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Jonathan Spiel has tried three times to turn his beloved Tea Lounge in Brooklyn into a thriving chain. Four years ago, he closed his second location after his landlord raised the rent. Another outlet failed because of poor sales, and he abandoned his last attempt when a co-op board imposed tough rules. With the sluggish economy crimping his cash flow, Spiel has found a new way to expand: franchising. In Kuwait.
Spiel hadn’t planned on doing business in the Gulf emirate. But his first—and, so far, only—taker is in Kuwait. How does a Brooklyn lounge that boasts a bar and is popular with nursing mothers become a winning concept in an Arab country where alcohol is banned and women must be modest? “It’s a tea culture, yet there are no tea places,” says Spiel. While that’s not technically true, the desert state does have two things Brooklyn lacks: oil money and a hunger for more U.S. brands. For franchisee Mohammed Al-Arbash, whose family’s holdings range from its original jewelry business to recycling machines, that makes Tea Lounge a terrific bet. “I don’t care if it’s famous,” says Al-Arbash. “I was looking for new ideas in the United States.”
He’s not alone. Hans Hess had barely expanded Elevation Burger beyond Falls Church, Va., when he struck a deal in 2010 to bring the chain to Kuwait. While some might balk at handing their organic burger concept to a twentysomething Kuwaiti owner of hookah bars, Hess never looked back. He has since signed several deals across the Middle East, and sales at Elevation’s restaurants there are more than double the average of their U.S. counterparts. While Hess says he never thought he’d hit Kuwait before hanging a shingle in, say, New York, “it made sense once I understood how in love they are with American brands.”
The Middle East has long been a magnet for U.S. restaurant chains thanks to its wealth and large numbers of foreign workers—not to mention its malls, tax-free zones, and jet-setting elites. Still, the usual franchising formula is to have some heft at home and then go global, often starting with a move into Canada or Mexico. That was before slow growth, tight capital, and stiff competition made expanding next door more difficult than opening in Dubai. The result: Dubai diners get to line up, New York-style, at local incarnations of Manhattan hot spots like Shake Shack and Magnolia Bakery (housed in a Bloomingdale’s (M), the 140-year-old retailer’s first foray abroad when it opened in 2010). Soon they’ll also be able to sample the goodies at Sprinkles Cupcakes, a 10-unit chain from Beverly Hills that just agreed to franchise 34 Middle East shops.
Some question the logic of franchising a budding brand. In return for an upfront fee and a cut of sales, buyers are supposed to get a distinctive and proven business model that can be replicated. “Franchisees are generally entrepreneur wannabes,” says restaurant consultant Michael Seid of MSA Worldwide. When a seller has only a handful of outlets or little experience, Seid asks, what system is being sold?
Smashburger Chief Executive Officer David Prokupek, whose first foreign store opened in Kuwait in April, says he’s glad his five-year-old brand had 120 units at home before venturing overseas. “I don’t think we’d have had the horsepower or supply chain to support a foreign franchisee before now,” he says. “There’s a real risk in these high-visibility cities. If someone has a bad experience, it can really damage your brand.”
The bottom line: The Middle East has become the go-to location for fledgling American franchises. The big reason: oil money in search of U.S. brands.