The competition in Oman's fast food business is heating up. Nayl D'Souza brings you the inside story on how difficult it is to serve up a healthy profit with a limited local customer base 

There is no doubt that the major players in the fiercely competitive fast food market are battling hard to keep their share of custom within Oman and remain profitable. Pizza Hut, KFC and McDonald's may have successfully expanded their businesses but they remain guarded about their profits. There is a general consensus within the local industry that the restaurant business has slumped in the past few years. Some operators privately complain that they are starved of custom. 
"The market appears to be too small for so many brands. The main trend in recent years has been one of fewer brands with a greater number of outlets competing for the same customers," says Abhilash Patel, Marketing Manager for Khimji International LLC, the local franchisee for Pizza Hut.
Apart from affordability of fast food products and the Sultanate's sporadic population density, a convenient lifestyle is partly to blame for the unhealthy state of the local market. Workers' extended hours for lunch and the ease of reaching home within this break time have contributed to the fewer number of customers reaching for a menu other than on special occasions. With many workers leaving late from the office during weekdays in Oman, restaurants also feel the pinch at evenings. Indeed, most business is clearly transacted during weekends but much of this is still perceived as a family treat rather than a convenient dining option.
The international fast food franchises have to compete with the region's king of snacks - the shwarma (a rolled sandwich traditionally with lamb, chicken or vegetable filling). Shwarmas sell for 200 baisas at food stalls across the country and are extremely popular among locals, other Arabs and Asian expatriates. Taco Bell struggled to shift Mexican tacos for one Omani rial while their Arabian equivalent was being scoffed at street kiosks for one-fifth of the price. 
Taco Bell disappeared from Oman's fast food market rather pitifully, and sadly so have a few others like Wendy's, Pizzaland and Burger King. But, despite these casualties in recent years and all the difficulties faced by the industry, McDonald's and Pizza Hut have more growth lined up. Each has plans to introduce at least two more outlets in the country by 2003. Cynics would suggest that this is being done to simply satisfy franchising agreements, but company officials say that there is much more to this strategy than boosting the brand.
"We've had excellent growth. All our sites are profitable and our total turnover in 2002 has so far risen over 20 per cent from last year," says Ali Kamal Daud, Oman's development licensee for McDonald's. He is planning to open another restaurant this month in Al Khuwair next to the Shell service station. "There is a lot of potential for us. So far we have focussed on the capital area to form a strong base before moving to Salalah. Sohar, Ibri, Buraimi and Nizwa are also possible future locations but with perhaps some modifications to the size of the restaurant we would open." 
Patel of Pizza Hut Oman says, "We are planning to open two more restaurants next year. We still have some concerns about our Al Khuwair and Medinat Qaboos outlets. We are looking at perhaps merging the two operations or introducing a larger restaurant in the area to take care of dining facilities and keeping another for the delivery business." Pizza Hut currently has 15 restaurants across the country. There are 10 restaurants in the capital and five in the interior locations including Salalah, Sur, Sohar and Nizwa. 
Although Pizza Hut has new plans to beef up its operation, it has also decided to get leaner in the past six months developing smaller outlets into bigger restaurants and closing two out-of-town restaurants altogether. "The strategy is to consolidate our current network," says Patel. "Earlier we wanted to be focused on home delivery, but now we think that local people are looking for more of a fun experience so our priority is to give our customers bigger dining areas and creche facilities." 
Other fast food chains indicate restructuring is also the main order of the day. 
"We don't have plans to open any new stores next year and we will not consider opening stores outside of the capital area until there is a broader knowledge of the fast food market," says V.S. Naik, Baskin-Robbins' Oman Manager. A streamlining initiative in 2000 has already snipped two loss-making stores from the premium ice cream chain bringing the number of shops in the country down to seven.

'Shwarma syndrome'
Subway, a well-known but new global sandwich franchise which entered the local market last year, has gallantly grown to four shops, all in Muscat. Many in the industry have concerns about Subway's fiscal performance despite its novelty and rapid expansion. 
Kaizer H., Marketing Manager, Al Burj Trading and Consumers LLC, which manages Subway for the Royal Guard of Oman, shrugs off any vulnerability in the market by saying the chain enjoys a strong brand equity. Indeed, he doesn't rule out further expansion, saying: "We need to cater to giving more convenience and this can only be achieved by creating additional outlets to allow easier access to our stores." 
He does, however, concede, that affordability is becoming a major challenge. "Perhaps you can get five shwarmas for one of our sandwiches but they cater more towards the mass market while our products serve a luxury segment." 
Price is not the number one reason for visiting McDonald's, according to Daud. "In our customer survey, price is rated lower in importance as compared to friendliness, cleanliness, service, value and quality of the product," he says. "We've set a price that is acceptable to anybody. We have a hamburger that sells for 200 baisas, a cheeseburger that sells for 300 baisas. Both of these products can compete with a shwarma and you are guaranteed cleanliness, hygiene and an excellent service at our restaurants."
Many open food stalls are located on busy streets in Oman, and hygiene standards on offer are poor. A few months ago, 300 outdoor shwarma stands faced a crackdown by Dubai Municipality's Public Health Department to ensure that they sold food which was free from contamination. No such initiative has been issued locally.

The earnings enigma
Confusion reigns when it comes to identifying which fast food chain commands the highest share of the local market as official economic data within the industry is unavailable. No single fast food business in Oman was willing to feed OER with financial statistics, particularly profit or loss accounts, which could be a sign of difficult times.
"Our industry is very competitive. The less the competition knows about us, the more of an edge we maintain. They are free to make their estimates but we will not be the ones to volunteer information to them," says Daud of McDonald's Oman.
A reliable industry source estimates that the average weekly turnover spent on restaurant food in Oman is RO183,600 (US$477,360). This equates to around RO9,547,200 (US$24.8 million) spent on dining out in the industry each year. The fast food market approximately swallows slightly over 55 per cent of this suggesting that it is worth around RO5,250,960 (US$13.6 million).

Don't get mean, break even
Fast food restaurants may specialise in dishing out meals instantly, but they're a little slower when it comes to raking in profits. Andrew J. Sherman, author of Franchising & Licensing: Two Ways to Build Your Business (Amacom, 1999), explains that most fast food restaurants break even within six months to two years. In Oman, the break even period seems to be upwards of two years which is perhaps a reflection of the industry's weakness.
Daud of McDonald's Oman says, "The cost of opening a new restaurant varies but it is on an average around US$500,000. Typically, we will recoup our investment a maximum of four years." He confirms that he has recouped start-up investment in all his restaurants that have been open for four years and more. 
Each restaurant is different and will have its own recipe for profitability. If you're running a franchise and want to predict how soon it will break even, Sherman says to take a look at item seven of the chain's Uniform Franchise Offering Circular. This is a phone-book sized document that franchisers must provide to franchisees which includes projected costs to open the restaurant. Those who are operating fast-food restaurants that aren't part of a franchise chain will have to work up these costs on their own. 
To determine when you'll turn a profit, you'll need to figure out when the restaurant's total sales will start to exceed the startup costs, as well as your month-to-month expenses. "The sales at a given franchise unit are going to vary based on location, the food you serve, and the competition," notes Sherman. "I'd say if you're not breaking even within a year or two you've got a problem with the franchise system itself, with your locations, or your management of your costs." 
Smaller franchises such as Baskin-Robbins, which require around US$150,000 of start-up investment per store (excluding promotion expenses during the launch) do not fare any better with the average break even around four years also. 
"There is a danger that certain businesses will cut corners if they feel they are under pressure to grow the franchise. But they will find it difficult to cheat on food quality without customers realising that this is the case. In terms of staffing, hygiene and other procedures, they could reduce such standards if the business was not so good," warns Kaizer H. representing Subway in Oman when asked about the spot checks that take place to monitor if local development partners are abiding to a franchise's rigid standards.

Serving suggestions
Drive-thru is an important aspect of the McDonald's experience worldwide and in Oman with so many vehicle owners, it has been a major factor in its success. "The reason McDonald's Oman doesn't do home delivery even though it may generate additional revenue is that we would lose control of the quality of our product. We can guarantee hot and fresh over the counter or through our drive-thru but this will not be the case when it is home-delivered," says Daud. 
For home delivery, Pizza Hut has a dedicated call centre which was established in 1995. During peak hours of operation, 13 employees staff it. "The quality of our bilingualism at the call centre has been a major success. We get very positive feedback and we're proud to say we have some very good Omani telephone operators," says Patel.

McDonald's: Here for long
In December, McDonald's is expected to name three countries it is pulling out of and four countries it will be restructuring as part of a global streamlining initiative. The burger chain, aiming to rediscover the formula that made it one of the world's best-known brands, warned of a profit shortfall and announced the closure of more than 175 outlets last month. 
"McDonald's will not at all pull out of Oman nor any other Gulf State," said Ricarda Ruecker, Director Marketing and Communi-cations for McDonald's Middle East, in an exclusive interview with OER. She refutes any claim that the company's announcement will have an effect on operations in the region. 
"I can assure you that there will be no country closing in the Middle East. All GCC countries are 100 per cent owned and operated by Arab entrepreneurs. The owners are developmental licensees and McDonald's Corp. has no ownership in these countries. These countries will not be affected at all," she explains.
Ruecker emphasises that the McDonald's business will continue and the developmental licensees, including Ali Daud in Oman, will open new restaurants according to their plans and based on market research. McDonald's have announced several openings for 2003 in the GCC including three new restaurants in Kuwait, three in the UAE and another one next year in Oman. Locally, McDonald's employs over 100 people. 

Profits to go?
Many outstanding franchise area development opportunities exist in the Sultanate. Aside from the fast food chains that have disappeared and want to re-connect in Oman, many fast food companies are looking for agents to establish a foothold in regional countries. For example, an international chicken and seafood franchise called Popeyes is currently looking for a partner in the Sultanate. It is looking to receive a master fee of US$45,000 per restaurant along with an ongoing Royalty Fee of 5.0 per cent of gross sales payable every month. 
Patel of Pizza Hut Oman, does believe there is only a slim chance that new competitors will arrive in the market. "I would like to believe that we couldn't be challenged in the pizza business but without being too complacent there is a possibility that new entrants could arrive." 
Locally, there are many other threats confronting the fast food industry. For McDonald's, KFC and Pizza Hut a key challenge may be to be first to find new site locations. Restaurants will also have to cope with aggressive marketing tactics from one another. The potential of new competition from coffee shops such as Starbucks and Costa Coffee in the local market remains to be seen. Convenience stores such as Shell Select, BP Express and Al Maha's Souq are already doing significant takeaway food business. Discounts and promotions from all of these players are certain to eat into the margins of fast food chains.
Of course, another clear danger is that Oman may lose its appetite for fast food chains because of links to obesity. It's perhaps more likely that the industry could take more knocks from consumer protests as an indirect result of political decisions. Brands took a beating between April and June of this year when there was a widespread Islamic protest against companies of western or American origin. Although the companies targeted are global, the franchises are locally owned and operated. This meant that local businesses, local employees and the local economy were, ironically, worse affected by such measures. The industry reports that sales are back on track within the Sultanate but it is easy to understand why fast food restaurants in a number of Middle East countries will be anxiously studying the geo-political situation in 2003.