No rest for Amrest

By bne IntelliNews February 26, 2013

Nicholas Watson in Prague -

AmRest Holdings is an archetypal Central and Eastern European company. Forged in the post-communist fires by a young American abroad, this restaurant operator that brought pizza, burgers and fried chicken to western-starved eastern Europeans has outgrown its region and is now turning its attention to the fast growing BRIC markets.

AmRest - which at the end of 2012 had almost 700 outlets of KFC, Pizza Hut, Burger King, Applebee's, Starbucks and La Tagliatella spread across ten countries, most in CEE - on October 15 opened its first La Tagliatella restaurant in China, Shanghai. Currently, AmRest operates 136 La Tagliatella restaurants in Spain and France, which are designed to offer quality Italian food with prices at the casual dining level and the speed of service of a quick service restaurant.

"I am delighted to be opening the first La Tagliatella restaurant in China, which will be known as Chun Yi Tang or 'Pure Italian Heaven'," says Henry McGovern, the company's founder and chairman of the board, an affable, causally dressed American with an appetite for the restaurant business that shows no sign of abating, even though AmRest's success would allow him to give it all up anytime. "This is an extremely significant event for AmRest, as it gives us a great opportunity to expand our own brand with its unique and successfully proven economic model into a huge market with a fast-growing middle class population."

The company then followed this up with an announcement on December 14 that it had acquired a majority stake in Blue Horizon, an owner and operator of the casual dining restaurant brands in China, Blue Frog and KABB.

The move into China fits snugly into AmRest's strategy, which at its most basic is a leveraged play on the growth of the middle class in CEE and other emerging markets - after China, McGovern expects to follow shortly with a move into India - who are expected to flock in increasing numbers to its quick service and casual dining restaurants. And despite the global crisis of 2008 and now the sovereign debt crisis in the Eurozone, that's just what they have continued doing.

In its latest set of results, AmRest reported that third-quarter 2012 sales rose 13% on year to PLN603m (€143m), generating a net profit 7.9% higher at PLN24.3m. New openings were the biggest driver of sales growth, the company said, with 87 new stores added to the portfolio in the past year.

AmRest attributes the business' ability to hold up well in difficult times to its diversification across not only geographical lines, but also across business lines (though McGovern admits it's hard to get all four divisions - CEE , Russia and new markets, the La Tagliatella chain, and the US - moving at the same time). In addition, he says the company grew up in emerging markets, so is used to the wild swings that are part and parcel of operating in this part of the world.

Many of the best opportunities are in the large, fast-growing emerging markets, and it's the company's geographical diversification that will allow it to efficiently access these new markets. McGovern says it would be hard to run a business in Brazil out of its headquarters in the provincial Polish town of Wrocław, so it will do so from its Atlanta regional HQ in the US. Likewise, the Indian operations will be run out of its Spanish office. McGovern won't say which restaurant chains AmRest is looking to open up in these new markets, but its US business is Applebee's, while its Spanish business is La Tagliatella and KFC (and KFC already exists in India).

The company said for 2013 it expects to open more 80 new restaurants, with more than 60 of those in CEE and Russia. Growing at such a pace at a time like this takes guts, yet McGovern says AmRest throughout its existence "has been bolder than one would suspect" as it strives toward becoming one of the world's top-10 restaurant company in the world by 2020. If it achieves that goal, AmRest will have come a long way from its humble beginnings as a single pizzeria on a Wrocław square.

Investors too will have been amply rewarded for their patience. Those prescient enough to buy into the company when it listed on the Warsaw Stock Exchange in April 2005 saw their investment before the 2008 financial crisis reach a peak of PLN158 (€36), up almost 560% from the issue price of PLN24 and giving the company a market capitalisation of PLN3.3bn (€760m). Though the shares are now trading around PLN87.60, they have never fallen below their IPO price - not bad for a company that is, in McGovern's words, "in the disposable income business" at a time when household budgets are being squeezed. "Still, we're the last one into problems, and the first one out.

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