offers a good example.
Vergara explained, "Chief Happiness Officer Ronald McDonald has taken a more active role in educating and talking about balanced lifestyles. He also has come out of the playpen, and has become an accessible celebrity not only for children, but for young adults and the general public alike. That is why we most recently have seen him partnering with National Basketball Association player Carlos Arroyo."
Overall, while the islands population grew only 2.1% from 2000 to 2004, industry sources said the number of fast-food stores on the island jumped by about 50% since 1998. This means more and more fast foods are competing for a piece of the pie that isnt growing significantly, causing a dilution of sales that results in a slower sales increase.
New formats help cut costs, use space efficiently
The fact Puerto Rico is an island means space to expand is limited. This also means chains expanding or entering the island for the first time must do battle for a decreasing amount of developable land, making many fast-food executives implement a multibranding, space-sharing, or combo-store concept that will allow them to continue to open stores all over.
Back in 1996, industry sources already were warning CARIBBEAN BUSINESS that good locations were growing scarce. Back then, fast-food retailers were beginning to look outside the San Juan metro area for expansion opportunities (CB Feb. 29, 1996). Even though retailers still worry about the increasingly difficult job of finding good locations, expansion has continued.
"The market may appear to be saturated, but there is always room for new ideas, new concepts, and new restaurants," said Encantos Jiménez.
To deal with the scarcity of prime locations, many fast foods are using their creativity, growing beyond traditional freestanding or inline mall spaces and appearing within supermarkets, gas stations, hospitals, and more.
In 1999, locally owned sandwich chain El Mesón de Felipe began developing new store concepts that allowed the company to reach a larger market and enhance cost-efficiency. That is how El Mesón came up with Meso Express (which opened at gas stations and featured drive-through window service), combo stores, and freestanding locations with drive-through service.
The following year saw the launch of combo stores with the help of Baskin-Robbins Inc. and Dunkin Donuts Inc. Baskin-Robbins and Dunkin Donuts began sharing store space in 2000 and have since added other food establishments, including El Mesón.
Wometco de Puerto Rico, the local parent company of Baskin-Robbins and Dunkin Donuts, now operates 37 stand-alone Baskin-Robbins stores, 13 Baskin-Robbins / Dunkin Donuts combos, and three Dunkin Donuts stand-alones. It also operates two "trombos" (three-in-one concept) in Rexville Town Center in Bayamón and in Fajardo, with El Mesón.
Encanto also has some "trombos." "We have several restaurants that combine Taco Bell, KFC, and Pizza Hut Express concepts," Jiménez disclosed. They work well because consumers like to have [different options from which to choose] under the same roof. We will continue to operate multibranded units, but will select locations very carefully."
Subway is another chain that shares space with other brands. The difference from Encanto, El Mesón, and Wometco is Subway shares locations with brands from entirely separate companies, while the others operate their proprietary brands under one roof with some exceptions.
Subway is looking to sublease some of its real estate with other food concepts. "We are working with [Chinese fast-food restaurant] Panda Express, with which we already share space in Guaynabo," Swanson explained, adding that the chain also shares space with Taco Time. "We are looking to share real estate with other taco concepts and also with ice cream and hamburger chains."
Swanson emphasized his company doesnt do combo stores; it is just a matter of sharing real estate while the concepts remain individual. "These deals reduce costs for both concepts and increase profits," he said.
Subway also is going into gas stations. Eleven gas stations feature Subways, and nine of them have drive-through windows. Gas-station landlords have seen their sales increase by 15% when adding a Subway, according to Swanson, who explained Subway is opening in a Total gas station at El Cantón Mall in Bayamón, with others already open at a Gulf station in Bayamón, a Texaco in Trujillo Alto, and another Texaco station in Guayama.
Subway wasnt the local pioneer in joining gas stations. By 1996, gas-station company Gasolinas de Puerto Rico (100 of whose former gas stations are now under the Total brand) already had developed Taco Maker and Dunkin Donuts concepts inside its convenience stores, as CARIBBEAN BUSINESS reported back then.
Subway also is opening in hospitals. Some locations already are open in San Pablo Hospital in Bayamón, Doctors Center in Manatí, Centro Médico in Río Piedras, Hato Reys Auxilio Mutuo Hospital, and San Jorge Childrens Hospital and San Juan Health Center, both in Santurce. More are scheduled to open at Plaza San Lucas medical office tower, Dr. Pila Hospital, and Hospital Damas, all in Ponce.
Even supermarkets are featuring Subways. Subway is open at 13 Pueblo Supermarkets locations, two Grande supermarkets, and all eight local Sams Clubs (CB June 16).
Burger King, meanwhile, can be found at the University of Puerto Ricos Río Piedras campus. Another is opening soon at Bayamóns Inter American University, Arenas said. He believes the combo-store concept, already implemented by the likes of Dunkin Donuts, Baskin-Robbins, KFC, Taco Bell, and Pizza Hut Express, isnt the way to go for Burger King. He prefers restaurants in freestanding locations that feature drive-through windows.
"Even though it is true that in a [combo or cobranded concept] all brands pitch in to pay for rent and attract more traffic, the fact all brands would be sharing the same floor space presents some difficulties and could become very uncomfortable for consumers," Arenas indicated.
Encantos Jiménez, who has ample experience with shared formats, partly agreed. "Multiconcept stores could be an operational nightmare. Kitchen space is limited, therefore, you cant carry all the [menu items] You need to put your best-trained employees there because of the complexity and diversity. We will continue to operate multibranded stores, but will select locations very carefully. We wont open stores where space limitations hinder us from maintaining our food and service quality and cleanliness standards."
Changing lifestyles call for an industry revolution
On one hand, working consumers have little time to sit down and enjoy a good meal. On the other hand, some are more aware than ever of the importance of maintaining a healthy and balanced diet.
While the lack of spare time has worked wonders for fast-food chains that can serve up a meal in a jiffy, the health craze has forced them to add lighter dishes in which salads reign supreme. This health trend also is partly responsible for consumers support of sandwich chains, which are perceived as providers of healthier meals.
"The family structure is different from what it used to be 30 years ago. Mom has become the gatekeeper of the family, and there is less time to eat at home every single day," McDonalds Vergara explained.
Jiménez agreed, adding, "about 30% of [local] households are [run by a] single parent, a large number of [people in the workforce] have more than one job, and women represent more than 40% of the workforce. There is simply no time to cook."
The pharmaceutical industrya major employer in Puerto Ricois an example of how long residents of Puerto Rico and the mainland U.S. work in comparison to Europeans. A trade publication called Pharmaceutical Technology performed a survey in 2004 that revealed 97% of U.S. and Puerto Rico respondents and 95% of European respondents work full-time.
On average, the nominal U.S. workweek is 39 hours, but respondents reported they actually put in 46 hours; Europeans work an average of 44 hours in a nominal 38-hour workweek.
This situation has encouraged fast-food companies to create formats and services that provide more convenience to consumers. Delivery is one of the strategies in which on-the-go consumers increasingly are taking advantage. Local fast foods took the idea of adding delivery services to their restaurants in the mid-1980s, when Dominos Pizza entered the market and popularized the strategy.
At first, pizza restaurants such as Pizza Hut and Little Caesars, directly in competition with Dominos, adopted delivery services. Later on, KFC and many independently owned Puerto Rican and Chinese fast-food restaurants added delivery service. Still, consumers dont need just fast and convenient services, many want a healthy menu to go with it. That is why more and more chains are introducing lighter and healthier menu items.
"The need for healthier options has increased over the years. Most recently, McDonalds Puerto Rico launched its Ensaladas y Más (Salads & More) platform, featuring premium salads, fruit yogurt, premium grilled-chicken sandwiches, and oatmeal, among others," Vergara explained.
However, it also is true people dont necessarily follow general trends. For instance, Vergara admitted that at McDonalds, "while overall units for this new platform have increased as much as 15%, our flagship product and all-time favorite Big Mac is still our bestseller."
The experience has been similar at Encantos KFC, Pizza Hut, and Taco Bell restaurants. "[Our restaurants feature such items as] salads, pico de gallo (a chunky Mexican salsa), and lean meats but something we have learned is, in Puerto Rico, people dont want to compromise the flavor of their foods. The truth is that despite the trends, people always are going to eat what they crave," Jiménez revealed, adding that, nevertheless, the trend toward healthier foods does exist.
This trend is, in part, what has helped Subway and other sandwich chains become so successful. In fact, one thing that has made it easy for Subway to open at hospitals is "hospitals are very accepting of healthy food," Swanson said.
Despite challenges, new chains keep coming
Market saturation and the scarcity of developable land and good locations dont seem to be scaring entrepreneurs away. CARIBBEAN BUSINESS is constantly breaking news about new fast-food chains setting up shop in Puerto Rico. The best thing about this is that, in many cases, the new chains are coming thanks to local businesspeople, who decide to go into business for themselves by becoming franchisees.
Taco del Mar, for example, announced its entry into the local market last month. "The corporate office...is very enthusiastic about having the concept in Puerto Rico. Stateside, the company looks to open where there are 30,000 people within a five-mile radius. Any corner in Puerto Rico surpasses that number," Master Developer Clarissa Morales said. The franchise will open in Condado, Guaynabo, Bayamón, elsewhere in the San Juan metro area, Caguas, Barceloneta, Manatí, Cayey, Humacao, Hatillo, and Las Piedras.
Texas-based Wings n Things, a relatively new casual-dining concept with some 20 stores stateside, is opening its first local store at Carolinas Escorial Shopping Village by September, Master Franchisee Félix Vizcaíno said last month. He expects to open two more stores before the end of 2006 and to have 10 in six years. He also expects local stores to rake in 20% more revenue than stateside counterparts.
In general terms, fast-food restaurants make more money per store than do their stateside counterparts. "Our average sales per square foot are higher than in the U.S. [mainland]," Jiménez said, although he clarified this isnt the case for each and every local store.
Another industry source with restaurants in some of the top local shopping malls said even though it is very expensive to open a restaurant at "A" mallswhich charge very high rents, ranging from $40 to $75 a square footthe expense is very well worth every penny because the malls high traffic brings business right to their doorstep.
Fast-food jobs created over $324 million in total wages in 04
Chain executives want to erase the negative image of fast-food jobs
Statistics from the federal Bureau of Labor Statistics (BLS) reveal more than 37,500 fast-food jobs in Puerto Rico created about $324.7 million in total wages in 2004, up 9.6% from the $296.2 million in 2002. Still, the industry continues to be perceived as a provider of jobs no one really wants because, although it is a good source of employment, it mostly offers part-time jobs that pay minimum wage.
Nevertheless, fast-food executives want to erase this negative perception. To do so, they like to highlight those employees who began working as part-timers and now hold important executive positions. In fact, many of the executives running the show today began as part-timers.
"The industry needs to improve the overlaying perception that working at a [fast food] is a bad thing," indicated Héctor Jiménez, Encantos marketing vice president. "You can move up quickly in the restaurant environment. You have the opportunity to learn how to run your business. You learn about finance, marketing, management, human resources, accounting you name it!"
Luis Arenas, chairman of Burger Kings local operations, was one of the people who made it to the top by starting from the bottom. His first job at a Burger King in Miami was janitorial in nature but, shortly after, he was offered the opportunity to work at a Burger King in Puerto Rico. Here, he went from store manager to chairman of local operations, which is celebrating 42 years of uninterrupted business.
Still, contrary to Arenas example, most people who take a job at a fast-food restaurant dont plan to make a career there, preferring to stay only while strictly necessary, which translates into high turnover and low staff loyalty. Arenas recognized there is a very high turnover rate at Burger King, as in other chains.
Another industry source agreed, saying, "Of every 100 people we recruit, only 30 are still with us after six months. It is just horrible." He disclosed the industrys average turnover rate is 80% which, although lower than the 90% rate seen stateside, is still very high.
Even though fast-food chains are among the largest employers on the island, creating almost as many jobs as the local hospital industry (with some 40,000 jobs), statistics from the BLS show the increase in the number of jobs available and wage increases are slowing.
For instance, in May, there were 37,500 fast-food jobs. This figure is lower than that seen for the same month in 2003 (38,500) and 2004 (39,300).
Wages also are increasing at a slower pace, according to BLS data. In 2002, total wages earned at fast-food restaurants in Puerto Rico added up to approximately $296.2 million, jumping 7.9% to $319.7 million in 2003. However, wages only increased by 1.6% in 2004, going from $319.7 million in 2003 to $324.7 million.
What type of eatery do you visit most often?
Grocery store with cafeteria 6%
Full-service restaurant 43%
Fast-food restaurant 77%
Source: AC Nielsen, Radiografía del Consumidor 2005 (Puerto Rico)
Total number of people employed in local fast-food restaurants
May 2003: 38,500
May 2004: 39,300
May 2005: 37,500
Source: U.S. Bureau of Labor Statistics (PR)
How often do you visit a fast-food restaurant?
Twice a month 20%
More than once a week 27%
Source: AC Nielsen, Radiografía del Consumidor 2005 (Puerto Rico)
This Caribbean Business article appears courtesy of Casiano Communications.