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Middle East Accords: Cinnabon Grows Overseas

A Cinnabon franchisee steps up expansion in Dubai to cater to tourists and a wealthy and diverse local population.

By David Farkas, Senior Editor -- Chain Leader, 6/1/2008

Focus Brands’ Dubai franchisee, Cravia Inc.,
Last June, Focus Brands’ Dubai franchisee, Cravia Inc., invited children at the Deira City Center to whip up sweet cinnamon rolls during the mall’s Summer Surprise promotion.
You don’t want to know how much Walid Hajj is paying to rent space for two tiny Cinnabon units at the Dubai Mall, scheduled to open in August in Dubai, the booming city some are calling “the pearl of the United Arab Emirates.”

Really, you don’t. Nobody ponies up that kind of dough for a spot in a food court.

Even if you did, Hajj wouldn’t tell you. He’ll just say that until he inked the confidential lease, his highest food-court rent, in the palatial Mall of the Emirates, was half as much as the new one.

What is he supposed to do? His company, Cravia Inc., is headquartered in Dubai and already operates a dozen franchised Cinnabons there. The Dubai Mall will be the largest shopping center on the planet. Hajj has to be there.

You may want to be, too. Dubai, among the fastest-growing markets in the Middle East, has a multinational population of 1.5 million and attracts 28 million visitors a year. Over the last several years, numerous American restaurant companies have struck franchise deals in the city and elsewhere in the United Arab Emirates.

“We fought for as many locations as we could get,” Hajj offers, adding there were 750 applicants for 300 spaces. Hajj ended up with five of them: two for Cinnabon and three for the two other concepts—Zaatar w Zeit (two spots) and Roadster Diner—he franchises.

The food courts, Hajj boasts, are not your garden variety, with flimsy metal tables and chairs. “They’re high end, with water features,” he says, alluding to the mall’s highly anticipated aquarium (also said to be the world’s largest) and sprawling ice rink.

Disciplined Expansion

Hajj, a Cinnabon franchisee since 2000, wins praise from Mike Shattuck, vice president of international operations for Atlanta-based Focus Brands, which owns the Cinnabon brand. “Walid has a disciplined approach to development. He wanted to build Dubai out first before moving to Abu Dhabi,” Shattuck says, referring to the UAE’s capital, where Hajj has opened a Cinnabon.

Hajj, who describes himself as a “territory developer,” is in his third six-store agreement with Focus Brands, having opened 20 Cinnabons, the bulk in Dubai. He also operates Seattle’s Best Coffee, a concept Focus Brands franchises only internationally. After opening just three of each in the UAE last year, Hajj is stepping up expansion.

Cravia CEO Walid Hajj
Cravia CEO Walid Hajj has been a Cinnabon and Seattle’s Best Coffee franchisee in the United Arab Emirates since 2000. The 39-year-old Harvard MBA is opening 10 Cinnabons and six SBC units in 2008. About Cravia’s aggressive expansion, he declares, “It’s about time we keep petrodollars in [the Middle East] and develop our own countries.”
“This is a very aggressive year,” Hajj declares, alluding to the 10 Cinnabons and six Seattle’s Best Coffees that he’ll open by the end of this year. He thinks Dubai is becoming a “hub” city like New York, Paris and Singapore. “There isn’t a single hub in the Middle East to serve the 100 million people who live here and their vast wealth, except Dubai,” he says.

Hajj has opened nine SBCs so far, all inside Cinnabon units. A handful of the Cinnabons are in Egypt, where he has a joint-venture deal involving 22 outlets, including Carvel Ice Cream, another Focus Brands concept, and Oakville, Ontario, Canada-based Teriyaki Experience. Earlier this year Hajj signed on as a minority partner in a Ruby Tuesday franchise in Cairo.

Since 2005, he’s been expanding Zaatar w Zeit, a full-service, 24-hour Lebanese concept; he has opened five so far in the UAE. The Roadster Diner, a casual-dining concept with a comfort-food menu, in the Dubai Mall will be his first. Hajj expects systemwide revenues this year to reach 100 million dirham (about $30 million).

Snapshot

Company Cravia Inc.

Concepts Cinnabon, Seattle’s Best Coffee, Carvel, Zaatar w Zeit, Roadster Diner, Teriyaki Experience, Ruby Tuesday

Headquarters Dubai, United Arab Emirates

Units 47

2008 Revenues $30 million (company estimate)

Average Check $5.50 (Cinnabon)

Expansion Plans10 Cinnabons, 6 Seattle’s Best Coffee in 2008

Hajj, 39, is no stranger to the restaurant business. His Palestinian father founded a restaurant distribution company (now called United Group) in the 1970s in Saudi Arabia. By the late ’90s, the company was the Kingdom’s exclusive supplier to McDonald’s.

Hajj earned an MBA from Harvard University in ’95 and afterwards joined the Saudi branch of Procter & Gamble. In 2000 he signed an agreement with then-Cinnabon and SBC franchisor AFC Enterprises and began developing restaurants in the UAE and Egypt. Today Cravia has more than 800 employees.

Land of Opportunity

The UAE, a member of the Gulf Cooperation Council, is one of the wealthiest regions in the Middle East. It has proven a lucrative and safe market for American brands like Cinnabon. Even periodic Pan-Arab boycotts, usually stemming from U.S. support of Israel, haven’t affected business, Hajj claims.

“Dubai and the UAE have been in a sort of isolation,” Hajj says, referring to the relatively small native-born population and the growing numbers of non-Arab immigrants, now estimated to be nearly 70 percent of the UAE’s 4.2 million people; Emirati make up about 20 percent.

The influx of non-Arabs and well-heeled tourists has spawned a race for restaurant space in Dubai, where an estimated 1.5 million live. “Not only is real estate extremely expensive, even if you can pay, it’s tough to get your hands on it,” Hajj laments. Apartment rents climbed 30 percent in 2006, according to GlobalPropertyGuide.com, which notes skyrocketing prices have been driven by Dubai’s swelling population.

His mostly mall-based Cinnabon-SBC system ranges from tiny kiosks to 3,000-square-foot bakery-cafes. He likes “streetside” locations for Zaatar w Zeit, which is popular with late-night revelers.

Dubai
Dubai is one of the wealthiest regions in the Middle East. It has proven a lucrative and safe market for American brands like Cinnabon.
James Walker, chief development officer for Thousand Oaks, Calif.-based Baja Fresh and also a Cinnabon franchisee, toured the UAE in April and counted 328 restaurants among 14 U.S.-based concepts, not including Cinnabon or Seattle’s Best Coffee. “We’re seeing very large deals for the UAE, both in Abu Dhabi and Dubai, because of the growth and affinity for American brands,” he says.

This year Ruth’s Chris Steak House, Ruby Tuesday and California Pizza Kitchen announced UAE franchise deals. Franchising upscale restaurants is a recent trend. “Things are moving toward a higher level of dining,” Shattuck says.

Market Conditions

Filling slots in his growing empire hasn’t been a problem for Hajj. The government recently mandated that business fill positions with native-born Emirati, but the ruling hasn’t been strictly enforced, he says: “You’d rarely see one working as a waiter.”

Most of his 850 employees are Filipinos, who he praises for their loyalty and skill, especially with their hands. “They are extremely efficient and stay for a long time,” Hajj says.

He pays them the equivalent of $1,300 a month before deductions for housing. (Hajj rents the apartments many workers live in.) Store managers are transplanted Arabs, who make about $3,000 a month. If those salaries seem small, consider there is no income or sales tax. Employers are not required to pay a minimum wage, despite government efforts last year to enforce the one already in place since 1980, according to Human Rights Watch’s “World Report, 2008.”

There is, however, inflation. Ingredient costs have climbed 30 percent so far this year. Hajj hiked menu prices 15 percent as a result and has yet to see a drop in traffic. “Keep in mind our products are generally cheap. When you increase something by one dirham [about 30 cents], people aren’t going to notice,” he says. “Everything here is going up, including rents, and people expect to pay more.”

Inflation has yet to discourage visitors. Last year the UAE was among countries recording the strongest incremental growth in passengers, reports Airports Council International, a London-based association of airport operators. In 2006, 28 million people passed through Dubai International Airport, the world’s 10th busiest, the group says.

Hajj is hopeful those numbers keep growing. “My [Dubai Mall] rent should be compensated by higher sales,” he says.

 

Middle East: Great for Business, Not for Litigation

By Joycia Young and Philip Zeidman

Chili's Middle EastThe Middle East remains one of the few regions of the world without franchise legislation. That could change, of course. In Dubai, the Department of Economic Development has produced a draft franchise law of more than 50 pages, which appears to be modeled on Australian franchising legislation. Yet government officials haven’t implemented any of its measures.

But concerns do not end there. The Commercial Agency laws, in Dubai as elsewhere in the region, can provide significant statutory protection to franchisees. One must examine the whole range of laws affecting contractual relationships, including labor laws and company laws, which usually impose local ownership requirements, to assess their impact on a franchise.

The regulatory climate is relatively benign: no exchange controls, no quotas, no trade barriers. Nor are there corporate profit or personal income taxes. And the UAE is perhaps the only country in the world where foreigners dominate the private sector.

But keep in mind that the Gulf Cooperation Council states are Islamic nations. Many of the principles of Shari’a law—the widely practiced Islamic system of laws, customs and norms governing most aspects of Muslims’ life—apply to commercial transactions.

English, moreover, is considered a foreign language and the enforcement of legal rights is often difficult because Middle Eastern courts don’t recognize legal precedent and have limited ability to obtain injunctions.

Therefore it is absolutely crucial for franchisors to conduct legal and commercial due diligence on prospective franchisees and ensure that the franchise agreements have been reviewed by lawyers familiar with the laws of the relevant jurisdictions.

DLA Piper attorneys Young and Zeidman are international law specialists in Dubai and Washington, D.C., respectively.

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