PF Chang's, other U.S. restaurants look to Canada for growth

Thu Sep 27, 2012 11:18pm IST

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* P.F. Chang's opened first Canadian location in July

* Mexican, Kuwaiti debuts came before Canada

* Market seen promising for U.S. chains despite costs

* Smashburger, Famous Dave's among other recent arrivals

By Atsuko Kitayama

TORONTO, Sept 27 (Reuters) - P.F. Chang's China Bistro, one of the most popular casual dining chains in the United States, opened its first Canadian restaurant in an upscale Toronto mall this summer, at least two years after its international debuts in Mexico and Kuwait.

Business is already exceeding expectations, the chain says, raising the question of why it waited so long to enter a neighboring market that would seem a natural fit. After all, many border-hopping Canadians are familiar with the brand.

Canada already has a few U.S. full-service restaurant chains - Darden Restaurants Inc's Red Lobster is an obvious example. But the rows of chain restaurants inside or just outside malls all across the United States are missing in Canada. That would seem to be an opportunity worth exploiting.

For P.F. Chang's, perhaps the most prominent of the U.S. restaurant chains now testing the Canadian waters, the high cost of operating a restaurant in Canada was one reason for waiting.

Pay is much higher in Canada, benefits cost more, and supply management boosts prices for key ingredients such as poultry and dairy, said Michael Aronovici, president of Interaction Asian Restaurants L.P., P.F. Chang's Canadian franchisee.

The Scottsdale, Arizona-based chain, operating more than 200 of its own namesake full-service restaurants in the United States, also wanted experience in other international markets through franchising before coming to Canada.

"Once we established the brand in Latin America and the Middle East, we gained a lot of confidence to execute the brand through partners," said Mike Welborn, president of global brand development for P.F. Chang's, which recently went private in a $1.1 billion deal with private equity firm Centerbridge Partners.

"Canada is our first test of more a developed economy," he said. "If we can be successful in ... Canada, that means we can be successful in other higher-cost markets around the world."

For chains such as P.F. Chang's, Canada has some obvious attractions.

Some 47 percent of Canadians dine out daily, including visits to quick service places such as Tim Hortons Inc, compared with 44 percent in the United States, according to market research firm NPD Canada.

"Canadians love using restaurants," said Robert Carter, NPD Canada's executive director for food service.

While P.F. Chang's Chinese-inspired cuisine has fueled impressive growth, its home market is highly competitive and the fragile economy means less cash for restaurant meals.

Carter said the U.S. full-service segment has experienced a sharp drop in traffic and revenue during the economic downturn, while the Canadian market has been relatively stable.

The Canadian market may also be a bit less competitive. Tim Horton's dominates Canada's quick service segment, but independents command 55 percent of traffic in the full-service segment, Carter said.

That leaves an opening for P.F. Chang's, which plans three more locations in Canada in 2013, two of them in Montreal. It expects to add three to four units a year until it gets 20 to 25 Canadian outlets.

It also plans to move into different parts of the world, including Amman, Istanbul, Buenos Aires, and Bogota.

GROWTH OPPORTUNITIES

"Fast casual dining" - somewhere between casual dining and quick service - was the fastest growing segment in the United States over the last five years, Carter said, and other chains in that category are looking to expand in Canada.

"Canada is the biggest near-term opportunity for international expansion," said David Prokupek, chief executive of the U.S.-based Smashburger, a fast-casual dining chain that opened its first two outlets in Calgary in May and June.

"The trend for the fast casual dining, where you order at the counter and the food is brought to you, is somewhat underdeveloped in Canada," he said.

Denver-based Smashburger aims to open 15 to 20 locations in Calgary and Edmonton over the next two to three years, and a couple of hundred throughout Canada over 10 years. It expanded into Kuwait this year, and plans to open in Costa Rica and Saudi Arabia.

Another U.S. chain, Famous Dave's of America Inc, came to Canada in July, choosing Winnipeg for its first Canadian location, partly because the city boasts a higher number of restaurants per capita than many other cities, said Victor Salamone, vice president of franchise operations and development for the chain.

"Per capita expenditure for eating out is comparable to Manhattan," he said.

In its opening week, the Winnipeg restaurant was "probably the second busiest restaurant in Famous Dave's history," he said.

Minnesota-based Famous Dave's plans to open somewhere between 25 and 75 Canadian restaurants, depending on how warmly Canadians embrace its concept, as it expands its North American footprint to 400 to 500 restaurants.

In general, Salamone said, "the concept of BBQ translates very well in Winnipeg".

P.F. Chang's concept also translates well, Interaction's Aronovici said. There was no need to change the menu to accommodate Canadian tastes, though it compiled a wine list from scratch because Canadians often prefer local vintages.

"A lot of Canadians are exposed to the brand in the U.S., and they are expecting P.F. Chang's to be exactly the same," Aronovici said. "That's what they want."

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