Lessons From a $1.20 Pizza

1. Lessons From a $1.20 Pizza Case exploration and analysis on Presented by Trevor Zink March 26, 2008 MBAG/H 646 Dr. Anatoly Zhuplev

2. The Overview • Brief case review • Chinese lifestyles and trends • Tradition, change, implications • Company overview • Company, founder • Industry overview • Competition, analysis models • The future • Prospects, recommendations

3. The Case • Anthony Le Corre • Started and closed two pizzerias before opening… • Hello Pizza • Cheap, consistent pizza • Started with $500,000 in seed capital • Three restaurants, three delivery centers, others • Surprise: Successful

4. The People Changing Traditions Implications for Business

5. The Preferences • Preference is for Asian tastes, flavors • Western food attractive, but not daily meal • Eating out is common • At least 1 meal per day average • Majority of sales are eat-in (not take-out) • “Chunr” (Street food) is popular • Convenient, cheap, fresh, tasty • Fast-casual not popular • Price/convenience first considerations • Difficult to break in to market Source: Euromonitor Consumer Lifestyle Report 2008; Newman, Jacqueline

6. The Changing Culture • High motivation to eat healthy, organic, local • Traditional foods, such as rice, seen as healthier • Health regulations growing stricter • Relative growth in restaurant food/drink spending is low • Cooking is traditional, still common • 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

7. The Changing Culture (Cont.) • Increasing disposable income • Spend more on entertainment/shopping • Growing urban population • Concerns of work, career, time management • Trend towards prepackaged and frozen food • Singles, working professionals • Refrigeration is common • Increasingly, “convenience is king” • With growing young working class, price is major consideration • Link Source: Euromonitor Lifestyle Report 2008; Newman, Jacqueline

8. The Meaning of It All • Balance of tradition and change • New businesses • 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

9. Hello Pizza The Man, the Mission

10. The Entrepreneur • Anthony Le Corre • Finished French “military service” • Accountant for Swiss water company • Motivated by necessity • Set up pizza parlor in Kunming • Was distracted, sold business • Set up another in Chongqing • 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

11. Michelangelo, The Creation of the 10 Yuan Pizza Michelangelo’s alternate title: Adam is disciplined for trying to steal God’s piece of Pizza

12. The Business Model • Competitive Strategy • Aggressively cost-based • 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 • Offer limited, rotating choices • “People will get sick of old products” • Economies of scale • Model viable for large number of restaurants

13. The Marketing Mix • Price • Cost-leader, minimum price • Product • The “Model T” of pizza • Limited choices, precise ingredients • “Really not bad at all considering how cheap it is” • Distribution • Restaurants, delivery centers • Online orders, phone orders • Promotion • Online coupons • Room for improvement

14. Hello Pizza, Welcome to Today • 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) • Growth • 8 restaurants in 5 cities Source: Hello Pizza Website

15. The Industry Fast Times in Fast Food China

16. The Industry: Overview • Highly saturated market • Over 1 million outlets, 6% growth in 2007 • 元340 billion in 2007 (~$49.79 billion) • 9% growth in 2007 • 12% growth per annum since 2002 • Dominated by multinational chains • Yum! Restaurants China – 41% • KFC, East Dawning, Pizza Hut • McDonald’s – 21% • Ting Hsin Intl Group – 9.5% Source: Euromonitor Industry Report 2008

17. The Trends • Slower growth expected • Increasing cost of ingredients • Many Chinese consumers are quite price sensitive • Western style operations • Chains moving to lower-tiered cities • 24-hour stores gaining foothold • Started by McDonald’s, picked up by others • Food safety, health are main concerns Source: Euromonitor Industry Report 2008

18. The Competition • Yum, McDonald’s, Ting Hsin • Pizza Hut • 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) • Other Premium and “Authentic” Pizza Parlors Source: Euromonitor Industry Report 2008; Yum! Website; Dominoes Websitec

19. Hello Pizza vs THE WORLD

20. The Good, the Bad… • Opportunities • Huge market potential still exists • Growth, expansion, new product lines • Leverage combination of local tastes and western business model • Risks • New entrants • Rising cost of ingredients • Increasingly health-conscious market

21. Source: Euromonitor Industry Report 2008; Zhang, Guibin; Euromonitor Lifestyle Report 2008;

22. The Future The Prospects The Pitfalls The Magic 8-Ball says…

23. “The Signs Point to Yes” • 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

24. The Advice • Promotion, promotion, promotion • Make name known both to convenience seekers… • Many choices, low-involvement decision • Bombard with image, identity • …And subculture • Backwards integrate • Reduce supplier bargaining power • Expand • Economies of scale are key • Develop business system “package” • Franchising • Training • Expanding

25. Selected Bibliography • 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 Sitehttp://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 • Jesuit Connection Librarian Assistance • Dr. Anatoly Zhuplev