When civilizations collide, war, conquest and subjugation often follow. But so can sharing of the finer things in life, like food. When New World met Old during the time of Columbus and Cortes, for instance, Europe got acquainted with the potato, maize, tomatoes, chili peppers, strawberries and, most importantly, chocolate. The New World received bananas and coffee, which Europeans originally got from Asia and Africa, respectively.
Nowadays, this exchange of food still takes place, with the New World exporting the likes of double cheeseburgers, delivered pepperoni pizzas and coffee-inspired beverages. The globalization trend is not new in the restaurant industry. It just so happens that more U.S. brands are breaking out further into the nooks and crannies of the global restaurant landscape.
Major portions of revenue for the largest chains come now from international expansion. About 55 percent of McDonald's revenue comes from its Europe and Asia, Pacific, Middle East and Africa divisions. Yum! Brands Inc., another huge chain with the likes of Taco Bell, Pizza Hut and KFC as its brands, opened more than 850 new restaurants in its international unit, not including the 425 its China Division expects to open annually as part of its "ongoing earnings growth model."
"International expansion is a big deal because the domestic restaurant business is so saturated," says Stephen Levene, executive vice president at brokerage firm Lockton.
It's not just the name-brand fast-food chains either. Casual-dining companies are also eyeing the opportunity.
"The majority of us are just starting to get any kind of presence," says Kim Sanders, director of risk for Brinker International Inc., whose brands include Chili's, Maggiano's, On the Border and Macaroni Grill. But they are definitely aiming for that presence because the global marketplace holds tremendous potential, she says.
Some might say it's a goldmine. When going abroad, however, risk managers encounter the other kind of mine, the proverbial landmine, simply because regulations, operations, customers and insurance are different the world over. And it appears that risk managers and their companies are still trying to figure out how to side-step or defuse these exposures. Heck, they are still trying to locate and identify some of these landmines.
"From a risk management standpoint, I really don't think the risk managers, or the companies themselves, have line of sight of their operations around the world," says Levene.
By "line of sight," he means: "How are the restaurants in that part of the world different from an operation standpoint than in the United States?"
Levene mentions a client of Lockton's opening in China. The client's U.S. buildings are typically 3,000 square feet and one storey, whereas a Chinese location will be 10,000 square feet with multiple stories and delivery done by a guy on the back of a motorcycle. Not only are there worries about liability from that delivery boy getting hurt, or running somebody over. But what about preventing slips and falls in the new facility, and uncovering the "blind spots" where tort-issuing people collisions could lurk.
If restaurants serve local flavor on their menus, says Greg Benefield, food and beverage practice leader for Willis, they might have to change their prep work and cooking procedures in the kitchen, and even alter the equipment that individual international locations will need. A different menu could even open them to different claims based on dietary issues or nutrition labeling issues.
Restaurants going global might have to learn a completely new way of serving food. Another Levene client normally doesn't have table service or a host, but in Australia, they now do. Jumping from fast food to so-called casual dining is big.
"If you don't have casual dining experience," the broker says, "you have to ramp yourself up."
Jan Schnabel, who leads Marsh's hospitality practice and oversees its work with restaurants, mentions one issue with a steep learning curve: A patron ordering rum and cola, not just a cola, something possible in the Caribbean or Europe.
"When liquor becomes an issue, they don't know how big an issue it becomes," Schnabel says about fast-food companies.
Behind these operational differences, it is easy to peel away at the other issues that emerge, involving local insurance, customs, regulations and laws. It's a lot to get your arms around.
"We are working to establish what our infrastructure will look like," Sanders says about Brinker. How should the company insert itself into relationships with its franchise and joint venture partners, from a brand protection standpoint and otherwise, if at all? Brinker created a whole global development department, charged with developing the infrastructure, to support the growth. Sanders has reached out to this department, she says, and has some individuals that she works with on these issues.
"We have certain objectives that we have as well," she says, like figuring out how to best insure this global growth infrastructure.
According to Benefield, this seems to be how it goes down with international developments: Risk management gets brought in after this infrastructure, or "development agreement," is put together by corporate. Then risk managers have to become intimately aware of the development agreement, he says, and advise management about hurdles and issues.
It all comes down, again, to getting that line of sight that Levene spoke about: knowing what your restaurant is doing in a given location and making sure you're managing the risks associated it.
One way is going beyond the typical global general liability and property policies. Levene says he's putting together programs now for clients that are almost customized by the country.
"Now that we're getting line of sight, we're seeing different types of liability exposures," Levene says.
Peel the international onion one more layer, and local laws become another issue.
"You just couldn't imagine the tort liability in China or Australia," Levene says.
Schnabel points out that the more idiosyncratic the local regulations, the greater the chance a company has at running into issues with them.
And if by idiosyncratic, you mean vague, contradictory, or nonexistent, then risk managers could be in for an even more wild ride compared with the numerous and concrete regulations they might be accustomed to in the United States.
A franchise agreement could be one of the most powerful tools that restaurant risk managers could use to "set the bar" where it might not be set in the local law, says Schnabel.
"They have to be very, very aware of the rules and regulations of where they're going and any vicarious liability ... before they put together a franchise agreement," she says. "The agreements have to be structured around the product offerings no matter where they are."
For Steve Legg, director of risk management for Starbucks Coffee Co., working on contractual indemnification and insurance provisions is an aspect of the company's international operations that his department has a big hand in.
Though focusing on these international issues is a small but growing percentage of what he does, risk management comes up with the insurance provisions for use in agreements with international joint venture partners and licensees. They work with the legal department to ensure that insurance provisions reinforce indemnification provisions within the agreements that dictate the responsibilities of each party.
Legg stresses the most important part is knowing who you are partnering with.
"A lot of time goes into selecting who you're going to partner with in the first place," he says.
This is assuming, of course, that these international stores are opened as a franchise and not a corporate-owned operation. But it seems that's the way many are going.
Legg says that some international Starbucks properties are corporate owned, while others are joint ventures or licensees.
"As for the international marketplace, our current mix is almost completely franchise-ownership," says Sanders from Brinker, adding that franchising will make up most of the company's international presence in the future though company ownership and joint ventures could increase in the mix.
After all, many of the largest restaurant companies are on a serious bout of franchising and refranchising at home as well as abroad, as any look at the 10-Ks of the likes of McDonald's and Yum! will reveal. Levene says he can't remember a time when companies were pushing harder to move toward franchising.
With franchising, whether domestic or abroad, comes a whole other host of issues. Restaurant corporations devote time to franchising agreements to delineate indemnification and insurance requirements, they pore over the details of brand protection and the proper logos to use on napkins, french-fry holders and signage. But when it comes to brand protection through corporate safety programs, says Marsh's Schnabel, many restaurant chains do not share.
"They leave it completely to their (the franchisees') responsibility," she says.
That doesn't mean many franchisees are left high and dry. According to Brad Frawley, a producer with MJ Insurance in Indianapolis, an Assurex Global Partner, at least with franchisees for one well-known fast-food company, the owners belong to co-ops designed to pool money for regional advertising that also serve as forums where they can discuss insurance and risk issues.
"Insurance definitely comes to play in that," he says.
Frawley says for this particular company the corporate risk manager is also available as a resource, and can oversee franchisee insurance purchases because the corporation is named as an additional insured on all policies.
As for the larger franchisees (he works with owners of up to 150 locations), Frawley says, their safety and loss-control systems are downright "sophisticated" on their own.
Can restaurants expect the same of their partners overseas?
Some big companies have risk managers abroad to help answer this question and all the others that come with global expansion, says Levene.
When the conquistadors sailed the ocean blue, they faced risks too, all in the name of some potatoes (and a little bit of gold too).
MATTHEW BRODSKY is senior editor/Web editor of Risk & Insurance®.
April 15, 2008
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