Broken Chains: The Struggles of Foreign Fast Food in Iceland

On New Year’s Day, Icelanders woke to the closure of Dunkin’ Donuts. The American doughnut chain, perhaps better known for its coffee, made its Iceland debut in 2015 to great fanfare but closed with little more than a shrug from locals.

Dunkin’s local management company said it would have to raise prices significantly to stay in business. This is the same reason for the famous shuttering of McDonald’s in 2009. The “lack” of McDonald’s is of perennial fascination to the global press. The restaurant chain had to correct a New York Post article that the Golden Arches would be returning, and the story also played into the exotic image that the tourist industry promotes. When Iceland’s first McDonald’s opened in 1993, then prime minister Davíð Oddsson ate the first burger. It was seen as a step toward modernisation and globalisation.

Other American chains have come and gone, including Burger King, Popeye’s, Papa John’s, Dairy Queen, and Little Caesar’s. Others have scaled back or only operate one or two branches such as TGI Friday’s and Ruby Tuesday, respectfully. This island does have some good news for fast-food loving readers: Domino’s, Subway and KFC have survived economic turmoil, with many branches to show for it.

Going to Kentucky

Visitors to Reykjavík will see that the city has a thriving restaurant scene, despite being stripped of its only Michelin Star in February. A few short decades ago, however, there were only a handful of establishments serving the hungry masses, the still-thriving Prikið, Hlöllabátar and Þrír Frakkar among them.

The oldest surviving foreign chain is KFC, which opened in 1980 in Hafnarfjörður. Icelanders love “to go to Kentucky” and confuse foreign friends with that phrasing. The restaurant recently announced it was changing french fry suppliers, the story was the most read on the popular Vísir news site that day, beating out articles on major political and labour disputes. KFC boasts eight locations around the country, sprinkling towns big and small with its 11 herbs and spices. Domino’s,likewise, has cornered the pizza market since it opened in the 1990s.

Secret Ingredient

The long list of failures, and a few successes, raises the question of what contributes to staying power in Iceland. Like many things on this sparsely populated rock, it comes to location and population size. According to Davíð Þorláksson, director of competitiveness at the Confederation of Icelandic Enterprise, “The country’s geographical isolation leads to higher transportation costs that pose problems for restaurants that need to import a large portion of their resources.” KFC and Domino’s proudly use Icelandic products in their food. McDonald’s, on the other hand, sourced its materials from the corporation’s supplier in Germany. The Icelandic króna (ISK) fell significantly against the euro (and everything else) after the 2008 banking crisis and the resulting price increase, management believed, would be too high.

Davíð pointed out that “fluctuation of the ISK poses a risk for everybody doing business in Iceland. For foreign restaurant chains, the problem is that all income is in ISK, while many resources need to be imported and purchased in a foreign currency and the chains will expect their dividends in their local currency. This can create an imbalance that can be mitigated with costly hedging.”

Iceland is not a member of the European Union but “the EEA (European Economic Area) grants Iceland access to the European Single Market with its four freedoms: the free movement of goods, capital, services, and labour. All of them help make it easier for foreign restaurant chains to do business in Iceland.”

In an interview with US business channel CNBC at the beginning of the year, Reykjavík University assistant professor Már Wolfgang Mixa said he believed the failure of foreign chains boils down to management. Those that have longevity are financially cautious—he explained that the McDonald’s team had taken large loans in foreign currencies. Már believes other companies had better relationships with the banks.

High Costs

Davíð explained the main challenges to the industry “The restaurant industry is a labour-intensive industry. Icelandic workers receive the second highest average wage and the third highest minimum wage in the world.” The purchasing power of those wages are significantly reduced by the high cost of living, particularly in housing over the past five years. The tense wage negotiations of the recent months have centered around this issue.

“In addition, the Icelandic government collects the third highest taxes in the world, as a percentage of GDP.” Davíð continued. That tax burden has also been falling on the lower classes in the past few years. The top tier tax rate was eliminated and VAT on food doubled. “All this, coupled with high transportation costs and fluctuation of the ISK, increases operating costs.”

Second Chances

Failure is often the end of the story. Several restaurants reopened with new names, new management or a whole new idea. Heck, Iceland is on its second Hard Rock Café, with a prime location in downtown Reykjavík and over two million tourists as perspective diners far cry from its first incarnation in Kringlan and a small local customer pool. The manager of the original Hard Rock found success with his own chain, Tommi’s Burger Joint. The former McDonald’s locations and operators reopened as Metro, with essentially the same menu—the McFlurry became the Flörrí—but using local ingredients and letters. Pizza Hut recently came back from the brink and opened a second location in Hafrnarfjörður.

Overall, Davíð sees potential for foreign restaurants. “Iceland with its 350,000 inhabitants might seem like a market that is too small for some chains. But, the recent tourist boom, with more than 2.3 million tourists arriving each year, has increased the market significantly.so, it should therefore be more feasible for foreign chains.”

Tourism has expanded our food horizons and waistlines.