American fast food holding company Yum Brands announced that it would restructure its China business. Normally, there’s nothing wrong with finding a better approach to deal with the local market environment (quite to the contrary, actually), but this case seems to be different. Yum’s major brands KFC and Pizza Hut have been struggling in the Chinese market in recent years (see other posts on this blog). First, in 2012, antibiotics and growth hormones were found in KFC chicken, then Pizza Hut made some bad calls with regards to their menu and pricing, and most recently competition from Chinese fast food chains got rather intense. Yum brands had lost their appeal and started to loose money. This led to Yum headquarters making a bold move by cutting the Chinese market loose from global operations. Had it only been in order to give local operations more control over decisions on their China strategy, this might have been a good move, but it’s been reported that it is largely an attempt to shield US operations from risk. That could mean even tighter controls and a narrower look on the financials, and it could also result in a complete lack of support. Potentially, even damage to the global brands could emanate from the Chinese market.
Archive for the ‘International Business’ Category
Whad’ya know? Wal-Mart is not only the company that had failed internationally before – readers of this blog know about the retail giant’s epic blunders in Germany or South Korea – it is also a company that seems to be able to learn from experience after all. Wal-Mart had long eyed the Indian market as it had seemed to offer great opportunities – a very fragmented retail sector and a huge number of current and emerging consumers. It was for that reason that Wal-Mart had entered a partnership with Bharti, and Indian conglomerate a number of years ago. In 2013, however, the marriage of the giants broke apart among allegations of bribery and a legal environment that was very unfavorable for foreign retailers. Rather than to pull out, Wal-Mart has learned its lessons and changed course. In August 2015, Wal-Mart will open its first new Best Price Modern Wholesale store – not a retail store for consumers but a wholesale store for retailers. There are no legal restrictions for foreign companies to operate wholesale stores, and there seem to be other benefits as well – Wal-Mart is being a good corporate citizen by not competing with small, independent retailers. Quite to the contrary, as the Los Angeles Times recently reported, Wal-Mart is actually making the lives of these stores easier by providing them with a one-stop-shop opportunity for all their sourcing needs. Wal-Mart has learned, and it believes that it can open around 50 of the new wholesale stores within the next five years in India. Well done, Wal-Mart!
Most of my inspiration for specific blog topics comes from current news items. And often, I discover those when traveling on long haul flights– one of the few times when my addiction to all things in print and some quiet downtime without interruptions intersect perfectly. June 17 was such an occasion. Two different papers ran a total of three stories with similar content. The Financial Times reports that European carmakers fear that the “China cash cow is dying”. Mercedes, BMW and their peers had such high hopes to be milking that cow for years to come, but recent developments have triggered a change of perspective. A slowing economy, rising global and domestic competition and limits of car ownership have led to anything from revised growth predictions for some to actual year-on-year declines in car sales for others. With similar declines in Brazil and Russia, this could end not so pretty for the automotive industry. Which leads me to an article the Wall Street Journal ran on the same day. Real estate developers, retailers, and consumer goods manufacturers alike have long predicted a gold rush in India – a market with a growing middle class. Or so, they thought. Over the last decade approximately 250 new shopping malls have been developed and it seems that many of them are struggling with weak sales. By now, so the paper, India’s middle class should have grown to approximately 400 million, but recent estimates by McKinsey count it at a meager 10 million. And, finally, the Financial Times also reports on Swiss food giant Nestlé’s recent decision to cut their African workforce in 21 different African countries by 15 %. At first glance, the reasons seem similar. Only four years ago, in 2011, the African Development Bank had estimated the African middle class at 330 million. A 2014 survey by Standard Bank, however, concluded that the middle was only approximately 15 million across 11 of Africa’s most important countries. On the other hand, however, that may not be the full story as the continued growth in Africa of retailers such as Wal-Mart or Carrefour suggests. Nestlé may simply have misjudged the demand for its highly standardized product offerings and it may have underestimated the challenges coming from poor logistics infrastructure. The truth probably lies in the middle, and that leaves us with a generally bad aftertaste: the promise that the BRIC countries held just a few years ago seems to be fading quickly. And if not even emerging markets hold any more promise, what does?
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?
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.