HARVARD I eustNESs I SC H OOL REV : FEBRUARY 26, 2013
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Christopher A. Bartlett and Arar Han
CASE 7.1 LEVENDARY CAFE: THE CHINA CHALLENGE
HBS Professor Christopher A. Bartlett and writer Arar Han prepared this case solely as a basis for class discussion and not as an
endorsement, a source of primary data, or an illustration of effective or ineffective management. This case, though based on real
events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are some references to actual
companies in the narration.
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Levendary Cafe was spun out from private equity
ownership in January 2011, and the following
month, Mia Foster was named as its new CEO. The
departing CEO, Howard Leventhal, was the beloved
founder ofthe popular chain of 3,500 cafes. He had
grown a small Denver soup, salad, and sandwich
restaurant into a $10 billion business, but after
32 years was moving on to new interests.
This was Foster’s first job as CEO. Previously,
the 47-year-old had been president of the U.S.
business of a large American fast food company
for seven years. She had started her career at a
major global accounting firm, leaving to earn an
MBA from Wharton. Upon graduation, she had
become a consultant at McKinsey before taking a
job in product management at PEtG, where she
worked her way up the ranks. Foster was known
for her frank communication style and strong
execution.
In spite of the promise held by the Levendary
brand and Foster’s strong track record, Wall Street
was cautious about the stock. While the company’s
fundamentals were strong and its performance
generally in line with management forecasts, its
shares traded at a discount to comparable restaurant stocks. There were two reasons for this. First,
analysts were concerned that Levendary’s domestic business was nearly tapped out. Second, given
Foster’s lack of previous international management experience, they were skeptical of her ability
to build a multi-national brand.
Foster felt challenged by Wall Street’s skepticism and wanted to address it head-on. In particular, she knew that Levendary’s recent entry
into the fast-growing China market would be
closely watched. So she was concerned by reports
that recently opened China locations incorporated some dramatic departures from Levendary’s
Building New Management Capabilities
U.S. concept, particularly in store design and
menu selection. She was also frustrated by the
apparent unwillingness of Louis Chen,
Leventhal’s hand-picked president of Levendary
China, to conform to the company’s planning
and reporting processes. To address these concerns, Foster decided she needed to visit the Chinese operations.
On May 25, 2011, Foster stepped out of the
limo that Chen had arranged to pick her up at the
Shanghai Pudong airport. Heading in to her first
in-person meeting with Chen, she knew there
were big decisions to be made. Indeed, they
would determine the future of Levendary China.
The Multi-Unit Restaurant Business
In 2010, the U.S. restaurant and contract foodservice industry was a $600 billion industry with
960,000 locations. 1 Multi-unit restaurant concepts represented approximately 300/o of the
industry by units, with independent operators as
the balance. The restaurant and foodservice
industry was highly fragmented, and even industry giant McDonald’s generated just 20/o of total
revenues.
Multi-unit concepts were generally categorized
into three industry segments:
• Specialty Establishments like Starbucks, Dunkin’ Donuts, and Baskin-Robbins primarily
served snacks and beverages under $5.
• Quick Service Restaurants, or so-called “fast
food” concepts like McDonald’s, Taco Bell, and
Wendy’s, provided counter or drive-through
service with average tickets between $4 and
$10.
• Casual Dining included brands like Olive
Garden, Applebee’s, and Outback, and offered
table service for dinner entrees priced between
$8 and $20. Within this group, fme dining
concepts like Ruth’s Chris and Capital Grille
featured entrees into the $40 range.
While some concepts had bridged these categories for years (e.g., Friendly’s offered casual
1 “Freedonia Focus on Restaurants,” Freedonia Group.
February 20 11.
dining coupled with a strong takeaway ice cream
business), more recently several concepts had
clustered around an emerging category often
called “Quick Casual.” For example, Panda
Express was a quick service format of Chinese
casual dining, while Chipotle offered a quick
casual Mexican-American dining experience.
Like other quick casual restaurants, Levendary
promised more wholesome choices than its quick
service cousins and a more informal self-serve
dining experience than its casual dining relatives.
Quick casual restaurants typically had average
checks in the $8 to $12 range.
Restaurant Cost Structure
Restaurants had relatively simple cost structures
which one industry expert defmed as follows: 2
• Occupancy: These costs included real estate
rental, common area maintenance, and energy
and waste disposal. In the United States, they
hovered around 100/o of revenues.
• Labor: Even at minimum wage, labor was typically the largest cost element. High turnover in
the industry required restaurant companies to
continually source and train new employees
and to manage employee attrition. Labor typically represented 250/o to 350/o of total revenues.
• Food: Food costs accounted for 280/o to 320/o.
This expense was influenced by not only the
cost of the ingredients purchased, but also the
amount of waste.
• Supply: About 10/o to 40/o of revenues typically
went to paper products at quick service restaurants or to linen and uniform deaning at
higher-end casual dining restaurants.
In a best case scenario, a restaurant might
make up to 350/o gross margin, but 200/o to 250/o
was more typical. Franchised restaurants also
paid a royalty, adding a 30/o to 60/o cost line, and
a marketing fee which added a further 20/o to I00/o
in costs. Depending on the size of the franchise
organization, overhead might account for
another 50/o to 150/o of cost.
2 http://www.bakertilly.com/userf1les/BT_Retail_
RestaurantBenchmarks_web_small.pdf.
Case 7.1 Levendary Cafe: The China Challenge 427
Exhibit 1 Levendary Organizational Chart
Mia Foster
CEO
EVP, Administration
Peter Steele Lucien Leclerc
VP, Business Dev.
Nick White
Chief Franchise Officer Chief Concept Officer Chief Operating Officer
I
VP, Fin/Acctg SVP, Marketing
VP, Legal Director, Creative
VP, Real Estate Director, Distribution
VP, IS Director, Online
VP, Purchasing
Restaurants typically operated on razor-thin
margins, with profitability a direct function of
their ability to generate high traffic, execute
consistently, and control costs. Traffic, in turn,
was a function of the brand’s appeal, marketing
effectiveness, real estate location, and store
experience.
Levendary Cafe: The Foundations
In the quick casual restaurant segment, Levendary Cafe was distinguished by two elements:
wholesome soups, salads, and sandwiches using
high-quality ingredients, and a commitment to
service in a comfortable, friendly environment.
Its corporate chefs were highly trained artisans
from the Culinary Institute of America and
other top cooking schools who took pride in
creating everyday versions of gourmet fare.
Customers raved, “Eating at Levendary makes
me feel rich.”
Levendary was also distinguished by its
willingness to take risks, especially those that
helped evolve its concept over time. It was an
SVP, Food
Regional VPs,
US Market
Louis Chen
VP, China
Director, Ops, Tools &
Learning
Director, Catering
entrepreneurial characteristic traced to founder
Howard Leventhal. The most recent risky change
occurred five years before Foster became CEO,
when the company decided to use only organic
grains in its breads and hormone-free naturally
raised meats in its sandwiches. To management’s
delight, customers willingly paid the premium
price, resulting in increased revenues and
margins and a simultaneous boost in customer
trust in the brand.
The Organizational Foundation: Blending
Concepts and Operations
A complex organization supported Levendary’s
primarily U.S. business. The Denver headquarters
housed the following activities (see Exhibit 1 for
a basic organizational chart):
• Concept: For 23 years, Howard Leventhal had
relied on Chief Concept Officer (CCO) Lucian
Leclerc to keep Levendary a top U.S. restaurant
concept. Leclerc managed both the food development group and the marketing team that
together determined what Levendary
Building New Management Capabilities
represented to the customer. With Leclerc’s
uncanny ability to sense nascent food trends
and Leventhal’s willingness to take calculated
risks, the pair had kept the company at the
forefront of changing tastes. Their shared commitment to healthful, wholesome eating was
embedded in the company’s culture and
reflected in its well-known advertising slogan
“Tasty Fresh Goodness” or TFG as insiders
referred to it.
• Marketing: The Marketing group reported to
the CCO. Its creative team worked with outside
advertising agencies to convey the TFG concept through advertising copy and images. The
logo, store decor, and media images used a
palette of earth tones to communicate natural,
wholesome goodness. The distribution team
ensured that banners, table tents, window
decals, and menu boards were properly placed
in all 3,500 company and franchised stores,
appropriately modified for differences in store
size and layout. Preparing menus and menu
boards was complicated by variations in menu
items to respond to local market preferences
and by pricing differences to meet local competition. But the comfortable, welcoming, and
homey “look and feel” of stores always
remained consistent.
• Food: A fully scaled test kitchen and food
science laboratory also reported to the CCO,
taking the items developed by the CCO’s
executive chefs and making the adaptations
necessary to supply their components with
quality and consistency to each of Levendary’
3,500 cafes. The food team was also responsible for conducting quality checks in the field.
• Operations: Led by Chief Operating Officer
(COO) Nick White, who had 30 years of operating experience in U.S. franchised restaurant
companies, this group managed the day-today restaurant business. Store managers at
the 1,200 company-owned cafes reported to
district managers, who in turn reported in to
area directors, then market vice presidents.
This structure allowed tight control of store
level expenses and close monitoring of operations against the company’s detailed and
strict operating standards, policies, and
practices. It also relayed any recommendations
for modifications to the menu or variations in
the store “look and feel” to the Concept group
for consideration and approval.
Operations was also responsible for Operating Tools and Learning (OIL). As retail
employees were often high school-aged or
minimally educated, OIL set operating standards and provided materials to enhance
employees’ learning. Acting as a bridge
between the Concept team and the stores,
OIL also developed the training materials and
processes to break down food preparation into
steps that ensured quality local delivery of the
chefs’ gourmet creations. In general, OIL functioned as both an internal school and a standards enforcer.
• Franchise: About two-thirds of Levendary’s
3,500 stores were franchised. Headed by Chief
Franchise Officer Peter Steele, the franchise
team recruited new franchisees, supported
existing franchisees, and enforced brand and
operating standards in franchised stores.
• Business Development: Staffed by former
strategy consultants, this department sourced
new revenue opportunities such as Levendary
branded grocery items like coffee, cold cuts,
and soups. This group also led research for
the company’s nascent international expansion and was responsible for an experimental
licensing deal in Dubai. Launched in 2009,
this opportunistic venture was run by a Saudi
Arabian restaurant company owned by an
old friend of Leventhal’s. Aside from China,
Dubai was Levendary’s only international
operation.
• Administrative Staff Groups: Real estate,
fmance and accounting, legal, purchasing, and
information systems all reported to an Executive Vice President (EVP) of Administration.
Headquarters staff totaled approximately 300 in
all. There was no separate international division.
The Strategic Base: Serving the U.S. Market
Levendary was built on a culture that emphasized
“delighting the customer.” As founder, Howard
Leventhal was fond of telling store staff, “Forget
Case 7.1 Levendary Cafe: The China Challenge 429
Exhibit 2
Levendary Income Statement 2010 (dollars in 000s)
Revenues
Sales
Royalties
Ingredient & paper good sales to franchisees
Total
Costs and Expenses
Food & Paper
Labor
Occupancy
Total
Food and paper good inventory
Depreciation and amortization
G&A
Marketing
Pre-opening expenses
Total costs and expenses
Operating profit
Interest expense
Other expense
Income before tax
Income tax
Net income
today’s profit. Have a positive impact on customers’ lives. Make them want to come back. That’s
how we’ll win in the long run.” Day-to-day, this
philosophy translated into a personalized
approach that would accommodate customer
requests such as removing sprouts from a sandwich or serving a soup extra hot. Such service
appealed to Levendary’s customer base of whitecollar professionals and upper-middle-class
women. “Heavy user” customers in these groups
visited Levendary five or six times a week.
But this approach taxed Levendary’s store-level
operations. The two key store operating metrics of
speed of service and order accuracy were driven by
standardization, and personalization threatened
both. In response to store operators who questioned
his relentless drive to provide personal service,
Year Ending
December 31, 2010
9,248,134
603,365
945,924
10,797,423
2,623,712
2,933,980
706,790
6,264,482
776,902
480,711
710,458
1,239,413
29,974
3,237,458
1,295,483
4,725
29,624
1,261,134
480,571
780,563
Leventhal would simply point to the company’s
impressive results. (See Exhibit 2.)
Leventhal’s philosophy ofdelighting the customer
also translated into local menu adaptions. With
stores in urban, suburban, and rural environments
across all 50 states, Levendary believed there was no
such thing as “the American consumer.” While
McDonald’s created one menu for its entire system,
Levendary was more flexible. It offered fewer soup
items and more drink options in the South, allowed
one or two regional specialties to be added to its core
menu, and listed its menu items in order of local
popularity. While appreciated by customers, the
menu variations represented a challenge for the
Food, Operations, and Marketing teams.
To keep the brand fresh in the eyes of the
customer, the company was also committed to
430 Building New Management Capabilities
evolving menu choices, typically by featuring intrend healthy ingredients like pomegranates or
quinoa. The Concept team rolled out a suite of
new products five times a year, often with minor
variants adapted to the South’s appetite for fattier, sweeter formulations, or the Northeast’s love
of turkey and cheddar cheese. Each new release
was accompanied by a marketing program and
new menu boards.
In truth, the new items boosted the company’s
image more than its sales. Systemwide sales were
driven by a small number of core items. For 800/o
of locations, those included such Levendary classics as its turkey and avocado sandwich with
cranberry dressing, its award-winning cheese
soup, and its chicken Caesar salad. For the other
200/o of outlets, the core sales drivers could be as
diverse as espresso beverages, Howard’s Famous
Cookies, or a local seasonal special.
Expanding Abroad: China Dreams
In 2008, the company’s domestic growth was
slowing. Its geographic expansion strategy Qokingly referred to within the company as “follow the
mommies,” later adapted to “follow the yuppies”)
had plateaued. Recognizing that its concept did
not translate well into small towns, particularly
in the Midwest and South, the board of directors
began discussions about overseas expansion. At
the board’s urging, management instructed its
strategy team to research opportunities in China,
a market that had attracted a great deal of attention among U.S. restaurant companies.
Opportunities in China
With a population of 1.4 billion people and
annual GDP growth of 14.50/o over the past
decade, China was ripe for investment. Two additional trends attracted U.S. restaurants: China’s
urban population rose from 36.20/o of the total in
2000 to 46.60/o in 2009, and a strong middle class
emerged whose per capita income surged from
RMB 6,282 to RMB 17,175. (In 2010, RMB 1 =
USD 0.15.)
An affluent middle class, a large increase of
women in the workforce, and a growing lifestyle
trend to eat out all supported growth in the Chinese food services industry, which increased from
RMB 1.106 trillion in 2004 to RMB 1.996 trillion
five years later. Independent full-service restaurants still dominated the industry (there were
2,723,000 nationally), but the highly competitive
quick service sector was growing the fastest, from
RMB 254 billion in 2004 to RMB 471 billion
in 2009.
While foreign fast food companies attracted the
most attention, restaurants serving Asian food,
primarily Chinese, took the biggest share of the
quick service segment. These mostly independent
restaurants appealed to locals’ preference for ricebased dishes and low prices. However, due to low
margins, wide variation in regional food tastes,
and most of all, the difficulty independents had
experienced in standardizing operations, there
were few successful local chains.
The most successful foreign fast food chain
was KFC, which had more than 3,000 restaurants
in 450 Chinese cities. In 2010 KFC opened on
average one new store every day. Through its
Chinese joint venture partners and local management, it had learned to adapt. It added a few
items such as congee rice porridge and even
altered the famous seasoning on its core fried
chicken offering.
McDonald’s entered China in 1992, five years
after KFC, and by 20 JO operated 1,100 restaurants in 110 cities. Its restaurants retained a consistent worldwide look and feel, and a menu
featuring its Big Mac, McNuggets, and french
fries. While its core menu was the same, localized
specials such as the China Mac with black pepper
sauce, pork burgers, and red bean ice cream had
been added. Despite the fact that a plate of six
pork buns cost 25 cents at a Chinese street stall,
McDonald still charged $2.50 for its large fries,
appealing to Chinese youth’s willingness to
indulge in foreign fare.
Pizza Hut’s China strategy was notable for its
departure from its U.S. original. Its 560 outlets
were positioned as high-end casual dining restaurants, and its menu extended well beyond
pizza to include scallop croquettes and escargot.
Wine was served, reservations were accepted, and
a 45-minute wait for a table was not uncommon.

Case 7.1 Levendary Cafe: The China Challenge	431 ~– – – —
Young affluent Chinese went to Pizza Hut to market position as a base for franchising outlets
impress their dates.	throughout China, but apart from a requirement
Despite these successes, many other American to “do right by the concept,” gave him broad
restaurants had struggled in China. When Apple latitude to execute.
bee’s replanted itself in Shanghai, the concept fizzled. So too did California Pizza Kitchen, for	To prepare for his assignment, Chen became a rotational intern in each of the major depart

cing the founders to personally intervene to	ments in Levendary’s Denver headquarters as
relaunch the effort. Many attributed Pretzel Time’s failure in China to its white tile decor that well as in a handful of stores. Over six weeks, his mandate was to pick up as much as he could
reminded people of a bathroom.	and replicate it in China. The Denver team invited
More recently, Chinese chains had begun to him to tap into their resources and expertise,
learn from foreign competition and began to	interpreting and adapting them for use in the
focus on standardization and tight control of local Chinese stores. Before his departure for
raw materials, food preparation, and in-store ser	China, the board asked Chen about his plans. He

vice. After overtaking McDonald’s as Hong
Kong’s leading chain, Dar Jia Le (“Big Happy
House”) took its tightly controlled operations to
China. Other successful Asian chains in China
included U.S.-listed Country Style Cooking
(2009 Chinese sales of $495 million) serving
Sichuan food, Hong Kong-based Little Sheep
($235 million} featuring Mongolian hot pot, and
Japan’s Ajisen ($256 million) ramen shops.

Leaping into China

with turkey, but they love chicken, so we’ll adapt the menu, just as we do in the States. It

After reviewing the research, Levendary’s board
and top management decided to enter China. The
decision was hastened by the appearance of Louis
Chen as a viable candidate to lead the effort.

Chen heard about Levendary’s interest in China	In spite of the monumental work ahead, the
through a Stanford MBA classmate who had become a partner at the private equity firm that board was convinced that Chen was the right choice. The 34-year-old was bilingual in English
had owned the company prior to its 20 I 1 IPO. Chen gradually earned the confidence of CEO Leventhal and other key stakeholders. In time,	and Mandarin Chinese, and his decade-long experience as a retail property developer gave him intimate familiarity with neighborhoods in
Leventhal dropped his original idea of a joint Shanghai and Beijing-a valuable asset given the
venture with an established Chinese operator, and entrusted Levendary China to Chen, whose	powerful impact of store location on profitability. Chen also had a network of contacts to help speed
energy and entrepreneurial spirit reminded him up the process of permitting, incorporating, and
of an earlier version of himself.	staffmg stores. Finally, he was passionate about
Chen’s formal contract provided a two-year good food, and had long wanted to work in the
term starting in September 2009 with an option for annual renewal, but his relationship with the company was best described as a handshake	restaurant industry. Chen opened his first location in the expatriate-heavy Pudong region of Shanghai in

agreement. While Chen formally reported to
Leventhal, the CEO managed him with a very
light touch. He asked Chen to establish a strong
was confident:
It won’t be easy but others have succeeded
and we can too. I believe we have a good
chance of building a credible foundation of
stores and breaking even within a year. We
just have to be flexible. For example, Chinese
eat few dairy products, so we should downplay our cheese soup. But a new generation
now gives milk to its children, so tastes are
evolving. And most people aren’t familiar
may take time, but I believe Levendary will
connect with Chinese youth, and that’s the
future.
January 2010, just three months after returning
to China in his new role. Occupying the comer
ground floor location of a new high-rise office
Building New Management Capabilities
building, the first restaurant was both prominent
and luxurious. It was an instant hit among whitecollar employees of the global financial firms
housed above it. Taking a page from Pizza Hut’s
China playbook, Chen positioned the new location as casual dining with table service and
higher prices than local fast food concepts. But
with the real estate markets in Beijing and
Shanghai heating up, and KFC and McDonald’s
snapping up sites, Chen wanted to move fast. His
local knowledge and connections helped him
lock in prime locations at good prices, and within
a year, his initial location had grown into a chain
of 23 restaurants.
Expansion in China: Key Decisions
During her interview process, Foster heard much
about the great hopes for Levendary China. However, she had not had the opportunity to meet
Chen or to closely examine the China business.
When she became CEO in February 2011, the new
CEO was surprised to fmd that the Chinese subsidiary submitted all management and fmancial
reports to Denver in its own format. The frnance
group then “massaged” them to apply U.S. Generally Accepted Accounting Principles (GAAP)
and adapt them to Levendary’s internal monthly
reporting format. Foster felt strongly that this
would not be a sustainable practice as the China
operations grew into a larger portion of total
revenue.
The First Meeting: Raising the Questions
In considering her options for bringing the China
reporting in line with the U.S., Foster favored
hiring an international fmancial analyst for the
Denver frnance team, and thought Levendary’s
auditor should also manage the China audit. Both
steps were expensive but seemed necessary for a
publicly traded company that intended to stake
its future on growth in the China market. During
a video conference that Foster set up to meet
Chen in her first week at Levendary, she shared
these thoughts with him. He bristled at her suggestions, claiming that both changes would not
only incur unnecessary costs but would also
greatly inconvenience his local operations.
Chen’s resistance struck Foster as either naYve
or antagonistic, and she responded firmly:
“You’re going to have to make a change, Louis.
We have to protect the integrity of our reporting
structure.” “Fine,” Chen shot back. “But to operate here, we have to be compliant with local tax
laws or we’ll get shut down. If you need those
changes, you’re going to have to spend the
money to set it up right.” Saying she would
follow up, Foster left the virtual meeting with a
nagging feeling that developing a productive
relationship with Chen was not going to be easy.
The next day, Foster added the China operations as an agenda item in the weekly executive
meeting she held with her direct reports in
Denver. The EVP of Administration agreed that
using non-GAAP numbers from China in the
fmancial reports was a risk, and that formalizing
the reporting process was a necessary change. As
the discussion broadened, COO Nick White, the
person to whom Chen had reported since
Leventhal’s departure, spoke up:
I talk to Louis every week or two. I’m floored
by how quickly he got a couple dozen stores
up and running. It’s an amazing achievement.
But the reality is that no senior executive has
visited China since Howard officiated at the
opening ceremony for the Pudong store a year
ago. I’m sure a lot has changed since then, but
I haven’t been able to get Louis to give me
much. Howard gave Louis a lot of freedom to
establish the Chinese operations, and frankly,
it shows. Louis is a great asset but I confess
managing him bas been a frustrating exercise.
By the end of the meeting, the executive team
had agreed it was time to obtain more information about the China operations. Chief Franchise
Officer Peter Steele agreed to conduct a comprehensive review of the 23 Levendary Cafes in that
market. White said he would advise Chen of
Steele’s plans, emphasizing that this was a routine process regularly undertaken in all franchised and licensed cafes in the U.S. market,
and that Steele had recently completed such a
review in Dubai.
Steele spent 10 days in China, and at a weekly
executive meeting in late March, presented his
Case 7.1 Levendary Cafe: The China Challenge
fmdings. He provided detailed descriptions of the
23 China locations, all in or around Beijing and
Shanghai. Chen had taken many liberties with
the look and feel of the cafes. While the first
location in Pudong largely conformt’d to Levendary’s design standards and menu selection, other
locations held surpnsmg and sometimes
alarming changes. For example, the second location, located in Shanghai’s historic Yu Garden
area, was a takeaway counter with no seating.
The third location, on Beijing’s embassy row, was
similar to the first store in both design and
offering, but the fourth, at the north entrance to
Beijing’s Forbidden City, not only had no salads
on its menu, it replaced Levendary’s classic
wooden framed upholstered chairs with a plastic
framed alternative from a local furniture supplier.
By the opening of the 23 rd location in a Korean
expatriate-heavy suburb of Shanghai, all but one
sandwich item had been removed from the menu,
and replaced by a variety of local dumplings.
Immediately after the meeting, an irate Lucian
Leclerc appeared in Foster’s office. She was not
surprised, given his visible agitation during
Steele’s presentation. “Plastic chairs and dumplings! This is a pure disaster,” he exploded.
“What’s going on in China could destroy everything I’ve worked for over the past 23 years. Our
customers travel a lot, and in one visit to just one
of those places, our carefully nurtured concept
and image will be ruined. Mia, you need to stop
Louis now.”
After letting him vent, Foster reassured Leclerc
that she would give the issue her full attention.
She turned to examine a chart comparing several
Levendary locations in the United States and
China (Exhibit 3). Inwardly, she knew that
resolving this issue would be a big test for her.
Meeting Two: Confronting the Issues
In early April, Foster sent Chen a copy of Steele’s
findings in advance of a second video conference
to which she also invited White. Foster opened
the discussion by explaining that China was critical to Levendary’s growth, so she wanted to be
involved in discussions about its plans. She
explained how concerned she and White had
been about Steele’s report. Chen’s response
sounded angry:
I don’t think you guys appreciate the difficulty
of managing a business in this environment.
We’ve worked like crazy this past year and
half. And in a tough market with minimum
support from Denver, we’ve built a business
that works in China. But now that we’ve
opened 23 locations in just over a year and
are about to turn a profit, you want me to
change everything? Why would you do that?
Levendary as it exists in the U.S. simply will
not work in China. Have you seen Denny’s in
Japan? It’s wildly successful but it serves tonkatsu [a Japanese breaded and fried pork
cutlet] and ramen. They understand that
nobody wants pancakes and BLTs in Tokyo.
People want the food they know but with cool
American branding.
The only places where we can do what
Levendary does in the U.S. are Pudong and
Beijing’s embassy row. Those locations are up
and running using the American model.
Everywhere else, we have to adapt our store
design and menu. Otherwise, we won’t be
profitable. I think our performance speaks for
itself (Exhibit 4).
Having reviewed the research, Foster was
keenly aware of the difficulties of localizing a
chain restaurant concept in a foreign market
and the major tradeoffs entailed. She was aware
that the Japanese company operating Denny’s
Japan had great success by radically changing
its entire menu while keeping the stores’ look
and feel. But she also knew that the McDonald’s
approach was much more standardized worldwide. A McDonald’s in Shanghai varied from
one in New York City only in local marketing
practices and some limited menu deletions and
insertions. Indeed, Foster had been amazed to
learn that McDonald’s had even imported bricks
to new markets it entered in Eastern Europe so
that its restaurants would be as consistent as
possible to its U.S. standards.
These were two opposite approaches, and
Foster was not sure either model was appropriate
Building New Management Capabilities
Exhibit 3
Comparison of Two Levendary U.S. and Two Levendary China Locations
Annualized 2010
sales (USD)
Square footage
Seats
Staff (full-time
equivalent)
Average traffic
(guests per
day)
Average check
Metro
U.S./ NYC
$10,320,000
2,500
84
24
3,210
$15
Suburban
U.S./ Denver
Area
$2,126,000
4,000
120
26
560
$12
Metro Metro-suburb
China/ Beijing China/ Shanghai
Embassy Koreatown
$806,000 $288,000
1,500 500
80 0 (counter only)
20 13
260 430
$10 $2
(USD)
Top 5 menu
items
Turkey sand. Denver Melt sand. Chicken soup Chicken dumpling
Cheese soup Cheese soup Chicken sand. Pork dumpling
Salmon salad Turkey sand. Roast beef sand. Chicken sand.
Chicken sand. Caesar salad BBQ chicken sand. BBQ chicken
Caesar salad Howard’s cookie Thai veggie soup sand. Pu-erh tea
Outdoor seating?
Personalized
service?
Free WiFi?
Yes
Yes Yes
Yes Yes
for Levendary. She had yet to be convinced by
Chen’s assertion that growth in China required
that the stores and menus be as different as they
had become, and responded carefully:
Louis, I think Peter’s report gives us a good
starting point to think about that issue going
forward. You’ve provided us a great platform
for our future growth in China. Now it’s time
for us to think through how we want to do
that. The home office will probably need to
step up and do more to support you. We’ll also
have to ensure the Levendary orand is positioned for growth, and that will require some
consistency across borders. Nick and I will
both commit to working with you to support
your efforts. But we first need to fully understand your strategic plan for growth in China.
Yes
(simplified table
service)
Yes
A more conciliatory-sounding Chen responded:
Mia, you speak from a place of ideas, best
practices, and compliance. But I’m here in
the trenches running 23 restaurants that I’ve
built one by one by reading market needs and
sensing opportunities. I’m proud of Levendary’s presence here. When you send in headquarters analysts and start telling me things
need to change, I don’t think you have a good
sense of what it took to get us to where we are.
You asked me about my strategic plan. Well
I don’t have one. And frankly, if I’d had one,
I don’t think we would have grown so quickly
because we wouldn’t have been as nimble or
responded as flexibly to market needs. I’m
willing to work with you to make some
changes. But understand that I was given free
Case 7.1 Levendary Cafe: The China Challenge 435
Exhibit 4
Levendary China Income Statement (2010)
Sales (US$)
Costs and Expenses
Food & Paper
Labor
Occupancy
Total
Depreciation and amortization
G&A
Marketing
Pre-opening expenses
Total costs and expenses
Operating profit
Interest expense
Other expense
Income before tax
Income tax
Net income
rein for 18 months. If you start putting in new
controls and tying local operations to the
home office, I can’t be held responsible if
growth slows. If you make changes, we’ll need
to be very clear about what I’m responsible
for, and what can I expect from Denver.
Foster found herself annoyed at what she
sensed to be Chen’s continued resistance and
negative attitude. But there was no time for that
now. Thoughts racing, she thanked Chen for his
candor and expressed a desire to visit China to
see in person what he had built, and also to
fmally meet him face-to-face. Chen welcomed
her planned visit and offered his sympathy for
the pressure she must be feeling from Wall Street.
“Mia, I love what I’m doing, and I hope we can
work things out. I really want to stay on when my
contract expires in a few months,” he said.
After ending the video conference, Foster
reviewed the exchange with White. The conversation had raised some big issues that needed to
Year Ending
October 31, 2010
$ 3,261,598
1,663,415
382,720
782,784
2,828,919
6,523
163,080
65,232
391,392
3,455,145
-193,547
0
5,925
-199,472
-55,852
-143,620
be resolved: What strategy should Levendary
adopt to drive its expansion in China? Who
should have responsibility to make and implement those decisions? And what changes, if
any, should be made in the roles, responsibilities,
and relationships that linked China’s management team to the home office? Acknowledging
the importance of these issues, White agreed it
was vital for Foster to get closer to the China
business. A visit was set for May.
Meeting Three: Deciding the Future
On May 25, as her plane landed at Shanghai’s
Pudong International Airport, Foster felt a mix of
excitement and concern. She was thrilled to fmally
visit this market that held such great potential for the
Levendary brand and for her new role as CEO. But
she was also grappling with some nagging doubts
about whether Chen was right person for the job.
An old mentor had once told Foster that
there were three types of managers in a new
Building New Management Capabilities
business’s evolution to greater scale: the gogetter, the local baron, and the professional
manager. All three types could be entrepreneurial in spirit, but not all were equally well
suited for the various stages of a business’s
growth. Chen was clearly a go-getter who
had evolved to become a local baron. The
question in Foster’s mind was whether he
could transition to become a professional
manager.
Two hours later, Mia Foster got out of the
limousine that Louis Chen had arranged to pick
her up at the airport. As she strode toward the
entrance of Levendary’s Shanghai office, she felt
confident and prepared. Foster was ready for this
conversation.