IPH in Brazil Case Study

1. IPH in Brazil Case Study Audrie Bielskis, SirahCamara, Mike Butler, Adam Willis

2. Introduction International Pizza House (IPH) is one of the largest restaurant chains in the world and was the leader in the pizza segment. The first IPH in Brazil was opened in 1989 in a suburb of São Paulo. The Stern Group was a financially and managerially stable major construction business looking to expand. In April 1992, the Stern Group bid against 3 other firms for the International Pizza House franchise for Rio Grande do Sul and was awarded this franchise in May 1992. The company formed Maxxi Foods S/A in June of 1992 to operate the IPH franchise in Rio Grande do Sul. Fernando Silva was responsible for the management of Maxxi Foods along with Mr. Marcos Stern until Stern left the company in 1995.

3. Sociocultural Factors Brazilians are very proud of locally produced products (-) Local products in several categories in Rio Grande do Sul have higher market shares than highly promoted national and some international brands (-) Highly inappropriate in the Brazilian culture to put down a competing product or service while promoting your own (-) Italian culture is widely represented in the southern states of São Paulo, Paraná, Santa Catarina, and Rio Grande do Sul. Inhabitants of these states had long ago established and appreciated Italian –style pizza (-) Success of pizza sales at a particular location could be unrelated to advertising and image building efforts. Primary success factors were the taste of pizza, location convenience, price, and/or the locale’s atmosphere (+) (-) Pizza is considered an inexpensive food item in Brazil (-) Breakfast is usually the lightest and quickest meal. Most common breakfast was coffee with milk, and bread with butter and jelly, or bread with cheese. Some people also included some of the many Brazilian fruits such as papaya, mangoes, pineapples and melons (+) Meat, fish, eggs and cereals were not as common at breakfast as in other cultures (+) Sandwiches and pizza were used a substitutes for lunch or dinner usually because the person lacked time, hunger, company with whom to share a meal, or money (+) (-) Most Brazilians didn’t perceive fast food as a complete meal, but rather as a heavy snack(-) Most popular pizza toppings were cheese and calabresa (a thinly sliced pork sausage). Pepperoni was an acceptable substitute for calabresa, but was not sold in stores in Brazil.(+) When pizza is consumed in restaurants a drink is normally served with it, often this is a draft beer (+) An outing to a pizzeria was usually more economical to than going to a traditional restaurant (-) Pizza was served through a popular system called rodizio which is equivalent to “all you can eat” (+) None of the pizza chains in Porto Alegre offered quality packaging (+)

4. Economical Factors São Paulo is the most economically developed state and is also the most densely inhabited, with population equal to 34 million (+) Rio Grande do Sul is a state with little over 9 million inhabitants (+) Porto Alegre is the capital of Rio Grande do Sul and is a cultural center for the southern portion of Brazil with a metropolitan area population of nearly 3.1 million (+) Cost of Brazilian mozzarella is higher than the cost of mozzarella in other markets (-) Retail establishments were subject to very high taxes in Brazil and tax evasion was common (-) Brazil is the largest country in Latin America and was the 8th largest economy in the world (+) The Porto Alegre market consisted of 43 pizza restaurants. 3 are chains while the rest are small family-owned businesses (-) The success of the Real Plan caused the market to stop tolerating price increases and consumers to begin to compare prices (-) Newly stabilized economy created franchising boom in Brazil, mainly in food sector (-) Average monthly inflation below one percent meant consumers would no longer accept price increases (-) 2 of the largest construction firms active in the state of Rio Grande do Sul, a national firm and a local firm had just declared bankruptcy (+) The franchisee for Rio de Janeiro suddenly and unexpectedly decided to close all of its stores and to stop all operations due to heavy financial losses. It also began litigation against IPH (-) Other fast food franchises that had begun operations in Brazil, such as KFC and Subway, were also not meeting profit expectations (-) The Pizza Company held local market leadership (-) There was rumor that a huge competitor, the market leader in pizza delivery in the USA, was about to enter the market by making the local Coca Cola distributor its franchisee (-)

5. Political Regulation Factors • Tax evasion was common especially in small, family-operated businesses such as restaurants, but such practices are difficult for a company with automated stock, accounting records, and sales records.(-) • Henrique Cardoso created a new currency, the Real, which began circulation on July 1, 1994 (-)

6. Ecological and Technological Factors Ecological • There are no obvious ecological factors Technological • Brazil has a well-developed media infrastructure (+)

7. Strengths One of the largest chain restaurants in the world and is the leader in the pizza segment It’s located in 63 countries and operations in these countries grossed close to US $1 billion per year Established franchises in places where they knew there was a lot of foot traffic and their product would be received well. IPH had a good reputation, and a successful business. Had their novelty thick crusted pan pizza that they were famous for. This initially represented 95% of sales The 7 stores Maxxi Foods had open in May of 1995 were within the sphere of influence (living, working, driving) of individuals possessing 70% of Porto Alegre’s income Fernando and Marcos Stern traveled to the USA for 2 months of training at three IPH centers for new franchisees and operators. This training included modules on topics such as store planning, infrastructure development, product preparation, and business operations and administration. They also attended lectures on topics such as human resources, implementation of operational and financial controls, etc. IPH realized that they were setting a new standard for packaging and charged more because of this fact In the beginning, sales increased and the chain’s market share and popularity grew. The target market was individuals and families classified as social classes A and B (the 2 groups with the highest levels of income and education in the entire population). Many of these people were already familiar with IPH in other markets. Introduced many new promotions in 1995. International Collection which introduced several new pizzas and succeeded in gaining attention and increasing sales. Another promotion increased lunch sales by 35% and another was successful in reaching its objective to increase sales on slow days. A thin crust pizza similar to the Italian style pizza found in pizzerias preferred by Brazilians was launched in 1998 and was sold at 10% less than other IPH pizzas. This pizza initially accounted for about 35% of sales in stores that launched it and sales of this type of pizza stabilized at about 25% of pizza sales

8. Weaknesses Their way of advertising in Brazil. It put down the traditional Brazilian food and that was offensive to the Brazilians. Initial launch strategy was an indirect knock on local ethnic cuisine. Their products were more expensive than other product sold in the local pizzerias. Their prices were between 20-30% higher than their competition. The ingredients they purchased were more expensive than the ones their competitors purchased. Because pizza was considered as an inexpensive item in Brazil, their high prices didn’t help their business. Their advertising was not consistent. Mr. Marcos Stern left the company They were subject to high taxes and because they are a big corporation they were not able to escape them in any way. Initial cost to purchase franchise was high. Stern Group’s initial fees were US $10,000 for each of the 20 stores it was authorized to open in the Rio Grande do Sul territory and a fee of US $25,000 for each store that actually opened. The agreement also required Stern Group to pay 6% of gross sales, less direct tax In 1995 Maxxi Foods only had 7 stores in operation which was well below the 20 stores expected to be open by this time As novelty of pan pizza wore off, customers returned to their regular pizza restaurants IPH’s management and cost control systems also revealed operational problems High operating costs often made profit margins lower than those of local competitors American franchises received cheese already shredded, but Brazilian franchises received the product in blocks and had to pay employees to shred cheese Other IPH standardized items, such as packaging, were also more expensive for Brazilian franchisee than for franchisees in other markets Some of the pizza preparation processes, which were automated in the US, were performed manually in Brazil IPH realized that they were setting a new standard for packaging and charged more because of this fact

9. Weaknesses Continued • Discounted prices were initially successful, but soon the sales price became the pricing reference point in the minds of many consumers • The franchisee received a lot less assistance from IPH than was forthcoming • Some executives in the firm openly raised questions about future investments in Maxxi Foods • Stern Group was considering going back to only construction and selling the franchise • There were well advanced negotiations for a franchise holder for IPH in Portugal to buy the stores and operations of Maxxi Foods, but this fell through at the last minute • The franchise agreement was restricting for the franchisee and did not allow for the most appropriate products for a market to be used • Another IPH franchise suddenly and unexpectedly closed because it was not doing well • Porto Alegre franchise was not large enough to bargain effectively with suppliers so profit margins began to fall.

10. Case Problem Area The Rio Grande do Sul franchise of International Pizza House needs to determine how to restore its image and profitability. Marketing strategies should be improved so as not to offend Brazilians.

11. Alternative 1 • Find a way to overcome the negative image so that the franchise can be sold. Make a more consistent marketing strategy that doesn’t offend the locals. Once sold, go back to construction. Positives: • Would improve the image of this franchise territory and possibly the surrounding ones • There is still possibility of a small profit for the Stern Group • A more subtle approach to marketing with less comparative advertising would make the franchise more attractive to Brazilians Negatives: • It might not work and they’ll just lose more money. It’s risky. • Marketing is expensive • Could be missing out on future financial gain if there is a better way to turn the franchise around

12. Alternative 2 • Incorporate more of the culture into the franchise. Begin a breakfast line by incorporating a French bread pizza/cheesebread. Get French bread from a local bakery through some kind of agreement. Expand menu to add pastas or some other food item that Brazilians enjoy. Also, focus on selling the thin crust Italian style pizza, with limited pan pizza selections. Negatives: Might not work, could be too big of a change. Risky. Franchise agreement might not allow this Competitors might copy this and be able to do it cheaper Positives: • Increases customer base • Increases profits • Increases their competitive edge, most other pizzerias probably don’t have breakfast • Brazilians would appreciate the company more for trying to incorporate their culture rather than trying to force US culture on them

13. Alternative 3 Begin serving pizza rodizio style in addition to regular menu. Focus on selling the thin crust Italian style pizza, with limited pan pizza selections. Negatives: Might not increase anything because there is so much competition already doing this Positives: • Caters more to Brazilian customers • Increases customer base • Increases profitability/profit margins. Most all you can eats charge you for more than most people can eat. • Increases competitive edge

14. Recommendation and Implementation • We would recommend the third alternative. It has the most potential and is the easiest to implement. There are more positives and fewer negatives than the other alternatives. • The target market is still Brazilians in social groups A and B, but is now expanding to include other social classes as well. • The positioning of the franchise is good • The price of rodizio should be reasonable, but still high enough to make a profit. • Promotion should be positive and should not involve putting down competitors.