Transcript Lessons From a $1.20 Pizza

Case exploration and analysis on
Presented by
Trevor Zink
March 26, 2008
MBAG/H 646
Dr. Anatoly Zhuplev
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Brief case review
Chinese lifestyles and trends
◦ Tradition, change, implications
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Company overview
◦ Company, founder
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Industry overview
◦ Competition, analysis models
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The future
◦ Prospects, recommendations
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Anthony Le Corre
◦ Started and closed two pizzerias before opening…
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Hello Pizza
◦ Cheap, consistent pizza
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Started with $500,000 in seed capital
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Three restaurants, three delivery centers, others
Surprise: Successful
Changing Traditions
Implications for Business
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Preference is for Asian tastes, flavors
◦ Western food attractive, but not daily meal
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Eating out is common
◦ At least 1 meal per day average
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Majority of sales are eat-in (not take-out)
“Chunr” (Street food) is popular
◦ Convenient, cheap, fresh, tasty
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Fast-casual not popular
◦ Price/convenience first considerations
◦ Difficult to break in to market
Source:
Euromonitor Consumer Lifestyle Report 2008;
Newman, Jacqueline
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High motivation to eat healthy, organic, local
◦ Traditional foods, such as rice, seen as healthier
◦ Health regulations growing stricter
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Relative growth in restaurant food/drink
spending is low
◦ Cooking is traditional, still common
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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
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Increasing disposable income
◦ Spend more on entertainment/shopping
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Growing urban population
Concerns of work, career, time management
Trend towards prepackaged and frozen food
◦ Singles, working professionals
◦ Refrigeration is common
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Increasingly, “convenience is king”
With growing young working class, price is
major consideration
◦ Link
Source:
Euromonitor Lifestyle Report 2008;
Newman, Jacqueline
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Balance of tradition and change
◦ New businesses
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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
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Anthony Le Corre
Finished French “military service”
◦ Accountant for Swiss water company
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Motivated by necessity
Set up pizza parlor in Kunming
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Set up another in Chongqing
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◦ Was distracted, sold business
◦ 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
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Competitive Strategy
◦ Aggressively cost-based
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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
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Offer limited, rotating choices
◦ “People will get sick of old products”
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Economies of scale
◦ Model viable for large number of restaurants
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Price
◦ Cost-leader, minimum price
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Product
◦ The “Model T” of pizza
◦ Limited choices, precise ingredients
◦ “Really not bad at all considering how cheap it is”
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Distribution
◦ Restaurants, delivery centers
 Online orders, phone orders
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Promotion
◦ Online coupons
◦ Room for improvement
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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)
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Growth
◦ 8 restaurants in 5 cities
Source:
Hello Pizza Website
Fast Times in Fast Food China
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Highly saturated market
◦ Over 1 million outlets, 6% growth in 2007
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元340 billion in 2007 (~$49.79 billion)
◦ 9% growth in 2007
◦ 12% growth per annum since 2002
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Dominated by multinational chains
◦ Yum! Restaurants China –
41%
 KFC, East Dawning, Pizza Hut
◦ McDonald’s –
◦ Ting Hsin Intl Group –
21%
9.5%
Source:
Euromonitor Industry Report 2008
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Slower growth expected
Increasing cost of ingredients
◦ Many Chinese consumers are quite price sensitive
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Western style operations
Chains moving to lower-tiered cities
24-hour stores gaining foothold
◦ Started by McDonald’s, picked up by others
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Food safety, health are main concerns
Source:
Euromonitor Industry Report 2008
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Yum, McDonald’s, Ting Hsin
Pizza Hut
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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)
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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
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
Competitive
Disadvantages
No
Cannot
No
market
saturation
Lack of brand
recognition
Promotion???
At mercy of
supplier prices
respond to
market changes
Corporate
bureaucracy
No brand loyalty
among customers
Limited local
offerings
tastes,
flavors
Members of the
community
Low overhead
Familiarity with
supply lines
economies of
scale
At mercy of
customer’s tastes
No unique angle
No variety-seeking
offering
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Opportunities
◦ Huge market potential still exists
◦ Growth, expansion, new product lines
◦ Leverage combination of local tastes and western
business model
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Risks
◦ New entrants
◦ Rising cost of ingredients
◦ Increasingly health-conscious market
Threat of New
Entrants:
LOW/MODERATE
(1.5)
(w=.15)
Bargaining Power
of Suppliers:
HIGH (3)
(w=.30)
Chinese
Cost-Based NonStandard Fast Food
Market
Competitiveness:
LOW/MOD (1.775)
Bargaining Power
of Customers:
LOW/MODERATE
(1.5)
(w=.20)
Threat of
Substitute
Products:
LOW (1)
(w=.35)
Source:
Euromonitor Industry Report 2008; Zhang, Guibin;
Euromonitor Lifestyle Report 2008;
The Prospects
The Pitfalls
The Magic 8-Ball says…
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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
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Promotion, promotion, promotion
◦ Make name known both to convenience seekers…
 Many choices, low-involvement decision
 Bombard with image, identity
◦ …And subculture
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Backwards integrate
◦ Reduce supplier bargaining power
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Expand
◦ Economies of scale are key
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Develop business system “package”
◦ Franchising
◦ Training
◦ Expanding
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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
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Jesuit Connection Librarian Assistance
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Dr. Anatoly Zhuplev