There's nothing so tired as the chicken-or-the-egg argument, but if next year a slew of foreign restaurants begin opening in Mongolia's capital, investors might be asking whether it was the economy or the chicken restaurant.
Mongolia is following in the footsteps of the nation that is also its largest trading partner, China, whose first western food chain was Yum! Brands' KFC in 1987. Now Tavan Bogd Group, one of Mongolia's largest holding companies, has attained the rights to develop and operate the restaurant famed for its buckets o' chicken. Last year it announced four would open up in the Mongolian capital Ulaanbaatar, with the first to open in mid-2013.
The chicken franchise will try to tap into Mongolia's emerging middle class that has grown out of a blossoming mining industry. The remote north Central Asian country saw the launch of one of the world's largest coal mines in 2011 and the continued development of one of the world's largest mines for copper. The latter, the Oyu Tolgoi copper-gold project, is due to begin operations in June this year and its output is projected to comprise a third of the economy.
Oyu Tolgoi in particular has driven up Mongolian wages, giving people the ability to spend more on food, clothing and housing. According to the World Bank, the country's per-capita GDP grew 61% from $2,250 in 2010 to $3,623 in October 2012. Matt Jones, an analyst at Mongolian Investment Capital Corporation (MICC), says: "Bullet points would be the large youth population - youth are generally more knowledgeable and disposed towards import goods like imported clothing, Western foods, and the like. And there's the high growth rate and all the wealth that comes from the mining sector."
Jones says his firm has looked to partner with franchises such as Papa John's and Dominoes to tap into that prized demographic.
Meat in the middle
Mongolian diets are heavy in meat, with beef and mutton being two particular favourites of the locals. Though people in the countryside live more traditional lives centered around the five customary meats from cows, goats, sheep, and even horse and camel, chicken imported from China is now easily available and consumed widely in the city. As Western culture continues to spread and the middle class grows, Tavan Bogd and Yum! are betting that this fast-food chain will perform as strongly here as it has done in China where the company experienced 3% same-stores growth in the fourth quarter despite an 8% decline following bad press on the company's chicken supply, and 15% growth in sales over the five-year period between 2007 and 2011.
Drawing in US franchises to Mongolia such as KFC or McDonald's has long been a goal for companies. Though its rapidly growing youth demographic is interested in western brands and products, multinationals have been hesitant to open up shop.
US franchises have opened in Mongolia before, but with varying degrees of success. Though BD's Mongolian Grill still caters heavily to the tourist crowd during summer months, Kenny Roger's Roasters' - who would have been KFC's main competitor - has long been closed. The fact that KFC is willing to take this risk now is acknowledgement of the rapid transformation taking place in the country.
The crux for franchises in Mongolia has been the ability to deliver the consistency one expects from these restaurants and ensuring quality control in such a far-flung and isolated destination. The challenges of dealing with only a single rail line from China that leads to Ulaanbaatar and the absence of other logistical infrastructure raises the cost of necessary ingredients and drives the price away from the low costs that western consumers are familiar with.
Though Mongolia has 14 heads of cattle for every person, meat producer Just Agro is the only one that has facilities that comply with standards for export. Russia put a ban on Mongolian meats due to outbreaks of animal illnesses such as foot and mouth disease. That ban was lifted in November 2011 and the Mongolian government is interested in seeking out ways to sell its meat as a high-quality specialty project. "I'm very sceptical that chain restaurants will be able to provide the same proportionate low cost service they can in the US in these developing markets due to ingredient scarcity," says Jones, whose company has still yet to find a franchise interested in coming to Mongolia. "In order to obtain high-quality and consistent products, you have to pay a higher price relative to the rest of the market."
Jones says the biggest obstacle is finding the right partner who is willing to take the plunge and invest in a country that is still unproven and with demographics that nobody knows very much about. In this instance, KFC is the "first-mover" that stands to either lose and pack up or lead a trend and have the best chance of dominating the market for some time.