6/20/2014 Levendary Cafe Case Study Commerce Essay

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Levendary Cafe Case Study Commerce Essay
Levendary Caf is a well-known, publicly traded, brand in the US and currently expanding into China. They began
as a small soup, salad, and sandwich restaurant that grew into a $10 billion business. Their fundamentals are
strong and performance is in line with managements forecasts yet their stock is trading at a discount. This is due to
their domestic growth slowing and the new CEOs lack of previous international management experience makes Wall
Street skeptical that she cant make this a multi-national brand.
The Multi-Unit Restaurant Business represents 30% of the foodservice industry which is a $600 billion industry with
960,000 locations. They are categorized into three industry segments: Specialty Establishments, Quick Service
Restaurants and Casual Dining. Levendary Caf is a hybrid of the last two called Quick Casual which has an
average check in the $8 to $12 range. They are distinguished by two elements: wholesome foods using high quality
ingredients and a commitment to service in a comfortable, friendly atmosphere. They were also distinguished by
their willingness to take risks which was a trait of the original founder. The same trait the President of Levendary
China possesses.
They recently entered into the fast growing China market and instead of keeping the US concepts intact they
changed the store design and menu selections in 23 new stores located in different cities in China. When the new
CEO came on board she started to look into the China operations. At this point the China operations have already
been set in place and have been running successfully now for eighteen months.
She reported her findings to the US team and now they are all furious at these changes they are insisting things
should remain as is in the US. The president of Levendary China tries to explain that if you dont adapt to the
environment in where you are trying to conduct business you will fail. He spent one and a half years opening these
23 locations in China and is about to turn a profit and now the US team wants to change things. They were afraid if
any of the US customers travelled to China and saw the changes it would ruin everything they worked so hard to
build in the US. They spent years carefully nurturing their concepts and image and keeping it consistent throughout
the United States nationally was now at jeopardy.
The new CEO compared companies that also expanded in other countries taking this approach by radically
changing their entire menu yet keeping their stores look and feel. But she also compared what McDonalds has
done worldwide keeping their stores standardized for the most part and just altering the menu slightly. She felt
neither of these approaches was appropriate for Levendary Caf and that they should keep things consistent
across borders.
Case Questions:
Q1 What is a Multi-unit Restaurant (MuR) Business? How big is it? Is it a consolidated or fragmented industry? What
are its economics?
A1: A multi-unit Restaurant Business is the concept of owning more than one unit of a franchise and/or being the
franchise owner owning more than one unit or store. In other words, running more than one unit of the same
business is considered a MuR.
Usually independent operators represent 70% of the industry while the multi-unit operators are the balance which
makes this a small percentage by units.
The food and beverage industry is fragmented, which means no one vendor or top vendors have significant market
share, which the multi-unit Restaurant Business falls under making it fragmented as well.
Chinas GDP growth of 14.5% over the last 10 years and the population of 1.4 billion people were ideal for investing
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6/20/2014 Levendary Cafe Case Study Commerce Essay
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in this country along with Chinas urban population rising from 36.2% to 46.6% in 9 years and a strong middle class
emerged whose per capita income went from $1,008 to $2,758.
Labor cost was a large cost element even though they have a small and static market for managers. Many senior
and middle managers arent fluent in English making it difficult with high turnover in the industry.
Q2 Identify MuR critical success factors in the US and then discuss potential institutional voids in China.
A2: The concept of healthful, wholesome eating was part of the companys culture and reflected in their well-known
advertising slogan Tasty Fresh Goodness. Marketing worked with outside advertising agencies to convey this
concept through advertising copy and images. This image portrayed throughout all 3,500 companies and franchised
stores and remained consistent. The food was of quality and always consistent. The operations had strict
standards, policies and practices that allowed for tight control of day to day operations and store level expenses
and operations. They also had an internal school called Operating Tools and Learning which set operating
standards to help employees learning. These operating standards were enforced in their franchised stores along
with their company stores.
There is a list of institutional voids that need to be addressed and they include: Political and social systems,
openness, product markets, labor markets and capital markets.
Institutional voids in China can keep a company from doing business in this location if its not willing to tackle these
institutional voids. It can also offer opportunities if the company is willing to adapt to the voids. The company needs
to modify its business model for this specific location and adapt to the voids in order to be successful. This is what
Levendary Caf did in the different locations in China. For instance, some locations required some drastic changes
like having a takeaway counter with no seating or changing the menu by removing everything but one sandwich item
and adding a variety of local dumplings. In another location they changed the furniture entirely by using a local
furniture supplier to supply them with plastic framed chairs which was an alternative to their classic wooden framed
upholstered chairs. Some of the locations were able to keep the same design and menu selection as the United
States but not the majority.
Locations were not an issue since the President of Levendary Caf in China had a network of connections already
in place to help him with speeding up the processes of permitting, incorporating and staffing the stores.
Q3 Why did Levendary decide to enter China Market? How did its US foundation match against China market
needs? (compare US vs China market in terms of customers and operations)
A3: The decision to enter the China Market was because of the slowing growth of the domestic market here in the
US. Chinas GDP growth in 2011 was 9.3% and in the US it was 1.7%, this exceeds the USs GDP by 7.6% therefore
allowing for expansion into the China Market was good timing. China Markets needs were different than the
foundation Levendary Caf had in the US. In the US they kept everything uniform throughout all their stores but in
China that would not work, they needed to adapt. From other companies experience as in KFC who was the most
successful fast food chain they learned to adapt with help from their Chinese joint venture partners and local
management.
Another reason they decided to enter the China Market was because the competitive quick service sector was
growing the fastest at this time. It went from RMB 1.106 trillion to RMB 1.996 trillion in five years. This all attributed
from more women in the workforce, an affluent middle class and a growing lifestyle trend to eat out more.
Levendary Cafs culture was all about the customer. The original founder drilled the concept of delighting the
customer into the staff. He believed if you accommodate the customer they will come back. This was a hit with the
white collar professionals and upper middle class women who returned five or six times a week. Operations in the US
were speed of service and order accuracy which was standardized and when orders were personalized to
accommodate the customer this threatened both, yet personalization was part of the reason they were profitable.
(See Exhibit 1.)
This need of personalizing they had in the US was similar to the needs they have in China. They had to adapt to
what the customers wanted in order to succeed as they are in the US. For example, the Chinese eat few dairy
products so they had a need to downplay their cheese soup and they were not familiar with turkey so they
substituted chicken. This type of need justifies the changes they made to their menus in various locations and also
to the appearance of the stores. It was all to accommodate the customers in China.
Q4 What are the key issues facing Mia Foster and what would you recommend her to address these issues?
A4: Mia is facing a few different issues. One being the reporting process from China back to the US. This issue
needs to be addressed to avoid the risks it possesses for not applying US Generally Accepted Accounting Principles
(GAAP) in place. Chinas accounting standards are not as strict as the United States and being the Levendary Caf
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is mostly US based this is a very important rule to adhere to. She needs to standardize the reporting process to
match that of the US before they increase the amount of stores in China and grows into a larger portion of total
revenue. They needed to be compliant with the local tax laws in China or could face being shut down. In order to put
the correct systems in place to transfer the financial records to the format of the US this would be a costly expense.
Another issue she faces is the adaptation China requires for a business from the states needs to take into
consideration before it can become successful in their market. The president of the china market did just that,
adapted and made the necessary changes required to become successful but Mia doesnt see that just yet. She is
focused on keeping the operations standard and consistent as in the US. This unfortunately will not work in China.
Conclusion:
There seemed to be a conflict between the original founder and the operating standards which are currently in
place. The founder believed in personalizing orders to make the customer want to come back for more. This
personalization approach taxed their store-level operations but the founder would simply point out the companys
impressive results yet the standards never changed. The president of Levendary China also operated like the
original founder. He took it upon himself to make the changes needed in order to adapt to the country he was in.
The new CEO came on board in 2011 with no international experience and immediately wanted to change things in
China without first researching how international business is successful.
The China operations had no strategy in place. Incorporating a strategy is the first thing I would do. They can use
what is called the balance scorecard, which is a strategic planning and management system used to align their
business activities to the vision and strategy of the organization, improve internal and external communications, and
monitor organization performance against strategic goals. It is done by measuring the company in four different
dimensions. Financial Dimensions are strong and in line in the US and shortly becoming profitable in China.
Customer Dimensions are already in place, customer satisfaction and loyalty can be seen in the financial
statements. They did a great job building their customer base. Internal Processes Dimension in the US they have
down to a science and if they supported the China operations things would quickly improve. Learning and Growth
Dimension is also already in place in the US with their internal school called Operating Tools and Learning. They
can also expand this into China especially since the turnover rate is higher there.
If the new CEO decides she wants to definitely keep operations consistent globally then I believe they will never
succeed out of this country and therefore should not invest in expanding into China and concentrate on growing
their business here in the United States. If she decides they are willing to change their standard operations and
adapt to the cultures in China then they should continue with the expansion and hopefully with the proper controls
and strategies in place they will become and stay profitable in the future.
Work cited:
http://globaledge.msu.edu/
Strategies That Fit Emerging Markets by Tarun Khanna, Krishna G. Palepu, and Jayant Sinha
Local Institutions and Global Strategy by Tarun Khanna
Levendary Caf: The China Challenge by Christopher A Bartlett and Arar Han
Exhibit 1. Levendary Income Statement (2010)
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