Outback's Seoul mate
The Tampa restaurant chain flourishes in South Korea even as it stumbles in some other foreign markets. The question is why.
By SCOTT BARANCIK
Published September 25, 2005
Walk into the Seoul headquarters of Outback Steakhouse's South Korean partner and you'll see 150 picture frames lining the walls.
Sixty-nine contain photos of a management team at each Outback location in South Korea. The rest, Outback chief operating officer Paul Avery said, are numbered sequentially to 150. And empty.
If the Tampa company continues its blistering expansion in South Korea - where more than half the predominantly female, college-educated customers mistakenly think it's an Australian chain - the picture frames might not stay bare for long.
And that is the point. Outback and its South Korean partner have added 19 locations this year, bringing the total to 69. Avery, who recently endured a 14-hour flight to see Outback's South Korean operation, said the team there is "fully capable" of opening 15 to 20 sites per year. It employs 6,000 people. Annual turnover among restaurant management averages 1 percent, versus 22 percent in Outback's U.S. steakhouses.
"It is a very favorable economic environment," Avery said. "Food costs are favorable. Labor costs are very favorable." Moreover, "Koreans love Western concepts. They're enthralled by Western concepts."
No other overseas market comes close for Outback, a casual-dining powerhouse with nine brands that include Carrabba's Italian Grill and Bonefish Grill, 1,250 locations and revenues of $3.2-billion last year. Canada, second with 16 restaurants, is shrinking, while Mexico has four. Japan has stalled at 11, as has Great Britain at six.
South Korea, a country about the size of Indiana but with eight times the people, is not simply Outback's biggest foreign market. It has more Outback steakhouses than all but one U.S. state (Florida is tops with 78). It is more profitable than any other country market, including the United States. It is South Korea's No. 2 chain of any nationality, next to best-selling Pizza Hut.
And it is Outback's third biggest contributor to earnings, next to its domestic steakhouses and Carrabba's.
"It's an unbelievable success story," Bill Allen, chief executive of the Outback Steakhouse parent company, told stock analysts and investment managers in June.
It also poses an intriguing question: Why South Korea? And why can't Outback replicate its South Korean juggernaut elsewhere?
Avery, a 46-year-old New Jersey native, joined Outback in 1989, replaced co-founder Bob Basham as second-in-command in March and has established himself as one of the company's key go-to guys. On a recent Friday afternoon at his modest Tampa office, Avery discussed his views on Outback's international venture.
There is no template for success overseas, he said. Some variables, like menu items or prices, can be adjusted. Others, like labor laws or the appetite for Western culture, cannot. Outback's international division has probably eaten more crow than steak since opening its first foreign restaurant in Ontario in 1996; markets it entered and subsequently left include Peru, Germany, Panama, Portugal and the Cayman Islands.
Most U.S. restaurant companies could say the same. In a new study of 142 international franchising agreements struck by such companies from 1982 to 1999, Cornell University associate professor Arturs Kalnins found that 87 franchisees failed within the development period, usually five years. The remaining 55, on average, opened 10 to 20 percent as many locations as planned.
"It's an interesting case of overconfidence," Kalnins said.
But nearly a decade after it ventured beyond U.S. borders, Outback and its faux Down Under fare have at least one restaurant in each of 20 countries and territories, and executives like Avery are the wiser for it.
Here are some of the lessons he and his colleagues have learned:
Find the right local partner. Many U.S. companies make the mistake of settling for the first moneyed native who comes calling. A few brazenly try to build abroad without local aid, oblivious to local customs and cuisine.
In South Korea, Outback did neither. It found a proven pro - Chung Intae, who had successfully developed 17 stores as the franchisee for TGIFriday's - and lured him away. Chung's is the office with 150 picture frames.
Don't jump in wallet first. When entering a country, Avery said, Outback usually signs a multiyear franchise deal with a local partner who pays for the initial restaurants. That way, Outback can assess the partner's performance and collect royalty fees with minimal financial risk.
If the franchisee proves capable, Outback may set up a partnership, such as its deal with Chung, who owns 20 percent to Outback's 80 percent. In South Korea, the switch from franchise agreement to partnership was accelerated by the Asian financial crisis of the late 1990s, which hit Chung "exceptionally hard."
Today, Outback has enough successful restaurants in South Korea that it can pay for new ones from free cash flow, rather than debt or U.S. earnings.
Choose countries open to Western culture. One reason Outback has thrived in South Korea while struggling in Japan, Avery said, may be that one's citizenry is more drawn than the other to Western popular culture.
He was struck by the fact that each Outback employee in South Korea has an "American" name. The top manager at each location goes by such names as Ivy, Symba, Good, Lion, Sky, Titan, Sergeant, Marine, Nova, Fanta, Snow, Murphy, Blue, Soda, Big, Yoda and Smile, as well as more prosaic ones like Justin, Peter and Joe. Chung is known as E.T.
"It's kind of fun, but I never quite understood that," Avery admitted.
Would Outback's South Korean clientele be as enthusiastic about the chain if they knew it was run by Americans? There's no telling.
Don't ignore history. You can learn a lot from other companies' international experiences. Mexico, Cornell's Kalnins said, has been a "graveyard" for U.S. restaurants. Japan is worse. Among the 142 franchise agreements he tracked, Japan had the largest number (19) and the most failures (16).
South Korea, Kalnins said, "is the one case where you see a couple of other chains actually hitting the full projected agreement and then some in terms of units under development."
Add a local twist to the menu - but not too much. In line with local tastes, Outback's South Korean menu includes less beef and more fish or pasta entrees; kimchi, a side dish and national staple made with pickled Chinese cabbage; calamari; and short ribs.
Alcohol accounts for 3 or 4 percent of Outback sales in South Korea versus 13 percent at its U.S. steakhouses. Chung bolstered the beverage menu by adding freshly made kiwi, lemon, grape and orange ades.
But Outback International president Michael Coble said the goal is to keep about 80 percent of the menu the same as in the United States. Outback's South Korean menu includes such brand-name favorites as the Bloomin' Onion, Brisbane Salad and Chocolate Thunder from Down Under dessert.
Listen to your cash register. When Korean sales figures began flagging several years ago, Chung's group investigated. They learned that customers considered the prices too high and the American-sized portions too big.
Chung shrank portions, rolled back prices and stocked the menu with more lower-priced items. The crowds returned.
Allow local innovation. Most of Outback's U.S. steakhouses are open for dinner only. Customers spend less at lunch, and serving both meals can stretch managers thin. But Outback's South Korean partner wanted to serve both meals, and that move has been profitable.
Avery was especially impressed by how Chung's team handled customers waiting in line. Restaurant staff feed them appetizers. A valet parks their cars for free. Upon leaving, they get a bottle of Dasani water. Costly, yes, but it pays off.
"Wouldn't you go back to a restaurant that had that kind of hospitality?" Avery asked.
Make sure you can be heard above the marketplace din. Japan has so many restaurant chains, domestic and foreign, that it's hard for Outback to be noticed. Television advertising might help, but it's too costly.
In South Korea, there are far fewer competitors. A couple years ago, Chung began running TV ads. The latest ad features South Korea's best-known model and about a dozen others sashaying off a fashion runway into an Outback, where they chow down on chicken wings and other fare.
"Television's really jumped sales there the last few years," Avery said.
The future. The lessons of South Korea may help Outback succeed in other international markets. They also may alter the way Outback does business domestically.
Avery said several South Korean practices provided a good model for the United States, including the treatment of customers waiting in line and adding lower-priced items to the menu. Focus groups suggest U.S. consumers trust Outback but find it "a little too expensive," he said.
Meanwhile, Outback's international team plans to focus on growth in Asia. Avery thinks Carrabba's Italian Grill will become the second Outback concept to go abroad, by 2007. He thinks the Cheeseburger in Paradise chain could do exceptionally well outside the United States.
But the South Korean trip was a revelation.
"I was so proud to see the Outback brand brought to life and success in a foreign country," Avery said.
Times staff writer Louis Hau contributed to this report. Scott Barancik can be reached at 727 893-8751 or barancik@sptimes.com