CAIRO: Across the Atlantic, fast food companies - or, in the industry's preferred jargon, "quick service restaurants - have been among the few to find an upside to the global recession. Quarter-pounders and French fries fit into slimmer budgets better than filet mignon, for instance, and those in the industry are eager to point this out. Here, however, things are a bit different. There is no immediate threat of recession, although economic growth is shrinking fast. And when it comes to fast food, Hardee's and Papa John's are hardly the cheapest options on streets packed with koshari and fuul vendors. The assistant general manager of McDonald's Egypt, Alaa Fathy, met with Daily News Egypt this week to talk about the up and downsides of making fast food in Egypt, including inflation, the effects of the intifadas on hamburger sales and the trouble with making McKoshari. Daily News Egypt: How does your supply chain work here? Do you import or export most of your foods?Alaa Fathy: We get around 85 to 90 percent of our products locally. The majority of the suppliers are local Egyptian companies. Only around 10 to 15 percent - I believe it's more like 10 percent - are imported, due to the fact that you can't get these products here in the market with the quality that McDonald's is looking for.When we started, the amount of products that we were importing was much higher, [at around 70 percent]. We worked with the suppliers in order to improve their facilities and their production process until we were able, in two or three years, to get them up and running according to McDonald's standards. Since then we [have been] getting more products locally. What do you still need to import?For example, fillet of fish. We don't have that quality of fish here in Egypt, so we have to import this from Europe. Apple pies - we don't have a local company that is producing apple pies over here. What we are importing from some Arab countries are, for example, cheese...imported from Saudi. These are just examples, the rest is manufactured here: dairy products, agriculture products like lettuce and tomato, the beef patties, the chicken products. What are the other difficulties you've had locally?Throughout 2008 and 2007, mainly 2008, we witnessed tremendous inflation in raw product prices. This was a worldwide thing, due to the inflation that occurred in all of the commodities. In some products it went up to 40, 45 percent inflation. The majority of the locally-produced products depend on imported raw materials. So if you have any change in the worldwide low product pricing, definitely it will impact you. This is the first challenge. The second is if you have any governmental regulations with regards to the importation of any product. Sometimes the government puts lots of taxation and whatever laws on, say, the chicken manufactured products. But if you have a local chicken supplier, as we do, this is not a problem. Did you have to raise prices?Definitely. But one of our strategies is that we don't dump all of the inflation on the consumer, because we have to maintain our competitiveness, especially in regards to pricing. So the majority of the inflation affected us internally on our profitability, and we just passed a minor part onto the consumer. One of the main products were beef. To give you an example, beef prices - this is an estimated number - went from around, let's say, $2,800 per ton, to the $4,500 per ton. So imagine what happened to the raw products. We didn't transfer all of this, definitely, but it did affect our profitability. Still, McDonald's is less of a budget option here than it is in America. Who are your customers in Egypt? A main challenge in Egypt is the low average income. And, over there, the cost of the food is low. Over here, the cost to produce the food is around 80 percent higher than the US. It's very challenging, due to the high food costs or product costing, with the low average income. This is where the difficulty is. The main customers we are attracting - and I'm not talking about McDonald's only, I'm talking about McDonald's and the majority of the QSR [Quick Service Restaurant] players - are mainly the social economic classes of A, B, C1 and C2. When you go down to E socio-economic class, you see them occasionally, say during feast periods or summer periods. But they order the very low-priced products like ice cream cones and cheeseburgers. Why is it more expensive to produce food here?These are the main two factors: currency exchange rates and the customs duties. In Egypt the customs duties are high compared to the US and compared to European markets. And, after all the inflation we have seen in 2008, this might be a challenge we are faced with again in 2009. If the dollar gets stronger against the Egyptian pound and the Egyptian pound is devalued, what worries me is seeing inflation again in the Egyptian market. How do you choose the local menu?We have a core menu, which contains the quarter-pounders, fillet of fish and so on. You have to go with the core menu first. And the more you are developed in the country, the more you start becoming localized. We started developing and introducing new items that match the local taste. Some time ago, we introduced the McFalafel, and the McFalafel was very successful. If I recall, we sold around a million sandwiches in just a matter of 10 to 14 days. We also have two sandwiches you will not find in the US: the McArabia Chicken and McArabia Kofta. Have you thought about a McKoshari?We thought of it one time before, but found it was very difficult to maintain. It would be the same challenge we faced with the McFalafel, which is maintaining a strong, consistent high-quality raw product. But again, if we find the formula to solve this issue, it might help a lot. You are planning five or six new locations in the coming year. Where are you trying to expand?Normally we are in the areas where we see a growing potential or areas we are not yet in. So, let's say, in the area of Sixth of October and in Sheikh Zayed district, this area is expanding, so we are thinking about going in this area. In areas like New Cairo, we just opened an outlet in the new campus of AUC [American University in Cairo]. Where are your most profitable locations? Whenever you see a socioeconomic class of A and B - these are your high-volume areas, like the Heliopolis area, like the Mohandiseen area, like Garden City, like Zamalek. These areas are the high-volume areas. Some others are seasonal, like Sharm El-Sheikh and Hurghada. But definitely now with the negative impact on tourism, we are expecting to see a slight drop on the volumes of touristic areas' outlets. Who are you competing with locally?If you talk about the chains - KFC, Pizza Hut, Hardee's - I believe you can consider these our main competitors. But we keep an eye on everyone, even the local chains like Mo'men, Cook Door and whatever - we keep an eye on them. Did your Tahrir location lose business when AUC left?Definitely it had a little bit of an impact. But the good thing about Tahrir is that throughout the past years we have seen a tremendous increase in the volumes coming out from the local, or the Egyptians, that are living somewhere in Tahrir or working near Tahrir. Especially now that the traffic downtown is getting extremely congested, you see an increasing trend in the delivery service. But yes, we have seen a slight negative impact on the volumes when AUC moved out. Israel's actions and the Iraq war have prompted some calls for boycotts of American brands. Have you been affected? We were impacted during the first [Palestinian] Intifada, and this is where we see the start of the boycott. The strategy we have started to use is to let all Egyptians know that we are a 100 percent pure Egyptian company. It [McDonald's Egypt] is owned by an Egyptian family. All employees working in McDonald's Egypt are Egyptian. We have around 3,000 Egyptian employees. The suppliers are Egyptian. This is how we started communicating to the local market. Over time, people knew it, they believed it. It helped us a lot during the Second Intifada. It helped us a lot during the last Gaza war - we didn't see any boycott happening to McDonald's. We started helping the community. We started with the Children's Cancer Hospital, where we donated as McDonald's Egypt around LE 4 million, then worked with an orphanage.And one of our recent initiatives, we're developing a place here in Cairo, it's an underdeveloped area - ashwa eyat - unplanned communities. We have an initiative in 2009 that will go in and develop 10 kindergartens to have them become suitable for children to go in, to stay in. This initiative will cost us around LE 1 million in 2009.
