Burger King is coming.
The domestic fast food market is awaiting the arrival of large international chains, although operators speak of this with a degree of skepticism. They try to appear more carefree than concerned. But there is reason to be concerned: given the high level of competition in Western European markets, the entry of large operators into Ukraine, as in other CIS countries, seems entirely logical and justified. This market segment, unlike "elite" restaurants, is far from saturated, and competition is noticeable only in central Kyiv. The country's other major cities remain virtually unexplored, offering additional opportunities for newcomers.
Other major international chains, such as the American Burger King, have repeatedly announced their possible imminent entry into the Ukrainian market. Experts believe Western companies will enter the market en masse after the parliamentary elections. They will acquire existing chains, thereby capturing the most advantageous locations, and begin building large retail and manufacturing complexes.
Analysts estimate the fast food market's annual capacity at approximately $650-800 million, growing by 15-20% annually. For now, fast food chains entering the market with one or two outlets aren't triggering increased competition among Moscow restaurateurs. This is because the market is currently occupied at approximately 40%, leaving room for new players. The time for active competition won't arrive until at least five years from now, when the market is fully saturated.
Minimum investment
Traditionally, fast food establishments include pizzerias , coffee shops, and modern cafeteria-style restaurants (like Puzata Hata and Domashnyaya Kuhnya). Unlike fast food restaurants, where dishes are prepared from imported semi-finished ingredients, in the latter format, the production facility is located on-site.
This business has undergone significant changes in recent years. While in 2001, $30,000-$35,000 was enough to open a 150-square-meter restaurant, attracting small and medium-sized investors, today the investment required to launch a mid-sized fast-food restaurant has risen to $100,000. Its promotion requires an additional $50,000 to $80,000 per year. However, due to high turnover, the initial investment is quickly recouped—in two years at most, as such establishments generate profits of $10,000-$30,000 per month.
Opening a modern cafeteria-style restaurant requires a significantly larger investment—starting at $600,000. However, it also generates a profit of over $70,000-$100,000 per month. Moreover, the fast-food niche is one of the least risky, compared to other restaurant formats (the restaurant business ranks fourth in the Dunn and Bradstreet World Bankruptcy Directory). Only two out of ten establishments are likely to be unprofitable. The reasons for failure lie in the irrational allocation of funds, poor location, and a lack of basic knowledge and skills in running this type of business.
It's very difficult for a single restaurant to survive these days, but much easier for chains. Higher profits can be achieved if at least four more fast-food outlets follow the initial one. However, according to operators, there's no definitive formula for successful restaurant promotion. Some companies expand their chains by expanding their product range, while others emphasize individual customer service, enticing them with various promotions, discounts, and loyalty programs.
The Ukrainian fast-food restaurant market is still unstructured. Therefore, it's not uncommon for one establishment to introduce a new dish on its menu that's completely out of keeping with its format, but similar to what's offered at a nearby fast-food outlet. Operators don't talk about unfair competition, but they admit that menu change plans are kept strictly confidential to at least get ahead of their ever-vigorous competitors. After all, the development and implementation of a "new" item takes between a month and two.
According to restaurateurs, competition in the market is intensifying, which is why there is a high demand for specialists who understand the trends of this business and know how to retain regular customers and attract new ones.
In the thick of the people
The success of this business directly depends on the availability of space in high-traffic areas. Therefore, companies try to locate their restaurants in the business district, where potential fast-food customers during lunchtime include employees, students, and others. Competition rages for the capital's main street, Khreshchatyk, and the adjacent streets and alleys. In addition to a steady flow of customers during the week, activity continues on weekends. "There aren't many places in Kyiv where a fast-food operator can set up shop. Therefore, there is indeed intense competition for the most profitable locations. Gambling parlors are a major competitor for players in this market. They often offer higher rents, so landlords are more interested in them than in fast-food restaurants," says Momotenko.
Operators of modern cafeterias, such as those of brands like "Dva Gusya" (Two Guses), "Puzata Khata" (Puzata Hata), and others, are particularly in need of 500-600 square meters of space with large display windows located on the ground floors of buildings. Other formats are also experiencing a shortage of smaller spaces. Opening restaurants in residential buildings on central streets is impossible, as sanitary regulations limit fast food establishments to only 70 square meters, which does not allow for a kitchen or sufficient seating.
Furthermore, high rental rates, which not all operators can afford, are a significant obstacle to business expansion in central Kyiv. "Most suitable real estate is privately owned. Due to the shortage and rising prices, landlords are setting excessively high rents – $10,000-$19,000 per month for a 150-square-meter outlet, depending on the location," says Taras Ostapenko, CEO of Mister Snack LLC. "The optimal level is $5,000-$7,000 per month in a good, high-traffic location, which will allow operators to generate a reasonable profit rather than relying solely on rent."
Restauranteurs are reluctant to open establishments in areas far from the city center: few customers, and consequently, low revenue, translates into little profit. Only large chains like McDonald's and Shvidko have opened establishments in residential areas. Other operators don't plan to follow suit for at least two years, when finding a location in the center will no longer be possible. However, analysts believe that more active development in these areas will begin after the city center is built out: office developers will move into residential areas, and restaurateurs will follow suit.
Food courts failed to live up to expectations
The shortage of suitable premises or land for new establishments, as well as the labor-intensive land allocation process, which takes three times longer than in Europe, is forcing restaurateurs to locate fast food outlets in shopping malls and shopping and entertainment complexes. However, this year's trend shows that many chains are abandoning this practice. This sector remains unattractive for operators, as the number of visitors—potential customers for restaurants and cafes—declared by shopping mall owners is not always met, affecting business profitability. This situation is observed both in Kyiv and in the regions.
According to Mikhail Temper, Marketing Director of Omex Corporation, the Dva Gusya chain already has experience locating a restaurant in the food court (a space that houses several cafes or restaurants) of the Golden Ring shopping center in Donetsk, but that mall didn't provide the necessary customer traffic. "Therefore, we don't plan to expand into other food courts, as we see clear competitive advantages and the opportunity to earn significantly more money in standalone restaurants," Temper says.
The success of a shopping center's operations directly depends on the pricing policies of its stores, and, accordingly, it's crucial to target their target audience. Some chains, such as Pizza Celentano and Kartoplyana Khata, proved unprofitable and subsequently closed.
New shopping centers are designed with food courts that can accommodate four to five operators. According to restaurateurs, developers often make a mistake by placing cafes and restaurants on the second and third floors, whereas they should be located at the entrance to the shopping center. Such establishments should have a separate entrance from the street for other customers, not just those shopping in the center.
Immature franchising
As competition intensifies in the capital's fast-food market, operators are increasingly interested in the regions. Although income levels and consumer demand there are significantly lower than in Kyiv, restaurateurs understand that once the market reaches its initial saturation point, it will be too late to expand into the regions. Therefore, some companies are already announcing plans to open restaurants in major Ukrainian cities. In late September, Kontakt, which owns two Puzata Hata restaurants in Kyiv and one in Lviv, announced its expansion plans. By the end of 2007, three new restaurants are planned to open in Kyiv, two in Kharkiv, and one each in Dnipropetrovsk and Odesa.
Puzata Khata's main competitor, Omex Corporation, plans to open a second Dva Gusya restaurant in Donetsk by the end of this year, and a larger restaurant in Yalta in early 2006. Within two to three years, the company plans to establish a presence in every regional center in Ukraine.
Franchising is an effective way to expand into the regions. For example, the "Dva Gusya" (Two Geese) brand has four franchised restaurants out of eleven (in Ivano-Frankivsk, Truskavets, Rivne, and Khmelnytskyi). The company plans to further expand its regional presence using this model.
The Wokie Dokie chain plans to pursue the same strategy in Ukraine. It's not yet known how many franchises of this brand the company intends to sell regionally, but it's quite possible that a significant portion of those who acquire them will open mini-chains of three to four restaurants each, rather than standalone locations.
Inspired by the success of large restaurant companies, many Ukrainian businessmen, considering this business profitable and quickly profitable "by definition," are not averse to trying their hand at it.
However, newcomers may encounter difficulties that can lead to losses, or, less commonly, complete bankruptcy. Most chains still often refuse franchises to new restaurant owners, citing the potential for a negative impact on the brand's image if the franchise network fails to develop.
"Franchising is not yet acceptable for our market, as the Ukrainian business mentality has not yet matured to the point of understanding the need to meet all the chain's requirements. Mass franchising leads to the emergence of restaurants with varying levels of service. For example, if you compare Pizza Celentano and Potato House, the quality and level of service varies across the different locations. They share a common name, but the service and even the menu within the same chain can vary. In Ukraine, perhaps only McDonald's maintains all its restaurants at the same level, achieving this through a clearly and logically structured management system," says Maryna Rymarenko, brand manager at Shvidko-Ukraine.
In her opinion, chain owners need to carefully approach entrepreneurs seeking to purchase a franchise. For a business to be successful, it's essential to establish ongoing quality control and ensure that the café or restaurant owner strictly adheres to the chain's established rules and regulations.
According to operators, the entry of new international networks into Ukraine will attract many Western franchises, giving private entrepreneurs more opportunities to enter the business. However, these entrepreneurs will face a difficult time – Western networks have much stricter requirements than domestic operators.
