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Levendary Café is a well-known, publicly traded, brand in the US and currently expanding into China. They began as a small soup, salad, and sandwich restaurant that grew into a $10 billion business. Their fundamentals are strong and performance is in line with management's forecasts yet their stock is trading at a discount. This is due to their domestic growth slowing and the new CEO's lack of previous international management experience makes Wall Street skeptical that she can't make this a multi-national brand.
The Multi-Unit Restaurant Business represents 30% of the foodservice industry which is a $600 billion industry with 960,000 locations. They are categorized into three industry segments: Specialty Establishments, Quick Service Restaurants and Casual Dining. Levendary Café is a hybrid of the last two called Quick Casual which has an average check in the $8 to $12 range. They are distinguished by two elements: wholesome foods using high quality ingredients and a commitment to service in a comfortable, friendly atmosphere. They were also distinguished by their willingness to take risks which was a trait of the original founder. The same trait the President of Levendary China possesses.
They recently entered into the fast growing China market and instead of keeping the US concepts intact they changed the store design and menu selections in 23 new stores located in different cities in China. When the new CEO came on board she started to look into the China operations. At this point the China operations have already been set in place and have been running successfully now for eighteen months.
She reported her findings to the US team and now they are all furious at these changes - they are insisting things should remain as is in the US. The president of Levendary China tries to explain that if you don't adapt to the environment in where you are trying to conduct business you will fail. He spent one and a half years opening these 23 locations in China and is about to turn a profit and now the US team wants to change things. They were afraid if any of the US customers travelled to China and saw the changes it would ruin everything they worked so hard to build in the US. They spent years carefully nurturing their concepts and image and keeping it consistent throughout the United States nationally was now at jeopardy.
The new CEO compared companies that also expanded in other countries taking this approach by radically changing their entire menu yet keeping their stores' look and feel. But she also compared what McDonalds has done worldwide - keeping their stores standardized for the most part and just altering the menu slightly. She felt neither of these approaches was appropriate for Levendary Café and that they should keep things consistent across borders.
Q1 What is a Multi-unit Restaurant (MuR) Business? How big is it? Is it a consolidated or fragmented industry? What are its economics?
A1: A multi-unit Restaurant Business is the concept of owning more than one unit of a franchise and/or being the franchise owner owning more than one unit or store. In other words, running more than one unit of the same business is considered a MuR.
Usually independent operators represent 70% of the industry while the multi-unit operators are the balance which makes this a small percentage by units.
The food and beverage industry is fragmented, which means no one vendor or top vendors have significant market share, which the multi-unit Restaurant Business falls under making it fragmented as well.
China's GDP growth of 14.5% over the last 10 years and the population of 1.4 billion people were ideal for investing in this country along with China's urban population rising from 36.2% to 46.6% in 9 years and a strong middle class emerged whose per capita income went from $1,008 to $2,758.
Labor cost was a large cost element even though they have a small and static market for managers. Many senior and middle managers aren't fluent in English making it difficult with high turnover in the industry.
Q2 Identify MuR critical success factors in the US and then discuss potential institutional voids in China.
A2: The concept of healthful, wholesome eating was part of the company's culture and reflected in their well-known advertising slogan "Tasty Fresh Goodness". Marketing worked with outside advertising agencies to convey this concept through advertising copy and images. This image portrayed throughout all 3,500 companies and franchised stores and remained consistent. The food was of quality and always consistent. The operations had strict standards, policies and practices that allowed for tight control of day to day operations and store level expenses and operations. They also had an internal school called Operating Tools and Learning which set operating standards to help employees' learning. These operating standards were enforced in their franchised stores along with their company stores.
There is a list of institutional voids that need to be addressed and they include: Political and social systems, openness, product markets, labor markets and capital markets.
Institutional voids in China can keep a company from doing business in this location if it's not willing to tackle these institutional voids. It can also offer opportunities if the company is willing to adapt to the voids. The company needs to modify its business model for this specific location and adapt to the voids in order to be successful. This is what Levendary Café did in the different locations in China. For instance, some locations required some drastic changes like having a takeaway counter with no seating or changing the menu by removing everything but one sandwich item and adding a variety of local dumplings. In another location they changed the furniture entirely by using a local furniture supplier to supply them with plastic framed chairs which was an alternative to their classic wooden framed upholstered chairs. Some of the locations were able to keep the same design and menu selection as the United States but not the majority.
Locations were not an issue since the President of Levendary Café in China had a network of connections already in place to help him with speeding up the processes of permitting, incorporating and staffing the stores.
Q3 Why did Levendary decide to enter China Market? How did its US foundation match against China market needs? (compare US vs China market in terms of customers and operations)
A3: The decision to enter the China Market was because of the slowing growth of the domestic market here in the US. China's GDP growth in 2011 was 9.3% and in the US it was 1.7%, this exceeds the US's GDP by 7.6% therefore allowing for expansion into the China Market was good timing. China Market's needs were different than the foundation Levendary Café had in the US. In the US they kept everything uniform throughout all their stores but in China that would not work, they needed to adapt. From other companies experience as in KFC who was the most successful fast food chain they learned to adapt with help from their Chinese joint venture partners and local management.
Another reason they decided to enter the China Market was because the competitive quick service sector was growing the fastest at this time. It went from RMB 1.106 trillion to RMB 1.996 trillion in five years. This all attributed from more women in the workforce, an affluent middle class and a growing lifestyle trend to eat out more.
Levendary Café's culture was all about the customer. The original founder drilled the concept of "delighting the customer" into the staff. He believed if you accommodate the customer they will come back. This was a hit with the white collar professionals and upper middle class women who returned five or six times a week. Operations in the US were speed of service and order accuracy which was standardized and when orders were personalized to accommodate the customer this threatened both, yet personalization was part of the reason they were profitable. (See Exhibit 1.)
This need of personalizing they had in the US was similar to the needs they have in China. They had to adapt to what the customers wanted in order to succeed as they are in the US. For example, the Chinese eat few dairy products so they had a need to downplay their cheese soup and they were not familiar with turkey so they substituted chicken. This type of need justifies the changes they made to their menus in various locations and also to the appearance of the stores. It was all to accommodate the customers in China.
Q4 What are the key issues facing Mia Foster and what would you recommend her to address these issues?
A4: Mia is facing a few different issues. One being the reporting process from China back to the US. This issue needs to be addressed to avoid the risks it possesses for not applying US Generally Accepted Accounting Principles (GAAP) in place. China's accounting standards are not as strict as the United States and being the Levendary Café is mostly US based this is a very important rule to adhere to. She needs to standardize the reporting process to match that of the US before they increase the amount of stores in China and grows into a larger portion of total revenue. They needed to be compliant with the local tax laws in China or could face being shut down. In order to put the correct systems in place to transfer the financial records to the format of the US this would be a costly expense.
Another issue she faces is the adaptation China requires for a business from the states needs to take into consideration before it can become successful in their market. The president of the china market did just that, adapted and made the necessary changes required to become successful but Mia doesn't see that just yet. She is focused on keeping the operations standard and consistent as in the US. This unfortunately will not work in China.
There seemed to be a conflict between the original founder and the operating standards which are currently in place. The founder believed in personalizing orders to make the customer want to come back for more. This personalization approach taxed their store-level operations but the founder would simply point out the company's impressive results yet the standards never changed. The president of Levendary China also operated like the original founder. He took it upon himself to make the changes needed in order to adapt to the country he was in. The new CEO came on board in 2011 with no international experience and immediately wanted to change things in China without first researching how international business is successful.
The China operations had no strategy in place. Incorporating a strategy is the first thing I would do. They can use what is called the balance scorecard, which is a strategic planning and management system used to align their business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It is done by measuring the company in four different dimensions. Financial Dimensions are strong and in line in the US and shortly becoming profitable in China. Customer Dimensions are already in place, customer satisfaction and loyalty can be seen in the financial statements. They did a great job building their customer base. Internal Processes Dimension in the US they have down to a science and if they supported the China operations things would quickly improve. Learning and Growth Dimension is also already in place in the US with their internal school called Operating Tools and Learning. They can also expand this into China especially since the turnover rate is higher there.
If the new CEO decides she wants to definitely keep operations consistent globally then I believe they will never succeed out of this country and therefore should not invest in expanding into China and concentrate on growing their business here in the United States. If she decides they are willing to change their standard operations and adapt to the cultures in China then they should continue with the expansion and hopefully with the proper controls and strategies in place they will become and stay profitable in the future.
Strategies That Fit Emerging Markets by Tarun Khanna, Krishna G. Palepu, and Jayant Sinha
Local Institutions and Global Strategy by Tarun Khanna
Levendary Café: The China Challenge by Christopher A Bartlett and Arar Han
Exhibit 1. Levendary Income Statement (2010)