Riyadh Catering holds 20% market share in fast food sector: Prince Mishal

Riyadh International Catering Co. (RICC) owns 100 percent of McDonald's franchising rights in the Kingdom but does not share profits with McDonald's Corp, Prince Mishal bin Khaled Al-Saud, the company’s chairman, told Argaam in an exclusive interview on Wednesday.

RICC has garnered the lion’s share in the Saudi fast-food restaurants’ sector at 20 percent, two times higher than the market share of its competitors. The company’s sales were also three times above sector peers, Prince Mishal added.

The Saudi company is eying over 25 branches this year and to increase McDonald's branches to 500 across the Kingdom by 2027.

Below is the complete interview:

Q: What can you tell us about Riyadh International Catering Co.?

A: The company is the owner and operator of the McDonald’s franchising rights for the Central, Eastern and Northern regions of the Kingdom. The country’s Western and Southern regions are, however, served by Alireza, general manager of Reza Food Services. Both companies obtained the franchise rights in 1992, with the first branch opened in Riyadh city in 1993 –McDonald's first branch in the GCC region.

McDonald's Saudi Arabia has over 8,500 employees. Saudiztion rate in the chain stands at almost 30 percent, which is equal to over 2,500 Saudi youth.

McDonald's Corp is the world’s largest fast-food chain with more than 37,000 restaurants in 18 countries with a workforce of nearly 2 million, to serve over 69 million visitors on a daily basis.

Q: How many branches are operated by RICC? And what is the value of your market share in the fast-food restaurants sector?

A: McDonald's has over 271 branches in the Kingdom. RICC operates 171 restaurants in the Central, Eastern and Northern regions, while Alireza operates other 110 in the Western and Southern regions.

Since establishment in 1993 and until the end of 2012, we opened 75 McDonald's restaurants through RICC. Meanwhile, Alireza launched 40 branches in the same period, bringing up McDonald's nerwork to 115 restaurants across the Kingdom.

Our restaurants more than doubled to 250 in three years only, thanks to the company’s ample liquidity and bank loans.

Last year, McDonald's chain served over 150 million visitors across the Kingdom. Riyadh Catering holds the largest market share in the sector at 20 percent – almost two times higher than the share of its closest competitors.

Q: How did RICC manage to operate under the exclusive franchise since 1993 despite the lack of a franchise law? And what are the details of the franchise agreement with McDonald's Corp?

A: The franchise agreement concluded with McDonald's Corp is distinctive. McDonald's Corp was established in 1995 and adopted several models to grant franchising rights, of which the most prominent was franchising a single party to fully cover a certain geographic area without joint ownership.

This was applied in the franchising agreement signed with RICC and Alireza.

As for the agreement details, we fully own and operate our restaurants in the Kingdom, while McDonald's Corp does not hold any stake in our company and has no management rights. The corporation’s role is just restricted to franchising and supervising all branches to ensure compliance with the international standards.

Meanwhile, McDonald's Corp receives a fixed share from our monthly revenue, unchanged since the agreement signing date. The share is marginal and does not impact our revenue, but I won’t disclose more details, in light of our obligations under the deal.

Under the agreement, RICC can grant the franchising right to a third party in the Kingdom, however, we are not planning to do this, as it might pose risks for the franchise.

Q: Does RICC have other investments? Who are the company owners? And what is the link between RICC and Alireza?

A: RICC is exclusively operating in the ownership and operation of McDonald's restaurants. We're not planning to undertake other business activities, pursuant to our deal with the parent firm.

RICC is just owned by our family. No stakes are held by private or public equity funds. We and Alireza represent a single franchise and we are coordinating on all operational and administrative levels.

Q: Can you give us details about the company’s financial performance, such as sales and profit over the last years?

A: From 1993 to 2002, we incurred annual losses. We swung to net profit only in 2003. However, in 2016 the company’s sales and profit were hurt by weak affordability and a rise in direct operating costs, amid subsidy removals and imposition of additional fees and taxes. Suppliers also raised prices which weighed negatively on the 2016 profit.

Last year, our profit improved, with revenue rising by 6.5 percent year-on-year. Our sales per branch were almost three times higher, when compared to rivals.

We hope to post strong results this year, however, we are still far from the profitability level in 2015, when revenue grew by 12.5 percent year-on-year.

Q: You mentioned that operating costs were high. Can you clarify the reasons?

A: We faced some internal challenges. When we launched the first McDonald's restaurant, operating costs were high due to rise in the import costs of raw materials. Over 20 years, RICC worked on localizing its products. Accordingly, almost 55 percent of our primary products are now sourced from accredited suppliers locally and regionally.

Meanwhile, costs of setting up a new McDonald's branch is almost three times higher, when compared to other restaurants due to the special design of McDonald's.

RICC owns some land plots, but these areas and locations just represent 15 out of 271 branches. The remaining locations are rented under long-term lease contracts. We are not aiming to buy land plots, so that we can have more flexibility for relocating our restaurants.

Q: Why did not RICC raise its prices to offset high operating costs and make better profit?

A: The main challenge for RICC is providing the best quality, quick service and cleanliness at competitive prices. Operating costs at McDonald's are the highest among peers in the fast-food restaurants’ sector. Profit margins of some rivals are almost three times higher than RICC’s.

Q: What are the main challenges for RICC in the fast-food restaurants’ sector?

A: Fierce competition is the main challenge, along with macroeconomic headwinds, which weigh on affordability and drive operating costs higher amid energy subsidy removals, and introduction of new taxes, fees and higher labor costs.

Another challenge is the high ratio of employee quits in the sector.

Q: Do you have any plans to offer RICC shares to the public?

A: We have no plans to go public, as we are mainly keen to maintain our management of the company. Public listing is good for companies, but the entrance of new shareholders who might be unaware of the company’s business and who might impose some restrictions is a major challenge that may risk our franchise.

Q: What are the company’s expansion plans going forward?

A: We’re looking to open over 500 restaurants in the Kingdom by the end of 2027. We’ll focus at this time on establishing independent branches and enhancing presence on highway fuel stations, airports and underground stations.

We are also planning to open more than 25 branches this year. RICC is looking to increase Saudiztion rate to 70 percent in 2027.