Analysis: U.S. restaurants want bite of the Canadian market

TORONTO Mon Aug 23, 2010 8:06am EDT

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TORONTO (Reuters) - Buffalo Wild Wings (BWLD.O), a U.S. sports bar-and-grill chain, outlined ambitious plans to enter the Canadian market earlier this month, saying it has found a "perfect fit" in a country where people like to eat, drink and watch hockey.

But it's not only American sports bars that feel they will find a warm welcome north of the border. A maturing U.S. market and a stronger Canadian economy make the country a logical growth opportunity for U.S. restaurant chains in general.

"The Canadian economy is in a lot better shape than the U.S. economy and that likely makes it more attractive in terms of development," said analyst Destin Tompkins of Morgan, Keegan & Co.

"On the whole, most of the mature (U.S.) casual dining companies and quick service companies have very limited domestic expansion plans," he said.

Buffalo Wild Wings, which began nearly 30 years ago as a college bar in Columbus, Ohio, announced plans last week to open more than 50 company-owned and franchised restaurants across Canada over the next five years, starting with two next spring near Toronto.

"I think the economy is going to have a slow recovery, and I think sometimes when you go in when it's slow, you really can take advantage of some of the growth opportunities that come along," said Buffalo Wild Wings Chief Executive Sally Smith, whose company is approaching the 700-store mark in the United States.

"Canadians have many of the same attributes as the United States: love their sports, love beer and love wings. So it seemed like the perfect fit," Smith said in an interview.

Buffalo Wild Wings said the expansion will create 3,500 jobs in Canada and will use Canadian sources for ingredients such as its fresh chicken wings.

The company is joining other U.S. chains that have recently set up shop in Canada and those that have been here for years and are looking to expand. Five Guys Burgers and Fries, which operates 655 burger joints in the United States, and Chipotle Mexican Grill (CMG.N), which operates roughly 1,000 company-owned restaurants south of the border, are two examples of relative newcomers.

Five Guys, which made headlines in 2009 when President Barack Obama made a surprise visit, expanded into Canada this year and has five locations so far. Three more are slated to open before the end of the year, and at least four more locations are in the works for 2011. Chipotle opened its second Canadian restaurant this summer after launching its first in 2008.

"There are several companies that are already there. I wouldn't be surprised if we see more that start to enter Canada similar to what Buffalo Wild Wings announced this week," Tompkins said.

According to the National Restaurant Association in the United States, Americans spend $580 billion, or 49 percent of their food dollar, in restaurants. In contrast, it's a C$60 billion ($57 billion) industry in Canada, which has about a tenth of the U.S. population, and households spend about 23 percent of their total food dollar away from home, according to the Canadian Restaurant and Foodservice Association.

"Canada really represents an opportunity to increase the amount that consumers spend away from the home," said equity research firm Wisco Research's managing director Greg Schroeder, noting that restaurant spending in the United States is flattening in a maturing market.

"There's no market saturation and just given the dynamics of how consumers buy their food there, it just seems like there's a lot of opportunity in Canada," he said, adding that even established chains are still expanding.

Some U.S. chains, McDonald's (MCD.N), Burger King BKC.N and Darden Restaurants Inc (DRI.N), the company behind Red Lobster and Olive Garden, for example, have been operating in Canada for decades.

But Krispy Kreme Doughnuts Inc (KKD.N) and Dunkin Donuts have all but disappeared, with only a handful of stores left. Part of their challenge was competing with cultural fixture Tim Hortons Inc THI.TO, which dominates 40 percent of Canadian fast-food traffic, according to NPD Crest, the leading global provider of consumer market research. Its nearest competitor, McDonald's, has about 14 percent.

And Canada is not always the natural first choice for international expansion for U.S. restaurants. The relatively small market size can be a deterrent.

"If you're not going to have critical mass in the country, the additional cost of learning how to do business in a foreign country may be tougher to generate a return," said analyst Bart Glenn of D.A. Davidson & Co.

It does represent "an easy first step" for companies looking to expand globally, however, said Tompkins. "It's a good transition as you evolve your international plans."

Buffalo Wild Wings, which began exploring the Canadian market two years ago, is already making visits to Europe and eyeing markets beyond that. It hopes to announce expansion plans overseas within the next two years.

"A lot of the companies I'm talking to in the last 12 months are announcing deals...outside of the United States," Schroeder said.

"They're really seeking international growth opportunities and Canada is just a natural, I think, over time."

($1=$1.05 Canadian)

(Editing by Peter Galloway)

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