1. Case exploration and analysis on March 26, 2008 MBAG/H 646 Dr. Anatoly Zhuplev Presented by Trevor Zink

2.  Brief case review  Chinese lifestyles and trends ◦ Tradition, change, implications  Company overview ◦ Company, founder  Industry overview ◦ Competition, analysis models  The future ◦ Prospects, recommendations

3.  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

4. Changing Traditions Implications for Business

5.  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

6.  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

7.  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 Link Source: Euromonitor Lifestyle Report 2008; Newman, Jacqueline

8.  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

9. The Man, the Mission

10.  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

11. Michelangelo, The Creation of the 10 Yuan Pizza Michelangelo’s alternate title: Adam is disciplined for trying to steal God’s piece of Pizza

12.  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

13.  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

14.  Link 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

15. Fast Times in Fast Food China

16.  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

17.  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

18.  Yum, McDonald’s, Ting Hsin  Pizza Hut ◦ 400 “casual dining” restaurants in 100 cities ◦ 79 Delivery stations ◦ Project 20,000 units ◦ Link 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

19. Hello PizzaInternational Chains Chinese Eateries Competitive Advantages  Unique business model, unique product  Entrepreneur’s business acumen  Flexible, fast  Established in the market  Knowledge of local market  Large scale economies  Management experience  Boundless capital  Training and facilities support  Bargaining power over suppliers  Local tastes, flavors  Members of the community  Low overhead  Familiarity with supply lines Competitive Disadvantages  No market saturation  Lack of brand recognition  Promotion???  At mercy of supplier prices  Cannot respond to market changes  Corporate bureaucracy  No brand loyalty among customers  Limited local offerings  No economies of scale  At mercy of customer’s tastes  No unique angle  No variety-seeking offering

20.  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

21. Chinese Cost-Based Non- Standard Fast Food Market Competitiveness: LOW/MOD (1.775) Bargaining Power of Suppliers: HIGH (3) (w=.30) Bargaining Power of Customers: LOW/MODERATE (1.5) (w=.20) Threat of New Entrants: LOW/MODERATE (1.5) (w=.15) Threat of Substitute Products: LOW (1) (w=.35) Source: Euromonitor Industry Report 2008; Zhang, Guibin; Euromonitor Lifestyle Report 2008;

22. The Prospects The Pitfalls The Magic 8-Ball says…

23.  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

24.  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

25.  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