KFC has been in China for almost 30 years. The first of Yum Brands’ restaurants to move into China has reported sharp profit and revenue declines for their first quarter China business recently. Some media outlets such as the WSJ argue that, with competition increasing, the novelty character of brands such as KFC simply seems to wear off, while others such as Reuters reason that recent food scandals have hurt consumer perceptions of the brand. Yum Brands actually seemed to have done a decent job to cater to Chinese tastes by enriching their offering beyond the usual staples by offering localized variations and entirely new menu items, including coffee drinks. For a company that runs more than 6,000 stores, these are not trivial changes. Reality, however, is that the Chinese market is complex and adaptations to the market strategy have to be made constantly. The Chinese market has many moving pieces from being hyper-competitive to low brand loyalty to being very prone to ever-changing fads. Another cultural trait, the relatively distinct status orientation of Chinese culture makes Yum’s latest move an interesting one – the addition of high-priced Italian restaurants to its portfolio. Viewed from the rabbit hole of international marketing, the question seems to be how much of this development is rooted in the many idiosyncrasies of China and how much is just the normal maturity of a brand along the product life cycle?
Archive for the ‘International Business’ Category
According to a variety of news outlets, California-based restaurant chain Johnny Rockets is planning for a major expansion in China. The 1950s themed chain currently has more than 300 corporate- and franchise-owned restaurants, about a third of which are in international locations. For the expansion, the company already entered into a joint venture agreement with its operator and franchise partner in Malaysia and a Malaysian owner-operator of department stores (that will also serve as locations in China). Beginning in 2016, Johnny Rockets will put approximately 100 stores into various locations throughout China. China definitely has an appetite for foreign fast food, especially if it is tied to a unique experience, but the road may be bumpy. The chain is following the likes of McDonald’s, KFC and Burger King, which have all had to manage steep, painful and expensive learning curves. It is to be hoped that Johnny Rockets will learn from their competitors’ mistakes, and make important adaptations to their business model and their menus. This author is not so sure if the chili cheese fries will catch on in China. Maybe we’ll read about Johnny Rockets again in the not too distant future…
About a year ago, it still took about 1.40 US dollars to buy one Euro, and today they’re almost on par. European tourists will find the United States a lot less attractive as a holiday destination, and European companies that have obligations in dollars are seeing their costs explode. What may look like a crisis to some, however, comes as a blessing to others. Products manufactured in Europe all over sudden are a lot more affordable to American buyers. As the Wall Street Journal reports on March 13, exports by most Italian or French luxury good producers to the United States are up. Ironically, some European companies that have been more careful by hedging their orders against long-term currency risks are not seeing such positive effects yet. On the other side of the Atlantic, export companies are hurting from the dollar’s recent surge.
How do you like your donuts? Chocolate or pink frosting? Rainbow sprinkles? Old fashioned? Some coffee with that? If you’re Indian you’re more likely to show up at the local Dunkin Donuts to ask for a “Brute tough Guy Veggie Burger”. Competing with other US-chains including Taco Bell, McDonald’s, Pizza Hut, or Subway, the Massachussetts-based company Dunkin Donuts and its Indian master franchisee Jubilant Foodworks have had some tough lessons to learn in the Indian market. Adding some local flavors to their donut menu was not enough – they had to completely alter its menu and re-align its brand to fit the needs of the local consumers. The changes in the menu have gone so far that there are as many variations of burgers on the Dunkin menu as there are on McDonald’s. And yes, before you ask, they are all free of beef like many food items of US fast food chains in India. The differences between Indian consumers’ preferences and their US counterparts went beyond just menu items. While the typical Dunkin Donuts customer picks up a fast breakfast there on the way to the office, the concept of getting coffee with sugary sweets on the way from home was very foreign to Indians. The result was that Dunkin Donuts was perceived as a pastry shop (with a rather limited selection of pastries…). Today, after aligning the concept with Indian tastes, Dunkin Donuts is now “Dunkin Donuts and More”. The concept is catching on with Indian consumers, and it has big plans of growing from 35 outlets to about 100 within the next two years. Well done, Dunkin!
Today’s Wall Street Journal (European Edition) ran an interesting piece on the Chinese market for fast food. Many domestic and regional competitors, so the Journal, are giving foreign fast food giants such as McDonald’s and KFC / Yum Brands a run for their money. Competitors such as Xiabu Xiabu (which serves Chinese hot pot), Da Niang Dumplings (serving – yes – dumplings), or Taiwanese Ting Hsin International Group’s dico’s (serving fried chicken) are expanding rapidly in China. Not only do they seem to cater better to local tastes, they are also moving into less-developed cities that their foreign competitors have largely neglected so far. Foreign competitors, in an entirely rational manner, often focus on target groups that have exposure to Western lifestyles and want foreign fast food – which often restricts them to affluent populations in a few select cities along the coastline. For many a company, that reduces the astronomical potential of a market with 1.35 billion population to an addressable market of a puny few million. In a way, it appears as if some street-smart Chinese companies patiently waited and intentionally let McDonald’s do the heavy lifting. Being a first mover can have its disadvantages, but often, it turns out to be more of a burden and a disadvantage. It is not uncommon for the first company to overcome certain regulatory or cultural hurdles, only to have the second mover and everyone else walk through the door that they have pushed open with much difficulty. It could well be that McDonald’s invested its time and resources to educate Chinese consumers, have them develop a love for fast food, and now its competitors are reaping the benefits. Nobody’s fault really, just interesting to observe…
Although Burger King has had its fair share of failures in international markets, things haven’t been going all that bad for the fast food giant over the last decade. Last month, however, the King was (partially) deposed in Germany. After repeated reports of poor hygiene and sub-standard working conditions, Burger King has terminated the contract with its largest franchisee in Germany. Over night, franchisee Yi-Ko Holding was ordered to close 89 stores or more than 10 % of all Burger King stores in Germany. Approximately 3,000 employees all over Germany were let go. What had gone wrong? In bare bone terms, investigative reporters had reported on severe breeches of the franchise agreement. The franchisee allegedly had ordered employees to alter the expiration dates on food products. Also, according to the reports, some of the restaurants didn’t even have the most basic restaurant equipment like dishwashers or garbage disposals. So much for the facts. But what has happened behind the scenes? If a franchisee of a global brand is in severe breech of the most basic stipulations of a franchise agreement, then the blame is often shared – particularly when it takes investigative journalism to uncover such a massive failure. It is hard to tell at this point, but in general it is the franchisor who sets the stage for success or failure. Successful global franchising starts by setting clear performance expectations and unambiguous language about contract enforcement. Another critical issue is the selection of the right franchisee who understands the culture of the global brand and has the capacity to implement the franchise system. If the franchisee acquires a master-franchise, then contractual arrangements, ability, and trust become even more important as the master-franchisee has the right to appoint sub-franchisees, leaving the brand owner even more removed from the market. And then there are training, permanent quality control and enforcement. In the recent case in Germany, it is almost certain that Burger King headquarters must have failed in some aspect. Once again, it has suffered from a disease that many global brands suffer from, a certain inability to transfer competitive advantage coming from a global brand and a well-oiled defined business model. So in some way, the King was not deposed in Germany. He has abdicated.
I recently came across this older post that discusses why American companies fail in China. The author of the post singles out Mattel, eBay, Google, and Home Depot and also offer his opinion on the reasons for their failure: a lack of flexibility, the failure to localize, or the existence of a strong competitor. In summary, so the author, it boils down to the fact that American companies have an inability to grasp how different the Chinese market is. I say, tell me something that is new! It’s not a secret that China is a difficult and different market; and it is also not big news that American companies often fail when entering foreign markets (e.g. WalMart in Germany, The Gap in Germany and Korea, Pizza Hut in Austria, eBay in Japan). The analysis therefore has to go a little deeper. It is not uncommon for large multinational corporations to side with standardization in case of doubt. Adaptation to foreign markets can be feasible and affordable if a company is only dealing with one, two, maybe even ten foreign markets. Beyond a certain number of markets served, however, adaptation becomes very costly and very complex. If preserving a business model (marketing approach, processes, etc.) is important to a company, then the question should not be HOW do we enter a market such as China, but SHOULD we enter a market such as China? If standardization is so important to sustaining competitive advantage of a company, then it should probably not sacrifice it on the altar of a very different market, but select foreign target markets very carefully. Sometimes this may mean to say no to markets even as large and juicy as China.
At the end of last month, Indian Prime Minister Modi traveled to the United States to lure US companies back to India to invest. According to the Wall Street Journal, just four years ago, the US investment stock in India amounted to approximately $1.9 billion, and now four years later it is only around $800 million. PM Modi tried to assure the likes of Boeing, IBM, GE, Citigroup or PepsiCo that he is cutting through all red tape and making sure that foreign investments are safe in India. The reality, however, tells a different story. The second largest cell phone company in India, Vodafone, has been battling the Indian government in arbitration courts over the imposition of retro-active taxes. Before entering India, Vodafone was promised tax breaks by the government, but after the check cleared, parliament instituted a new law that required Vodafone to pay taxes AND back taxes. Amazon is stuck in limbo, too. When Amazon entered it was fairly certain that as an online platform it would not be subject to retail regulations, but now it seems it will. WalMart, which had announced lofty plans for the Indian market not too long ago, has also put India on the back burner, and only operates wholesale stores there under a joint venture agreement. In most Western countries, the law is the law. In some countries, however, there are no laws or there are sometimes even contradictory laws. And in yet other countries, laws are either changing constantly or they are subject to interpretation. It seems as if some cultures have laws to make their lives easier and more predictable, while other cultures have laws to because … well … why … I mean….! The lesson is that companies need to pay close attention not only to differences in the law, but also to differences in how law is applied and practiced.
Most of the time, it catches my eye when companies fail internationally. This focus on failure may be the result of my academic training, and it may have something to do with my cultural roots. However, every once in a while I am really intrigued, even fascinated, by how smart some companies are. Hermes International SCA has developed a completely new brand for the Chinese market, Shang Xia. As the Wall Street Journal recently reported, Hermes has now spent several years to build the brand and isn’t expecting to break even before 2016. They understand that Western luxury brands will not continue to harvest the benefits of newly gained affluence in China forever. With the growth in the segment slowing down – from 20 % annually to about 2 % this year – the high demand for foreign brands will eventually cease. Chinese consumers are becoming ever more discerning and new brands, and more and more local brands, will succeed. Hermes has recognized this many years ago and made the right decision by building a strong local luxury brand. McDonalds (and yes, I admit, they compete in quite a different industry), however, is experiencing rapid declines in China for the exact same reasons. Competition from newer entrants is intense, and more and more Chinese alternatives eat into their market share. The time when being “foreign” or “American” was enough to drive purchase decisions will soon be over, and companies worldwide are well advised to adapt their China strategies.
And, by the way, I just realized that I ended up talking about failure again, after all.