In the aftermath of creating a private equity ownership position in 2011, the new CEO, Mia Foster, took the reins of the restaurant chain, while Leventhal stepped down as the former CEO. The restaurant constituted a chain of 35,000 cafes across China, Dubai, and the USA (Barlett & Han, 2013). Its origins lie in a small soup, salad, and sandwich restaurant in Denver, which has now grown to a $10 billion business (Barlett & Han, 2013).
Foster joined the business with much enthusiasm, yet Wall-street did not consider her much of a strong candidate to manage such a large organization. The results were very clear from the tumbling stock prices, which enraged Foster. Therefore, she set to prove herself a viable candidate against all odds.
Porter’s Model for China & US
The prime candidate of review after her appointment was China; therefore, a Porters analysis may provide an initial background towards the Country Foster was dealing with:
Threat of New Entrants
Threat of new entrants entails both local food competitors and franchisees, which can be determined by the growth patterns of the Chinese food services industry and the other macro economic factors. For example, it can be identified that the population in China is almost 1.4 billion and the GDP growth rate is 14.5% (Barlett & Han, 2013).
Additionally, the biggest market share is taken by Asian food providers, which implies that barriers to entry are high because not all cuisines are welcomed. Furthermore, according to Trade and Industry Department, a typical Chinese café may cost around HK $1275500 (China, 2013). However, the Chinese restaurant sizes are much bigger; thus, costs much more. Also, although labor is cheap, yet it contributes a large chunk towards the restaurants expenses. Brand identity does not hold much significance, although it does in a few segments, but more important aspect is the food itself.
Bargaining Power of Buyers
Since the consumer food services industry has numerous competitors, buyers do have a certain extent of bargaining power. There is a variety of local food restaurants, and foreign menus available providing an average customer with lots of options to consider.
Bargaining Power of Suppliers
The competitiveness of suppliers in the restaurant industry does not vary much within a particular segment of the multi-unit concept. For instance, Baskin Robbins will not have much of a competitive edge against Dunkin’ Donuts because there is an industry standard of $5 (Barlett & Han, 2013). Thus, all players intend to stay below the limit, and that does not leave many options for the suppliers. The case is similar in terms of Quick service restaurants and Casual Dining. However, across the segments, suppliers may exercise a certain extent of power in attracting customers by providing similar items, with a more rick experience.
This can be identified by looking at the following graph showing the profit margins per segment:
Threat of Substitutes
This is interesting in China because the trend seems to converge towards a similar appetite for rice, chicken, soup, so on and so forth. Therefore, even popular foreign brands tend to follow those trends. So it may be fair to say that the threat of substitutes is high because the consumer views equal or better products with a fairly standard price and considers switching.
The rivalry is high in the Chinese consumer food services industry as can be viewed from the case exhibit 3, whereby the pricing is rather stringent, and the traffic does not accommodate for that scenario. Rivalry within segments is high, yet across segments is lower, because Baskin Robbins cannot consider Lavendary Café to be a competitor because the genre of the industry is different. So successful competitors like KFC, McDonalds, Pizza Hut, and others are rapidly taking over the market, yet local restaurants still own a big chunk of the market.
Relative Power of other Stake Holders
The laws are open for the restaurant industry, yet not so open pertaining to the financial reporting side, taxes side, so on and so forth. The accounting standard utilized is the China GAAP, which is unique to its socialist regime (Delloitte, 2013).
The US market, on the other hand, can be viewed on similar lines:
Threat of New Entrants:
Threat of new entrants in the US is extremely high because of the cultural diversity that allows new concepts and designs to be exploited. However, the capital requirements in the US remain high and maintaining the restaurant business is even more costly due to the high labor costs that tend to eat all the profit margins. The projected Restaurant industry sale for the year 2013 is approximately $660.5 billion as opposed to $379 billion in 2000.
Bargaining Power of Buyers
The bargaining power of buyers remains high as in the case of China because the amount of restaurants are high, which provides a wide array of options to the average consumer. It is interesting to note the level of similarity within the two markets.
Bargaining Power of Suppliers
The bargaining power of suppliers is limited due to the numerous options available ranging from multi-unit concept restaurants to retail, vending, recreation, and mobile concepts. Additionally, the pricing is not really standardized as opposed to that in China, the variation in US is largely related to the state laws, locality, and so on and so forth.
Threat of Substitutes
The threat of substitutes is high but not as high as it is in China. The diversity in cuisine creates substitutes in the US, whereby you may find numerous options for Chinese, oriental, and other similar foods.
Rivalry is high in the US, even within segments because the restaurants tend to find avenues of extra profits even if it requires jumping into another segment. However, the larger chains tend to retain their brand identity across the world because it allows them to create a loyal consumer base (Su, 2012).
Relative Power of other Stake Holders
The liberal rules and regulations tend to allow for easy market entry but certain financial restrictions apply. For instance, the US considers reporting in US GAAP and has more recently allowed the incorporation of IFRS standards considering the eventual convergence efforts. However, Chinese GAAP is worlds apart from what is required by the SEC.
From the Case, you should be able to identify CSFs for Multi-unit Restaurants.
The critical success factors for the multi-unit restaurant are location, brand image, restaurant menu, pricing, labor costs, cultural contrast, supply costs, flexibility, and standardization.
The cost drivers include fixed costs such as the franchise cost, rent, overhead, supplies, and the re-design cost. The variable cost element involves the labor, food, advertising, regulation, maintenance, and transportation (Barlett & Han, 2013).
The CSFs tends to be a collaboration of factors that if present in lines with the country’s market analysis, will allow for a successful strategy implementation.
However, institutional voids in China essentially imply the potholes that disrupt or hamper the process of development. Entry in China is primarily hampered by the cultural shift which entails the preference towards local tastes of rice and chicken as opposed to pork and beef. Additionally, the Chinese business culture is hinged on interpersonal relations that are considered imperative for business growth.
Another important institutional void is the financial reporting standards that do not comply with the IFRS or US GAAP; rather China GAAP is mandatory for all entities. Foreign companies in China have to abide by the two reporting standards i.e. China GAAP and their own reporting standard relative to the belonging country (Arundhati, 2012).
According to the case study the driver of revenue in China was volume as opposed to the margin based revenue proportions in the US.
The CSF of location is imperative to any business. There are numerous elements that must be considered with respect to location, in fact, there are seven specific factors i.e. residential population, daytime employment, stability strength, population by age cohort, willingness to spend, residential occupation, and the average household income.
Residential population in Shanghai is rising drastically because of its position as a global financial centre. Shanghai attracts numerous foreigners and thus, has the largest volume of people from Japan, US, and Korea (China, 2013). The mortality rate is the highest so it may be inferred that the older generation still lives and so the majority of residents must be in the teens or middle-aged group (population by age cohort). This entailed spurious spending behavior and due to the presence of foreign exports, the inclination towards popular American cuisines must be on the higher side (willingness to spend) (AlixPartners, 2009).
Furthermore, the stability strength indicator infers the ability of local residents to withstand fluctuations in their incomes. This would provide information with respect to how the consumer behavior may vary in accordance to unemployment rates.
The residential occupation, which entails the number of white collar and blue collar individuals living in a certain centre, influences the daily traffic (Delloitte, 2013). This is definitely on the higher side considering the number of working people living in the vicinities of Shanghai.
– Fairly straight forward; you can do some additional research on China market; use case data to support your comments.
The Chinese retail food services industry depicts of about 20% during 2011 to almost 2.8 trillion RMB (Delloitte, 2013). However, even with such drastic growth patterns, the size of Chinese restaurant industry is almost half the size of the US restaurant industry. This primary reason for this variation is the lower expenditure per capita in China. Although the trends are now changing in line with the demographics, whereby, the middle class is getting bigger and wealthier in accordance with the Bureau of World Statistics (Statistics, 2013).
It has been identified by the Consumer Report 2012 that nearly 22% of total expenditure by an average Chinese is spent on food in restaurants as opposed to almost 50% expenditure of the average US consumer (Su, 2012).
However, the industry trends are different, whereby there are almost 6 million restaurants in China as opposed to just 1.3 million in the US, and the industry is segmented as depicted in the case study. A stark contrast can be evaluated by the fact that the Chinese top 100 restaurant hold only 8% of the total market share as opposed to the US top 100 food chains holding approximately 48% of the market share (Decker, 2008).
These trends can be evaluated from the graphs:
The growth pattern is consistent but still a long way to go from the US. Similarly, the expenditure patterns can be identified through:
Therefore, it can be safely stated that the trend in China is impressive and may provide evidence for considering long term investments and continued efforts towards making a mark in the minds of the consumers because it is the culture that poses the greatest barrier in China, especially for foreign organizations.
Consider these options in regards to Chen-Leave him alone; Replace him; manage him
Evaluation criteria: Chen; China as a subsidiary; HQ-Subsidiary relationships
In accordance with the aforementioned analysis, China poses a highly potential market for Foster; in fact, a success in the Chinese market may aid Lavendary Café to revitalize its stock price on Wall Street. Therefore, the option of letting go off Chen would be preposterous, especially considering the fact that his contract would be ending soon. This implies that rather than leaving the newly built foundations of a prestigious chain in the hands of a newcomer, Chen must be handled through her frank demeanor into maintaining the brand equity that is so imperative to be sustained. However, a candidate for replacement may be considered once his tenure reaches an end, but that is really contingent on a future decision making process. At the present, such consideration is out of the question.
Additionally, China must be a subsidiary due to the high growth patterns and its ability to generate profits in the future.
Conclusively, the relationship between Chen and Foster must be adjusted because it is the HQ’s responsibility to provide a helping hand towards its subsidiaries. Chen has played his part well in accordance to his understanding and the Chinese industry, in a time when the Lavendary Café HQ in Denver was nowhere to be seen. To adjust the relationship, a continuous effort will have to forward to fill the gaps in problems such as financial reporting and design concepts and menus.
AlixPartners. (2009). China Statistics Bureau.
Arundhati, P. (2012). Accounting Shifts in the PRC. Journal of Accounting
Barlett, C. A., & Han, A. (2013). Levendary Cafe: The China Challenge. Harvard Business School
China. (2013). National Bureau of Statistics of China
. Retrieved November 13, 2013, from Database: http://www.stats.gov.cn/english/statisticaldata/monthlydata/t20130321_402882493.htm
Decker, C. (2008). 2008 Top 100 China Food Service Operators Application. Decker Capital Research
Delloitte. (2013). China's Consumer Market: What's Next?
Statistics, W. P. (2013). World Population Statistics
. Retrieved December 14, 2013, from http://www.worldpopulationstatistics.com/china-population-2013/
Su, Y. (2012). Chain Restaurant Market of China. Journal of Hospitality