Restaurant owners and investors rarely sought professional help in the past. Unlike hotel investments, restaurant investments weren’t as lucrative and thus the need for a professional operator rarely made sense.
Yet the recent rise of the F&B and entertainment industry around the world, including in the MENA region, has piqued restaurant owners’ interest and need for professional management assistance. It has now come to their attention that appointing a professional operator is definitely worth the hassle, especially when it can lead to higher profits.
Regional developments
Following a thorough examination of the swift growth of the F&B industry in Saudi Arabia and in the UAE, it is safe to assume that this proliferation of casual dining and recent growth of delivery models has changed the rules of the F&B game in the region. Indeed, a minimum investment of a few million dollars is required to simply begin competing with the biggest F&B players on the scene. Surely, higher risks imply higher rewards; this has led many investors in the Middle East to enter multiple restaurant chains in anticipation of a generous payback.
That being said, an initial investment merely establishes the grounds for a restaurant. Quickly, investors in the field have realized that the investment is just the tip of the iceberg; the larger chunk involves operational expenses that require continuous management.
Demand for professional management
What creates a successful restaurant is actually professional management, in addition to a well-thought-out brand development strategy. It is this particularly daunting realization that created the need to involve professional operators in the equation. Seeking growth and profit in the Middle East, restaurants of all sizes – even the smallest of them – are considering handing over the management burden to professional F&B management companies in order to establish themselves as worthy competitors in the market. Some believe only small-to-medium F&B outlets require the help of such companies, whereas in reality, even successful restaurants must take advantage of their services to address a particular issue or for the sole reason of taking their operations to the next level to stay ahead of the competition.
Offers of professional management
In parallel, hospitality management companies have recognized this rising need and have begun offering management management related services for restaurants, in addition to hotel management services. Moreover, the increased demand has taken such a fast turn that even new players are entering the market. In the UAE, the most recognized F&B management companies are based in Dubai: (1) ADDMIND: founder and CEO Tony Habre, founded in 2001 in Beirut and later spread across the whole MENA region with 22 brands and venues; (2) 7 Management: founder and CEO Rabih Fakhreddine, founded in 2011 in Beirut, however already reaching KSA, Egypt, Greece and the UK; (3) Sunset Hospitality Group: CEO Antonio Gonzalez, founded in 2011 and actually present in 10 countries across over 20 F&B concepts.
In Saudi Arabia, the Modern Food Company (MFC) dominated the market share until the surge of MJS Holding, one of its cofounders being a former member of the MFC Group.
Elsewhere in the Middle East, the market of F&B management is yet to be defined, but it exists nonetheless. In Egypt, for example, certain hospitality groups started gaining some visibility, such as TLT Hospitality (founded in 2014) and Baky Hospitality, which was founded in 2013 by the hospitality tycoon Ayman Baky.
F&B management agreements
The recipe for a successful restaurant requires many ingredients, and finding the right operator is only one of them. Another main ingredient is a solid F&B outlet management agreement. This agreement can either make or break the relationship between owners and investors on the one hand and operators on the other. If significant loopholes are left unchecked, this agreement has the ability to hinder the dreams and goals of both parties, and in rare cases, it can completely destroy all chances of success.
Much like a hotel management agreement, a solid F&B outlet management agreement is easy to reach as long as both parties are conscious of their own interests and are aware of all the critical themes to agree upon during the negotiations. Below is a non-exhaustive list of themes that are of concern to both parties:
Operator and owner responsibilities
A high degree of cooperation is required from the parties. Each will have a serious interest in the performance of the other, since their respective duties and tasks are complementary and the agreement must read as a partnership between them.
Terms of operating policies
It is important for the owner to negotiate approval rights on the type and extent of the services offered by the operator. The conditions of such a mechanism will depend on the level of complexity of the hospitality establishment in question.
Staffing and labor issues
Typically, owners benefit from transferring the employment liabilities to operators, who, in turn, benefit from approval rights in the selection of employees in key positions.
Management fees
Parties must evidently negotiate on the basic fees — usually either a fixed amount, a fixed amount in addition to a percentage of gross revenues or simply a percentage of gross revenues. In order to maximize profits, the owner might consider incentivizing the operator through an incentive fee.
Budgeting and reporting
The issues related to the annual budgeting report and budget deviations must also be considered as critical.
Contract Term
It is crucial to both parties to agree upon the duration and to identify termination events as well as events of default. Terms of operating policies It is important for the owner to negotiate approval rights on the type and extent of the services offered by the operator. The conditions of such a mechanism will depend on the level of complexity of the hospitality establishment in question.
Restaurant management contracts are certainly not the only type of operating form. However, this type of relationship is perceived as attractive for both the owner and the operator when:
1-The operator is not willing to assume the liabilities and the risks associated with other types of agreements, such as a lease or a franchise, with the added benefit of a minimal capital expenditure.
2-The owner is looking for a higher potential return than the one provided by a simple lease, all the while retaining ownership and influence over the facility. All in all, it is important for restaurant owners to take the following steps when considering professional management assistance: assessing the need and the type of services required from the management company, which will depend on the overall company’s mission and vision for its business; choosing the right operator to work with; and finally, defining the nature and the details of the partnership in a clearly worded document to avoid potential disagreements and disappointments.
Ralph Nader, CEO Amber Consulting
