Case exploration and analysis on

March 26, 2008MBAG/H 646

Dr. Anatoly Zhuplev

Presented by Trevor Zink

Brief case review Chinese lifestyles and trends

◦ Tradition, change, implications Company overview

◦ Company, founder Industry overview

◦ Competition, analysis models The future

◦ Prospects, recommendations

Anthony Le Corre◦ Started and closed two pizzerias before opening…

Hello Pizza

◦ Cheap, consistent pizza Started with $500,000 in seed capital

Three restaurants, three delivery centers, others Surprise: Successful

Changing TraditionsImplications for Business

Preference is for Asian tastes, flavors◦ Western food attractive, but not daily meal

Eating out is common◦ At least 1 meal per day average

Majority of sales are eat-in (not take-out) “Chunr” (Street food) is popular

◦ Convenient, cheap, fresh, tasty Fast-casual not popular

◦ Price/convenience first considerations◦ Difficult to break in to market

Source:Euromonitor Consumer Lifestyle Report 2008;

Newman, Jacqueline

High motivation to eat healthy, organic, local◦ Traditional foods, such as rice, seen as healthier◦ Health regulations growing stricter

Relative growth in restaurant food/drink spending is low◦ Cooking is traditional, still common

China still very Chinese◦ Local’s purchasing power equal with foreigners◦ -0.39 migrants/1,000; 0.655% population growth

Source:Euromonitor Lifestyle Report 2008; CIA World Fact Book 2009

Newman, Jacqueline; Law Library of Congress

Increasing disposable income◦ Spend more on entertainment/shopping

Growing urban population Concerns of work, career, time management Trend towards prepackaged and frozen food

◦ Singles, working professionals◦ Refrigeration is common

Increasingly, “convenience is king” With growing young working class, price is

major consideration◦ Link

Source:Euromonitor Lifestyle Report 2008;

Newman, Jacqueline

Balance of tradition and change◦ New businesses

Opportunities for non-traditional products, services Large, untapped market willing to seek variety Must be culturally sensitive, aware Inside contacts or cultural assimilation needed

2008 Study: Reputation and relationships play important roles in formal financing of the small private firms

◦ Chains, established businesses Must be willing to adapt to culture Western management with Chinese tastes good mix Partnerships, physical presence, speaking language,

government appeasement crucial to success

Source:Zhang, Guidin; Anderson, Derek

The Man, the Mission

Anthony Le Corre Finished French “military service”

◦ Accountant for Swiss water company Motivated by necessity Set up pizza parlor in Kunming

◦ Was distracted, sold business Set up another in Chongqing

◦ Sold standard pizzas at standard prices◦ Didn’t stand out, closed business after one year

Read the history of McDonald’s Was commanded by God himself to make

cheap pizza

Michelangelo, The Creation of the 10 Yuan Pizza

Michelangelo’s alternate title: Adam is disciplined for trying to steal God’s piece of Pizza

Competitive Strategy◦ Aggressively cost-based

Overall mission: Turn pizza into an inexpensive commodity

Standardization and mass production of pizzas◦ Precisely measured ingredients separated in single-pizza

portions, premade crusts◦ Prepared the night before, cooked upon order◦ Small, easily trained workforce, segregation of tasks

Offer limited, rotating choices◦ “People will get sick of old products”

Economies of scale◦ Model viable for large number of restaurants

Price◦ Cost-leader, minimum price

Product◦ The “Model T” of pizza◦ Limited choices, precise ingredients◦ “Really not bad at all considering how cheap it is”

Distribution◦ Restaurants, delivery centers

Online orders, phone orders Promotion

◦ Online coupons◦ Room for improvement

Link Consistent with business model Slight changes

◦ Price changes September 2007◦ 元 25-35 up from 元 10 ($3.66–5.13)◦ Specialty pizzas

Sweetheart Pizza◦ Desserts, Risotto

Also cheap ( 元 5-25; $0.73–3.66) Growth

◦ 8 restaurants in 5 cities

Source:Hello Pizza Website

Fast Times in Fast Food China

Highly saturated market◦ Over 1 million outlets, 6% growth in 2007

元 340 billion in 2007 (~$49.79 billion)◦ 9% growth in 2007◦ 12% growth per annum since 2002

Dominated by multinational chains◦ Yum! Restaurants China – 41%

KFC, East Dawning, Pizza Hut◦ McDonald’s – 21%◦ Ting Hsin Intl Group – 9.5%

Source:Euromonitor Industry Report 2008

Slower growth expected Increasing cost of ingredients

◦ Many Chinese consumers are quite price sensitive Western style operations Chains moving to lower-tiered cities 24-hour stores gaining foothold

◦ Started by McDonald’s, picked up by others Food safety, health are main concerns

Source:Euromonitor Industry Report 2008

Yum, McDonald’s, Ting Hsin Pizza Hut

◦ 400 “casual dining” restaurants in 100 cities◦ 79 Delivery stations◦ Project 20,000 units◦ Link

Dominoes entered 1995◦ 12 locations◦ 15 choices, West/Asian mix◦ 元 76-108 ($11-16)

Other Premium and “Authentic” Pizza Parlors

Source:Euromonitor Industry Report 2008;

Yum! Website; Dominoes Websitec

Hello Pizza International Chains

Chinese Eateries

Competitive Advantages

Unique business model, unique productEntrepreneur’s business acumenFlexible, fastEstablished in the marketKnowledge of local market

Large scale economiesManagement experienceBoundless capitalTraining and facilities supportBargaining power over suppliers

Local tastes, flavorsMembers of the communityLow overheadFamiliarity with supply lines

Competitive Disadvantages

No market saturationLack of brand recognitionPromotion???At mercy of supplier prices

Cannot respond to market changesCorporate bureaucracyNo brand loyalty among customersLimited local offerings

No economies of scaleAt mercy of customer’s tastesNo unique angleNo variety-seeking offering

Opportunities◦ Huge market potential still exists◦ Growth, expansion, new product lines◦ Leverage combination of local tastes and western

business model Risks

◦ New entrants◦ Rising cost of ingredients◦ Increasingly health-conscious market

Source:Euromonitor Industry Report 2008; Zhang, Guibin;

Euromonitor Lifestyle Report 2008;

The ProspectsThe PitfallsThe Magic 8-Ball says…

Niche market Business model unique in sector Motivated, savvy entrepreneur Established, past point of probable failure Meets/solves a growing need/problem Sustainable competitive advantage

Promotion, promotion, promotion◦ Make name known both to convenience seekers…

Many choices, low-involvement decision Bombard with image, identity

◦ …And subculture Backwards integrate

◦ Reduce supplier bargaining power Expand

◦ Economies of scale are key Develop business system “package”

◦ Franchising◦ Training◦ Expanding

Anderson, Derek. “Yes To FTA, but what about the Barriers?” NZ Business; Mar2008, Vol. 22 Issue 2, p12-12, 1/3p

“Burger-Thy-Neighbor Policies” Economist; 2/7/2009, Vol. 390 Issue 8617, p68-68, 1p CIA World Fact Book: China; 2009. "Consumer Lifestyle Report: China." 10 Nov. 2008. Euromonitor International. Dominoes Corporate China Site

http://www.dominos.com.cn/english/ “Industry Report: Fast Food – China.” 22 Oct. 2008. Euromonitor International. Newman, Jacqueline M. Food Culture in China (Food Culture around the World). New

York: Greenwood P, 2004 Pizza Hut Consumer China Website http://www.pizzahut.com.cn/phcda/index.aspx Zeldin, Wendy. “China: Dairy Product Quality and Safety Regulations.” 3 Nov. 2008.

Law Library of Congress http://www.loc.gov/lawweb/servlet/lloc_news?disp3_762_text “Yum! Corporate information - China” http://www.yum.com/company/china.asp Zhang, Guibin. “The choice of formal or informal finance: Evidence from Chengdu,

China.” China Economic Review (1043951X); Dec 2008, Vol. 19 Issue 4, p659-678, 20p

Special Thanks Jesuit Connection Librarian Assistance

Dr. Anatoly Zhuplev