AmRest takes on the slow economy

By Timothy Sifert

American Restaurants (AmRest), the company that operates restaurant brands KFC and Pizza Hut, has instituted a two-pronged attack on the country's dawdling economy. AmRest is making Pizza Hut more upscale, and KFC positioning it as a dine-in restaurant, and not a take-out one as it has sometimes been marketed. KFC is offering more inexpensive items on the menu, guaranteeing, for instance, a food item available for zł. 2.99 every day.

Wrocław-based AmRest hopes to have its restaurants better positioned once the market picks up, and is keeping its head above water in the meantime.

"People have become more price sensitive, and at KFC in particular we are trying to package the food more cheaply rather than producing it cheaply," said Henry McGovern, AmRest's chief executive.

He said, for example, that KFC sells mainly whole chicken pieces that come from local farms rather than processed meat, which prevents the company from cutting down on production costs - something competing restaurants might be able to do with processed meat products.

KFC is therefore forced to offer different meal deals and combinations to trim customers' costs.

"There's not so much we can change; not the chicken," McGovern said.

But if KFC were to use other products, it would be able to trim some of the cost off its primary customer offer.

"On the KFC side, (our strategy change) was more reactionary," McGovern said. "We're a good barometer for the economy because (our business relies on) disposable income. We noticed that unemployment hit us because it hit our transactions."

AmRest, therefore, has opted to take a hit in the wallet to keep customers in the restaurant, even if they buy less, he added.

"At KFC we're telling our customers we'll always have something for zł. 2.99," McGovern said. The goal is to try to defy the economy somewhat by at least maintaining former transaction numbers, even if the margins inevitably suffer.

"We're taking a hit on our margins," he said.

But keeping less affluent patrons in the restaurants today augurs well for KFC in the future. McGovern estimated that current, loyal customers will begin spending more. "It might not be today, maybe another year from now," he said.

Krzysztof Kłapa, spokesman for rival restaurant chain McDonald's, said that he is aware of KFC's new strategy and welcomes the competition. Without going into details about KFC's strategy, he said that the plan would create a healthier fast-food market in the country as a result of greater competition.

The other point of attack for AmRest is via its Pizza Hut brand.

AmRest is currently splitting Pizza Hut into two operations, one for pizza delivery to target TelePizza's industry dominance, and another for in-house dining.

In this vein, the company is changing and more or less separating its combined KFC-Pizza Hut fast-food restaurants. In the future most restaurants will feature a KFC fast-food service, but only delivery service for Pizza Hut. AmRest has a dozen combined stores, a number it plans to halve in the future. Following this track, AmRest has also invested roughly E1 million into its Pizza Hut-only restaurants, upgrading its kitchens to provide a greater variety of non-pizza menu items.

McGovern said that AmRest executives opted for this approach because of what it found to be a fundamentally different consumer buying strategy in ordering for delivery and dining. Customers demand good prices primarily on deliveries, and not so much in restaurants, where the main demand is variety on the menu.

"We're going counter-cyclical," McGovern said, dwelling again on the economy. "We're taking it up a notch with 14 new products this year."

He said he wants to attract people even if they don't like pizza. "We feel that Pizza Hut should become more of a casual dining place," he said.

Pizza Hut must also step up its level of service on account of growing competition. Times have changed in the country since Pizza Hut's initial introduction to the market in 1993, when it was "enough just to smile" and customers considered it good service, McGovern said.

What's more, AmRest, which has financed its growth thus far through profits, has been planning to list itself on the Warsaw Stock Exchange, McGovern said. However, like many local companies, the state of the equity markets and the overall economy have almost shut out the prospect of an initial public offering, forcing AmRest into a holding pattern until it receives some positive economic signals.

One Warsaw-based investment banker, however, said that AmRest could stand to perform well in an IPO, given there are not many companies similar to it. And, much like AmRest customers, local investors are looking for variety but also reliable revenue and a viable and realistic growth strategy.

"I believe that the wider the diversity of companies, the better," the banker said. "But that doesn't mean that it could go to the market today."