Shatranj Capital on Ample Mideast Opportunities

going back. So a lot of different ways to hurt your back during CrossFit though, so that's a good I think that's all they do is to come up with different ways.

for a while. And with that, just gained a really broad international background. Prior to prior to Wendy's and them shipping me out here, I was with L Brands again in their international division with Victoria's Secret and Bath and body Works supporting franchisees in the Middle East, in the UK, and before them, I was with a consumer package good

company that also focused on international, but primarily Asia. So my entire career has been focused on international in some format of another and really found my passion specifically in F and B in the food and beverage industry. As a lot of people do you kind of I don't know if you necessarily seek it out, but once you find the industry, it's just it's just too much fun

to leave. And so even with Chatrone Capital Partners when we started the fund that ended up being a sector focused private ACA be fund on food and beverage focused here in the GCC in the Middle East. So it's it's just a lot of it's a lot of fun to be in this industry and to work with people. Ultimately, food is just such an intimate thing and you can never take yourself too serious if you're working in restaurants, and so it's always good to remind yourself that, specifically

with Wendy's, right, you're serving burger and fries. It's supposed to be fun, and so it's a good reality check and it keeps you waking up and doing something fun every day.

going to be something I was going to do. And so yeah, when the opportunity came to come out here to Dubai, I was working with Bob, who's very much Assault of the Earth guy, and he was the president of International Chief Operations Officer for Wendy's at the time. And then we made the move and that was ten years ago, so it's been it's been a whirlwind ever since.

It's the sector that we focus on is food and beverage, specifically QSR and fast casual restaurants, and then geographically we focus on the GCC here in the Middle East, so the GCC being Kingdom of Saudi Arabia, United Arab Memorates, Oman, Kuwait, Bahrain, and Qatar, and then we also look at Turkey and Egypt as kind of secondaries to those markets, but our primary focus being here on the GCC, and we ended up we just saw so much opportunity here in the region.

Iconic brands are no stranger to this part of the world, but what is a little bit different is the ability to properly grow those brands and scale them. There's a lot of opportunity with investments happening in Saudi Arabia and obviously here in the United Arab Emirates. And so this was a financial vehicle that we felt that provided a lot of liquidity into a part of the market that was underdeveloped. You know, private equity is a specifically sector focused.

Private equity is relatively untapped. And then with us, we took a little bit of a different approach. We took it to as a operations first private equity vehicle. So rather than kind of a bunch of private equity guys coming together and making agnostic investments, we're actually primarily a group of restauranteurs people that have worked in the industry.

Our advisors are people that have led global brands across the world, and this was going to be we brought our operations first kind of value creation levers to the fund and then utilize private equity as a vehicle to properly deploy capital quickly and efficiently, which solves some of the problems when you're commercializing markets. So it was really kind of a reverse engineering approach. We saw an opportunity

here in the region. We leveraged our experience of how we've seen businesses grow efficiently across the world and establishing restaurant brands and started on that journey. And that was a year and a half ago.

And so what what's happened is you have people that experience brands, that love brands, either when they're going to school or traveling into into the US or Europe. They they're well capitalized, and they bring those brands back to the region working with franchisors and then it's a part of a family group that it's kind of the sixth arm of their company's expansion. It's and it's just it ends up being not more difficult than they expected, I

guess would be a good way to say. And so where in the West, there, like I said, private equity exists, or there's this middle market where you're able to drive some efficiencies and these groups would typically just offload them or shut down. These brands are still very emotional and highly regarded because they're iconic global brands, and so rather than kind of losing face or just shutting them down,

typically they just hold on to them. And so similar how you kind of have zombie companies, you kind of end up with some zombie brands. And there's a lot of examples here of major major brands, global brands almost everywhere else in the world that would be successful, that are definitely in default of the development agreements. They've been stagnant for far too long, and you end up getting

frustration on both sides of the equation. Frustrations with the franchise ease because they're they're a little bit frustrated with the support potentially they're getting from the franchise oors that don't understand this part of the world, and obviously frustration with the franchise ors that see all the amazing things that are happening here in Saudi Arabia and UAE and all the investment that's happening and the population growth and

the strong economy, and then your restaurants aren't moving, and so you end up with kind of frustration on both ends, and that just causes a lot of a lot of friction, and so we our goal is to be the utility that comes in and unsticks that right, that releases that friction. We understand the West, We understand how governance and transparency and all those things need to be established for franchise

oors and for investors. But we also understand the franchise's point of view and kind of the boots on the ground perspective, and the restaurant industry. So I think those two those things coupled together create a unique proposition for people.

So any buyout acquisition would come with the entire territory most usually the GCC as a whole, maybe some additional shoulder markets, but with a platform company like that there's also opportunity to bring in iconic brands who have yet to make the jump into the region and plug them into an existing portfolio that is leveraging your supply chain efficiencies and some of the challenges that come with establishing

a market from zero. You can do that much better in a portfolio company, and then you get the transparency and an EESG that comes with Western back private equity compared to partnering with a local group which will run like a local company and come with some of those frustrations and frictions compared to what people might be used to in doing business in the West.

a little overwhelming. Like I said, there's a strong lack of liquidity in this market, so there's actually quite a bit of room to come in and evaluate different groups, and so there's a lot of people who are wanting to work with us and who want us to take a look at their businesses, and so it's more a matter of getting through all those groups versus having a you know, needing to find deals, which is a good problem to have, but it is a little bit overwhelming.

the dynamics of that. Your your infrastructure is very different in the UAE compared to a developing infrastructure in Saudi Arabia. Traffic patterns are very different in Saudi compared to to other parts of the world. So I think your casual dining is under pressure, and generally what I see at least is where you have more of an ability to leave the house not get stuck in traffic for a

long time. There's actually some interesting cost pressures that I think are favorable to casual dining at the moment if everything lines up like that, compared to Fast Casual or QSR. But ultimately QSR and Fast Casual delivers very well. And so here in this region, delivery has always been really,

really big. Even before delivery got big in the US, delivery was thirty or forty percent of sales for restaurants here in the region, and before the aggregators came in, everybody had their own call centers and their own bikes as part of franchise e systems. So delivery is part of this region and it's just something you have.

to go international, and so the brand decides to do that. Generally, that's a recipe for disaster because the brand will lack the support that it needs to support that franchise e. They're not necessarily ready to take that jump. And having a strategy, having a plan, having the infrastructure from a people perspective, those things are really really important when you're

setting up your first international expansion plan. So there definitely is a place where you need to be taking advantage of opportunistic things that come across, Like if there's a great potential partner who has a strong track record, well capitalized and is wanting to expand your brand. There's cases where you would want to look at that more heavily and maybe leapfrog that market over another one that you

had strategically planned. But in my mind, ideally you would tier out your markets and say this is the part of the world, or these are the group of markets that we're looking for, and this is where we think fits best, and then you go try to find the best partners that are in that tier one set of markets and then partner with those and so that order in that tier one sector might change a little bit, but ideally you're not taking somebody from a tier three

because an opportunity came up and leapfrogging them up to your tier one sector. And if you don't have a strategy, you're not going to know that, and you just kind of go wherever the windblows and causes quite a bit of problems.

franchise oors. So we actually have a pretty good idea of what we're looking for when we're evaluating franchise oors. And part of that we you know, we want to fly in and meet the team just like we would with a franchise e when we were on the franchise or side. We want to see what the support is, we want to see what the international infrastructure look like. We want to make sure that they understand the challenges and opportunities that come with international and the people that

we're going to be working with. And so I think sitting across the table from the leadership teams of the brands that we're talking to, you get a really good sense for brands that would be a good fit for international, whether they've expanded or not. Sometimes even if they haven't expanded yet, and they have the right leadership team and the right mindset and positioning. It can still be a

good fit. But I think more often than not, you see some of those red flags and you say, Okay, this is a great brand, it's working really well in the US. They're not ready for international expansion in our mind and we don't necessarily want to be the first ones to go through that learning curve with them. So obviously they're welcome to expand anywhere they want and potentially

even in the same region with somebody else. But ultimately, these are very very long term relationships, specifically with international master franchising. Generally, the master franchise e is investing a significant amount of their capital into developing these markets for the long term, and so you really want to make sure it's it's a good long term partnership and doing all that due diligence upfront is really really important in

our eyes. So I think we're uniquely positioned. Not too often I think you get groups like it that are that are franchisees that are doing as much diligence and interviewing of the franchise oors as we do. But ultimately we come from a franchise or background. You know, we're used to doing this with potential partners that we were looking at expanding with as franchisees. It's only fair to do that in reverse.

and your scale challenge very effectively. You know, private equity groups are incentivized to deploy capital quickly, efficiently, and generally by definition they're they're well capitalized, so that really solves that issue. When you look at it as an example, you know, I think Burger King got to entered India, you know, the same time as Wendy's. The main difference there was they entered with a joint venture with Everstone Capital,

which was a private equity group. Wendy's entered with a franchise with a master franchise e. And so if you look about, you know, three to five years in, you know, Burger King had over two hundred restaurants and growing, Wendy's was still stuck at the five restaurant mark. That's expanded since they've partnered with different people and different partners post COVID, but it still highlights the expansion potential with private equity,

you know. On another positive example, you look at what we did, and this is something that I was involved in and led with Wendy's, is we partnered in Japan with a private equity group called Long Reach, led by Mark Chiba and Tomoya Sujimoto, so both excellent, excellent human beings and mentors of mine, and we worked with them

to acquire a legacy business called First Kitchen. It was owned by Sun Torri, which is the Mega Ridge conglomerate mostly known for whiskey, and they had created that business First Kitchen to compete with McDonald's, and they had about

one hundred and sixty restaurants. McDonald's, though in Japan, has three thousand restaurants, and so this was just an afterthought for them and something they wanted to divest of, and so we worked with private equity to acquire that business and then merge the two brands, not co branded like they're merged Wendy's First Kitchen, so one menu, some products from the first Kitchen line, some products from Wendy's. So

it's a bit unique of a situation. And once we finalized that acquisition, we were able to rapidly scale within two or three years to seventy restaurants and growing. And so private equity definitely serves a very very useful purpose for brands expanding internationally and like you said, kind of supercharge the growth. One of the things to watch out for, and just generally it's a thing more involved with communication is private equity kind of by definition has a shorter

timeline on whatever they're working with. And there's options now as the industry kind of evolves with food and beverage to maybe roll over into a future fund or hold a little bit longer than they typically would, but ultimately they have a shorter term vision for what their exit is going to look like, whereas hopefully one of the partners generally the brand has a longer term vision and so those that communication is really important on the roles

that get played. If both brands end up having a shorter term vision, then you start to run into challenges with perspective and what each group is trying to look for in terms of what they need for their investors or their shareholders. And so knowing what you're working with and why, I think is important. Knowing the exit, knowing the long term vision is really important, but it serves its use for sure.

lot about international and particularly franchise management. And he's he's British, he's from the UK, and so there was there was me, this relatively young American guy working with with John and he would we constantly had us saying divided by a common language, because there were just be times where he would say, John, I understood every word that you said, but I don't know what you're talking about. And he

would say the same thing about me. And so I think you run into this issue of context, right, there's so much familiarity between the two, between the two markets, and sometimes I think that gets us into trouble, not just for Wendy's in this example, but any brand looking to make the jump into the UK, because you might make the mistake that it's so similar to your own market that it's kind of a copy past approach, or it's going to be you know, something that you can

just run from the US and in reality those little differences end up not being so little. They become even more stark in how a market operates. And so in the instance of the UK, I think there's a lot of that. You don't want to try to run something from the US for any brand. You know, Chick fil A, as an example, tried to enter really got beat up a bit on their first attempt when they were testing

out the market. They've gone back. I think they're retooling on how that's going to work, and I've seen something that make me think they're changing their approach, which is great. But for Wendy specifically, I think if I had one critique is and we mentioned getting to scale quickly, it's

just not moving. It's not moving fast enough with I think they've been in the market for four or five years now, if you exclude some of the reef kitchens which are kind of delivery only kitchens, I count around twenty restaurants. Really at this time, you should be at seventy restaurants and plus whether that's through franchising or your

own restaurants. If you've ventured a market like that, you really need to double down and kind of push through that level of growth, because that's when you're going to see the synergies that happen from you know, four while ebit dot improvement on your supply chain and your food costs. That's when you have a decent marketing ad budget to go after consumers share of mind. And so I think if you get to that twenty restaurant level and you kind of freeze or you go too slow, all those

things actually work in reverse against you. Your supply start getting angry because the restaurant counts that you promised them and the discounts that they were giving you because of what it was going to be start coming off. So your food cost actually gets worse and you just got a lot of headwinds that start coming your way. So I would really like to see Wendy's push through that, start franchising a little bit faster or opening more restaurants faster.

But that's a challenge in the UK, Like you really need to push through that. It's like a rocket getting out of Earth's gravity. You can't stop at twenty. You can't stop otherwise it just comes back down to Earth.

they opened really really aggressively. You know, it doesn't it doesn't mean that it was all sunshine and roses and that everything was there wasn't cost pressures along the way, but you know, they got to a really good scale and I think it's and it's a good example of of deploying and growing a market quickly to get to to get to a size where it's going to be feasible to continue to franchise and grow the business.

organization that backs franches is something that's very different than just having people that know what franchising is like or having that experience. So I hope that they're building that out and if that's going to be a strategy going forward, again, I think it is the right strategy to master franchise

in a high context market like the Middle East. On the flip side, from the boots on the ground here, there was a little bit of a red flag when the announcement came out that you know, they're partnering with Alshaia, which is a big group, but no restaurant counts announced, no, no strong commitment. It seemed very tentative for something that's iconic and global as Chipotle, so it raised a few questions. So it'll be interesting to see Alshaia as a group one of the major groups out here in the GCC

and across MINA as a whole. But what a lot of people don't realize is ninety five percent of their F and B units are actually Starbucks which is under quite a bit of pressure at the moment. The other brands that Alshaya has like Raising Canes, Cheesecake Factory, shake Shack. You know, when it comes to QSRs like like our fast casual, like a Raising Canes, they're they're not there's there's very few. They're they're not growing at the level

as we would want them to. I think they have some pricing differences with how the US and the primary brand prices their products. There's more Shakeshacks here than there are Raising Canes, which is crazy to me. So definitely over penetrated on some of the higher end of fast casual, and there's a lot of potential for getting the brand I think a little bit closer to the mark and the home brand and the core concept with with groups like Raising Canes and so with Chipotle, I think TBD,

let's see, let's see how it comes out. They I think they announced their first location would be in Dubai and Kuwait, which again Kuwait wouldn't necessarily be where I would launch my first location. I would be looking at UEE in Saudi Arabia transparently, but you know, quait Is is the whole market of Alshaia. So I imagine that has a.

overall everybody still took a step down. What we've seen to date is that gap between Western brands and local brands has actually has actually come together. So those trend lines are meeting, are just about to meet, and across those businesses there is a recovery line where you start to see a revision to the mean and potentially a return to standard sales. It's still going to take some time.

I think from what I see, assuming the conflict ended today, which you know, God willing it does, you'd see a pretty rapid recovery back to standard sales, maybe even as early as early Q three or mid Q three for McDonald's and Starbuck specifically, though they've been impacted significantly more, they also have a presence that's a little bit more exposed to Egypt and Jordan and Morocco, which those are higher impact markets compared to the to the GCC, so

that that we haven't been in the GCC, specifically Saudi Arabia, UAE, we haven't been affected as as significantly as those close those markets that are closer to the conflict. So uh, from what I've seen, I don't think you're going to see a recovery with McDonald's and Starbucks potentially until the end of the year. Just because they took it, they were a bigger step back. But everybody is on a

trend line that's recovering. So I think you are starting to see a little bit of potential, you know, outrage fatigue with the consumer. So as long as there's not something that continues to you know, irritate or or make the situation worse, I think you'll see a continued recovery.

to your to the previous guest on the podcast. I think there's examples that a lot of people give in the industry where it's almost a little bit of gas lighting the consumer saying, well, you know, dynamic pricing is already in place because happy hour and discounts, and I think it's it's just a little bit disingenuous in my mind, because when you're defining dynamic pricing, dynamic pricing is by

definition ever changing pricing. So really you're looking at a model that's much more similar to how airlines or airbnbs or hotels operating.

place for a long time. But consumers are smart, so they realize that this is this is something different, and as you pointed out, and as a lot of people pointed out the difference between our industry and other industries that are currently implementing dynamic pricing is there's not a supply constraint component, right, so more or less you have infinite supply with restaurants, you know, we're not. We're we go through a lot of work to make sure we don't run out of food and that we can that

we can serve consumers. So you don't have that supply constraint. So then really what you're looking at is just you're maximizing the demand constraint and that doesn't make sense to consumers. And so you get to this point where you know, to wax poetic QSRs are meant to be affordable, consistent, and fast. And so if you're losing face and trust with the consumer that you're not affordable or consistent anymore and they've lost that trust, then you really need to

change your strategy fast. And so I really don't think the juice is worth the squeeze in the industry. I would recommend and promote to brands that really, rather than trying to justify the reaction or to explain it away, you look at the consumer reaction for what it is. And you modify your strategies based on that. Specifically for QSR and fast catual, I think there's a lot of benefit for people to have consistency to understand what the

static price is going to be on the menu. And you know, at the end of the day, we're a price sensitive consumer that you know, people they're going to QSRs, they want to know what the price is. And they've given plenty of opportunities for everybody to raise their prices, you know, that's been built in. I don't I don't think dynamic pricing, especially now, is a good strategy.

pull a fast one over one or two times. But like I said, I if I'm in the drive through and I see my price changing all over the place, I'll give a brand one or two shots before I just change. And then with our industry, there's a lot of competition, right, there's a lot of alternatives, So there's a lot of reasons why we're different and why the strategy should be different for QSR compared to airlines or hotels.