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GLOBAL Restaurant Franchises in China Successes and Failures

Nick Salvatoriello

CHINA STUDY TOUR

November 2008

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Introduction and explanation of purpose:

My research paper seeks to answer the question, "What is the best strategy for opening

a chain of restaurant franchises in China today?" The answers are based on the

successes and failures of entrepreneurs and corporations seeking to do business there.

I draw my research from a personal interview of a franchise executive with first

experience as well as economic and trade articles published on the topic over the past 5

years.

I chose to use Phidias Dantos and Green Mountain Company Ltd. as a local case for

my research. His involvement adds a personal aspect to the project for me. I grew up

in Hanover, NH. Phidias and his wife Alice lived on the same street as we did and they

were close with my parents both as neighbors and business associates. I was able to

interview and research him personally, Phidias provided a local account and perspective

to compare with the successes and failures of global franchises and international retail

operations in the China market based on these common themes. The result of this

blend of research has revealed themes for success for companies to go into the China

market. My research is far from complete, but three major themes emerge as critical to

success:

1.) Location

2.) Guanxi

2.) Joint-Ventures & Partnerships

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Dantos Case Study: Background

Phid is an entrepreneur of the old-school who earned their MBAs from the trenches of

their businesses and from trial and error. Since he started his first company at age 25,

hes gone from nothing to being a millionaire and back again. To him it seemed, this

was all part of the package of being a businessman. Through his career development,

he had experience the successes and challenges of food service franchise ownership

from owning and running them personally for over two decades. In 1986, with the help

of financing from a few close friends he formed a private corporation called Northern

Bakers Inc, Franchisee of Au Bon Pain. He was offered the opportunity to franchise

license for the company, by a pair of Harvard graduates, Louis Rapuano and Louis

Kane who founded Au Bon Pain in 1978. Their first Au Bon Pain bakery, established in

Boston, was proving to be a successful concept for the region. Their caf concept

focused on serving coffee drinks, baked goods.

In 1991, the company went public as Au Bon Pain Co. Inc. In 1999, Au Bon Pain Co.

Inc. (later renamed Panera Bread Company) sold its Au Bon Pain division to

Bruckmann, Rosser, Sherrill & Co. Inc., which then sold it to Compass Group in 20001.

Phidias enjoyed success through these stages as the bakery-caf business developed

and eventually expanded his stake within the operation through the years to 10 stores

throughout the Northeast. He watched with interest as Au Bon Pain expanded their

business to over 230 cafes in the United States and abroad. Most of the stores in the

northeast United States remained company-owned, while stores that stretched into the

1 (Source: Panera Bread Company History Overview

http://www.panerabread.com/about/company/history.php)

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lucrative Asian market in countries like Thailand and Indonesia were typically

franchised. Their stores have been particularly successful in transportation facilities

such as airports and train stations, as well as shopping centers and business districts in

cities. For example, the companys website lists that Au Bon Pain has three locations in

New York City's Port Authority Bus Terminal alone. The website noted that the chain is

also very successful on college campuses; the University of Pennsylvania has four

locations on its campus2.

As a franchisor since their founding, Mr. Dantos was with Au Bon Pan for almost 18

years and had witnessed a lot of international growth in the restaurant franchises and

the success it had brought his business associates and competitors. Not content to run

a regional chain of franchises forever, he eventually developed international ambitions

of his own. Occupancy and labor costs in his Au Bon Pain stores were starting to

outstrip his profits from his cafs by 2004 and Phidias decided to seek new frontiers for

a better franchise model. This new frontier turned out to be China and the opportunity

to go there came from right from my own back-yard, Phid told me in our interview. As a

business operator in their state, Phidias became well connected within the Vermont

State Chamber of Commerce and was its president at one point. In late 2003 the

current chamber president, Chris Babieri went to China to represent trade between

China and Vermont. At the same time he was talking to the Green Mountain Coffee

about franchising and distribution opportunities in Chinas coffee market that were

largely untapped (save for the recent entry of Starbucks). Chris was a friend of Phidias

2 (Source: Au Bon Pain Location Finder

http://www.aubonpain.com/locations/alllocations.aspx)

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and knew his experience running Au Bon Pains specialty coffee, pastry and sandwich

concept was just the type of know-how he needed to launch Green Mountain Coffee as

a global franchise concept in China. If he could Phid was willing to go to Shanghai and

set up a specialty-coffee franchise model they could expand with in China, Green

Mountain would give Phids company the exclusive rights to sell their coffee in Mainland

China and Hong Kong. When I got there I realized only 2% of the population drank

coffee, but 2% of a billion should be a lot.

In order to get the finance and connections necessary to launch in China, Phid worked

with the Vermont Chamber delegation to seek out someone on to bring language and

business experience in China. He eventually decided on a gentleman named Nelson

Lo, a Taiwanese businessman whose resume displayed he had the expertise and

connections necessary to get this new venture off the ground. They formed Green

Mountain Coffee, Limited, a corporation with mostly Taiwanese shareholders.

Before heading off to Shanghai, China to take his business global, Northern Bakers

CEO was by most peoples standards, a thoroughly experienced executive in the

retail/restaurant industry. During the first half of his career in business, he had owned

and managed everything from convenience stores, to hotels, to luxury resorts. The

second half consisted of owning and running successful restaurants and 18 years in

franchise operations like Au Bon Pain in New York and New England. Because of this

experience in the food service industry for over 55 years, Phidias was confident he had

what it took to teach the Chinese a thing or two about the food service businesses.

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Before going any deeper into Mr. Dantos and the coffee business in China, the

background of what a franchise is and how it is structured must be provided:

What is a global franchise?

When people think about the franchising concept, McDonalds usually comes up first as

a prime example. Today, McDonalds franchise network is the worlds leading food

service retailer, with more than 30,000 franchise restaurants serving 52 million people in

more than 100 countries. Of those stores, more than 70 percent are owned by

independent operator franchisees

i

.

Truly, McDonalds is not just a success in America, it is the leading global franchise

chain. Interestingly enough, although McDonalds has spread all over the world, its

largest franchise store featuring more than 700 seats is in Beijing, Chinaii. The question

that naturally follows is, what factors contribute to making franchise models such a

success globally? One essential factor that contributes to McDonalds and the franchise

business models success across the globe is a consistent commitment to standards

and as a result customers know that no matter where they travel, they can rely on those

qualities at every franchise they visited.

How the franchise structure works:

(INCLUDE MORE ON THE PROCESS FROM THE DUNKIN DONUTS STEPS TO

FRANCHSING WEBSITE?)

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If youre going to start a franchise anywhere, youre going to first need aproven

concept, a proven winner Phid tells me in our interview, it is best if the chain has

shown success in around 2-10 stores initially.

-Franchisors that plan to go public need to prepare documentation that must pass SEC

stringencies. Phid advises me, If you want to sell stock, you need an approved

prospectus which is very controlled, and precise.

-Franchisors who will remain private can file for an S-Corporation. This is what Mr.

Dantos told me his company was in China; a private thing financed by friends rather

than strangers.

-The owner must next compile a franchise agreement. Phid considered this step almost

as needy of precision as the prospectus. Disclaimers need to be there, exact

percentages and royalties must be spelled out. You have a model.

-Included in a franchise format is what the franchisor agrees to provide. This largely

pertains to the restaurants format (standards). This could be a requirement that you

buy from a certain vendor ect. Phid explains.

-The franchisor agrees to the responsibility for developing new products, systems, and

procedures for their stories. The franchisee has the responsibility to keep it clean and

tight for the benefit of everyone, Phid continued, Quality, service and cleanliness must

be standard so that all stores will contribute to the common image. In exchange for the

rights to utilize the franchisors proven format in this way, the franchisee provides

anywhere from 5-7% of either gross or net sales depending on the specific franchise

agreement. The franchisor also provides a territory to their franchisee that protects

them from competition from other franchisees regionally. Mr. Dantos added, You buy a

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territory from the franchisor and so many stores to begin and you have to sign an

agreement on how many stores youre going to put in. In order to provide a growing

revenue stream to the franchisor to develop system wide improvements, franchisors

typically include a commitment to expand and open new stores in the agreements for

their franchisees. Franchisee can typically choose the sites of the new stores in their

territories, which could be as small as a neighborhood in a major city, or an entire

country. Franchisors want multi-unit owners, not ma-pa says Phid.

Franchising and China:

As a distinct business vehicle, franchising was introduced to China in the early 1990s.

With a population of more than 1.3 billion, an average economic growth of 9.4% for

more than twenty years, GDP per capita exceeding $1000 (over $ 3,000 in Shanghai),

as well as entry into the World Trade Organization, China was clearly becoming a focal

point in the world franchising market iii.

At the time Mr. Dantos took his first trips to explore business in China, there were over

1,900 franchise companies with around 87,000 franchised outlets covering more than

60 categories in Mainland China. Phidias quickly learned from researching reports on

franchising provided the U.S. Economic Development offices that Shanghai is a magnet

for this business model as the leading commerce and economic center of China that

has become one of the most dynamic city in the Asia-Pacific region, with the GDP

reaching the level of developed countries, it should be the natural first choice for

investors abroad.

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Because he was interested in developing new relationships and promoting his products

in the Shanghai area, Mr. Dantos pursued membership and association in the China

Chain store & Franchise Association (CCFA), which acts as the official spokesperson for

China's franchise industry. Its 600 members come from more than 40 industries and

include franchisers like KFC, MacDonalds, and Century 21 as well as retailers like Wal-

Mart and Carrefour. According to reports published by the group on the U.S.

Commercial Service website, China is expected to become the worlds largest importer

of franchises. Shanghai will become the leading market in China for franchise

operations, they write in a 2004 article. According to a survey conducted by the CCFA

in 2002 among Chinas top 100 retailers, the number of franchised outlets increased up

to 30 to 40 times over last year and sales revenue in 2002 reached $2.9 billion, an

129% increase over 2001iv.

This data concludes that Chinese peoples rising living standards has coincided with an

increased brand consciousness and desire for Western brands in the food and

beverage industry especially. Chinas gradual encouragement of a free market economy

and socio-economic developments have also greatly increased the number of well-

educated entrepreneurs in China who are eager to develop their businesses, careers

and lives by owning a franchise. These factors are encouraging international franchisers

to expand into China. Among the international brands have already been established in

China and have achieved great success are McDonalds, KFC, Pizza Hut, Athletes

Foot, Century 21, and the leading global caf chain, Starbucks.

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Starbucks in China: Think Local, Act Global Success

No other company was better positioned to tap into this market than the behemoth

international coffee chain, Starbucks. Their multitudes of stores that have spread

across the US and now the world have made a cup of coffee into a global phenomenon.

In the US aloneit is estimated that an average of 40 million people consume one of

their coffees every weekv. This statistic is an impressive example of Starbucks

Corporations ability to capture a huge segment the coffee industry market within the US

and internationally. With their international expansion in recent years, more markets in

Europe, Africa and Asia are discovering and cozying up to the Starbucks model. This is

acknowledged in the companys Fiscal 2007 Year in Review where they have dubbed

themselves The Worlds Coffee House:

With more than 15,000 locations around the globe, Starbucks is acknowledged as the

worlds coffeehouse. Our familiar green logoa symbol of one of the worlds most

recognized and respected brandsis a welcoming beacon familiar to millions of people in

43 countries. In fiscal 2007, FORTUNE magazine rated Starbucks the second most

admired company in the U.S., while brandchannel.com rated Starbucks among the

worlds top five most recognized brandsvi.

STARBUCKS demonstrates its commitment to China began another statement from

the company published in China Today. Seeking to take their successful coffee chain,

the American firm has poured huge efforts over the past decade into making China a

key market.vii

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Although its stores and brand are as familiar to us as McDonalds, Starbucks is actually

not a coffee franchise. It is actually a chain of stores owned and managed by the

Starbucks Corporate management team, not by independent franchisees like Phidias

Dantos and Northern Bakers Inc. Thats not to say Starbucks avoids strategic

partnerships and alliances to open locations in the most prime markets.According to

Schultz, the companys famous chairman and CEO, Starbucks will only enter into

licensing arrangements with companies when access to prime real estate which would

otherwise be unavailable such as airports, national grocery chains, college and

university campuses, hospitals, major food service corporations

viii

. This quote is an

example of the importance of key partnerships and prime locations in the successful

growth of franchisors that seek to emulate the success of the Seattle-based coffee

company. For, while they may not be a coffee franchise, Starbucks and their ability to

build their brand and retail operations lends itself very well to the principles of

franchising.

An example of the success of partnerships and join-ventures in China is shown by

Starbuck is in their recent deal to increase its stake in its southern China operations.

With the June deal, the NASDAQ-listed Starbucks will increase its ownership in Coffee

Concepts (Southern China) Ltd. to 51 percent, a colossal increase on its previous five

percent. To those interested in the burgeoning coffee business, this signaled a new

focus on China as the worlds leading retailer and roaster of specialty coffee . The joint

venture began opening Starbucks Stores in Chengdu towards the end of 2005.

Starbucks opened its first store in Hong Kong in May 2000, its second in Shenzhen in

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October 2002 and its third in Guangzhou in 2003. There are currently 13 Starbucks

stores in Southern China, including six in Shenzhen and six in Guangzhou. The

numbers are tiny compared to the potential, says U.S. coffee markets analyst Bill

Tanner. Starbucks has more than 9,000 outlets in northern and Latin America, Europe

and the Middle East. But its in Asia that it sees its future. Theres more virgin coffee

territory in Asia than anywhere else. And nowhere more so than in China.ix

As mentioned before, Starbucks underlying business principles- a great product,

effective marketing and PR, dynamic management and determination- can be applied to

a successful working principle for any successful coffee franchise. Their success and

struggles to take their Starbucks Experience into countries such as China and

succeed should inspire all potential franchisors and franchisees that with the right

ingredients and some elbow grease, American restaurateurs can come to China, sell

coffee, and succeed.

Further academic commentary I research on the business model contended that the

global-franchise chain provides a special challenge that business owners must confront

in operating their franchises across multiple markets that often represent a range of

different ethnicities, income levels, and cultural barriers. Understanding the culture in

which the global franchise is to operate in appears to be paramount. Dennis Cambell,

an author of a HBS case study on the organizational design and control challenges of

operating franchises across multiple markets. The basic idea is to think about how the

complexity of the customer-facing operating environment affects organization design

choices such as control systems, incentives, performance measurement, and ownership

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structures, Cambell wrote in the HBS case. Even firms that have very standardized

business models in terms of products, labor, and merchandising will face the challenge

of serving customers with different preferences and behaviors when that model is

stretched across multiple marketsx.

During his stay in Shanghai, Phidias Dantos studied Starbucks very carefully and hired

those who had worked for Starbucks. They had 25 stores at this time (2004-2005) in

downtown Shanghai. Seeking to understand his competitor, Phid went to Starbucks

stores around the city, seeing whos there, what theyre changing, what theyre paying

their employees. His experience meeting and speaking with patrons at the coffee stores

shows just how admired American brands our culture can be to the Chinese public.

Girls working at department stores here earned about $25 dollars a week for a 40-hour

week. Every Friday theyd meet at Starbucks to pay $3 (10% of their pay) more than

anything else because this was the place to be seen, Phidias told me in amazement,

Frankly theyd rather have a cup of tea that come free at any restaurants, but theyd

rather drink a late because they want to be very Westernized. The Chinese want to go

for the classiest most Western stuff they can afford, He recalled their love of

Westerners.

It is for these reasons that its little wonder Starbucks chose to launch in China as a joint

venture with a Hong Kong catering company that was tasked with convincing Chinese

tea drinkers to try the Starbucks Experience, their brands marketing slogan that

encapsulates the companys mix of quality coffee, cordial staff and a cultured

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atmosphere. According to a recent article on the joint-venture in China Today, if anyone

could bring Starbucks into China it was Maxims, Hong Kongs largest catering company

and a firm favorite at major mainland airports. We have worked hard to gain

acceptance of the Starbucks Experience in southern China, says Maxims managing

director Michael Wu in the article, adding that the local buy-in to the brand exceeded

expectations in such a short time.xi

Meanwhile, most start-up franchises in China fail because they are independent

operations that lack the management and marketing know-how or branding insights

inherent in the big chain-stores researched here. Bad location coupled with bad

management usually spell disaster, though another locally owned coffee chain, SPR

Coffee has managed to keep its handful of outlets in Beijing open. Bars and

restaurants go under almost every day in China, says Beijing-based marketing analyst

Jerry Garcia. A lot of people here dont seem to do any market research and choose a

bad location, offer crummy service and lack management skills, says Garcia, who runs

MGM, a branding and business consultancy in the Chinese capital.xii

There are some mixed advantages in Shanghais location and market particularities.

The Occupancy costs in extremely high, but labor costs were extremely low. Benefits

and Labor were 27% in US, Occupancy was 10%. This was flipped in China in the key

in the areas I wanted to open which were basically the 5 th Avenues and Lexington Aves

of Shanghai.

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Factoring the location into your franchise business mix means entrepreneurs must take

into account that occupancy costs are extremely high if youre going to go where you

want to be successful. These are famous streets such as Nan Jing Lu, Wai Hai Lu in

downtown Shanghai. If youre going to introduce a new brand, thats where you have

to be because thats where all the high end brands are there, Gucci, ect., Phid tells me.

You might run negative cash flow (50% occupancy) but thats your advertising. Theyll

see Green Mountain coffee nestled into the big brand names so theyll recognize it in Su

Jo. Once they see the name on 5th Avenue its better than seeing it in Time

Magazine.

It seems that Phid understood initially some things that Starbucks has forgotten recently

as their break-neck pace of growth has melted away with decreased earnings in recent

years: sometimes in marketing, less is more. For, although the companys new lines

like of Tazo(R) Teas have sold well, the firms recent venture into music, offering CDs of

cutting-edge chart music and ditties played in-house for sale under its Hear Music(TM)

label was less successful. In this regard, coffee drinkers proved decidedly less

enthusiastic than Starbucks executives had hoped. But the company is still young, and

liable to make mistakes. We are still in the early pages of the first chapter of our

international journey, says Christine Day of Starbucks. Truly, not all moves by the go-

getting coffee brewer have been wise.

This view was also supported by the authors of a HBS Working Knowledge Article titled:

Starbucks Lessons for Premium Brands. The paper points out that growing a global

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chain of stores and launching a vast array of products takes managements focus off

their main responsibility of improving same store sales year-on-year. This is the heavy

lifting of retailing, where a local store manager has to earn brand loyalty and increase

purchase frequency in his or her neighborhood one customer at a timexiii. The authors

warn that the exclusiveness of a brand requires controlled growth and premium pricing

comes from a limited distribution model. Public companies like Starbucks is constantly

challenged to grow and now runs the risk of having its brand experience being devalued

in the face of increased quality and competition from low-priced coffee offerings like

Dunkin Donuts and McDonalds.

The fact that his budding coffee business, Green Mountain Company, Ltd was a

privately run business controlled by private investors appeared to offer Phidias Dantos a

chance to build budding venture in a new exclusive brand in Shanghai. He continued to

visit various stores affiliated with his future business throughout his 18-months in the

booming city. He noticed KFC was very big in the fast food business here, bigger than

McDonalds hamburger stores. The Chinese like chicken, theyre afraid of beef. Theyll

never sell you a steak unless its black inside. They wont take red meat. A KFC

opened nearly every day in China in 2005, and KFCs and Pizza Huts now number more

than 2,300. (McDonald's has about 1,000 restaurants) Sam Su, who runs the China

division of KFC & Pizza Huts parent company, Yum Foods, projected January, 2008

article that they had plans for 20,000 stores someday. "We're nowhere close to

saturation at all," he said. "The sky is the limit."xiv

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As millions of Chinese find their wealth swelling and their time shrinking, sit-down meals

involving several generations no longer fit the needs of a hurried and harried middle

class. KFC's grab-and-go menu items were a novel solution, while Pizza Hut launched

the concept of eating out at a casual restaurant with the whole family. KFC opened its

first drive-through in 2002 just as China was becoming a car-owning culture. In 2001

Pizza Hut Home Service began introducing the idea of hot meals delivered to the door

(which might seem ironic to Americans, for whom Chinese is the ultimate delivery

meal)xv.

Pizza and fried chicken are tasty treats, but they're not staples in China like, say,

noodles and dumplings. So a franchise entering the market shouldnt worry if they don't

seek to offer overtly American fare. The most importance advantages a strong chain

store brings is that it still attracts Chinese consumers because of the quality and service

associated with an American brand. The formula developed by franchises like KFC --

cheap food delivered in cheerful surroundings--has provided a welcome mat reception

for their stores. Diner Frank Li, a project engineer on a trip from Suzhou, says

restaurant's link to KFC and Pizza Hut are a draw based on their reliable experiences

they deliver each time. "Those places are good quality," he says. "You know what you're

going to get. They are a very professional company that must know what it's doing, and

I think the quality there shows thatxvi."

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You walk into a Pizza Hut and its just like walking into the Ritz Carlton or Four

Seasons, Mr. Dantos told me, Marble floors and finely dressed waitresses. I recall

there was a bathroom attendant in Pizza Hut!

Alice, Phidias wife, shared copies of the many emails her husband would write home to

their son mark who managed some of their Au Bon Pain stores back in the US. In these

emails he noted some of the many elements needed in order to establish their

enterprise to compete with the established chains like Starbucks: greater infrastructure

and partnerships.

The Chinese are bad at the service business, therefore theres a need for a training

place for them. There is a need for coffee in China; a need to have our own factory in

China; otherwise too expensive to import food. When we went to a Starbucks here, we

asked the worker how much she earns. She said 60 cents an hour. Yet, the prices

were almost the same as the US and the blueberry muffin was crap.

In order to ensure efficient training of the standard operating procedures in a good

franchise, Phid saw would be a need to have a textbook on all their food processing

procedures written in Chinese. Phids partners were already drawing up plans for

corner stores and working on the question of whether it was better for him to use his Au

Bon Pain name recognition and pay that franchise company the 5 cents franchising fee

per transaction, or to and start our own and do the caf concept better. They would

eventually settle for a new name and new brand for their venture. They formed a

corporation: Green Mountain Company, Ltd of Hong Kong (as the only condition Green

Mountain Coffee gave them was not to sell their coffee in a store with Green Mountain

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Coffee in its title. Now that they had the concept, they worked on a franchise

agreement with Green Mountain Coffee where they were naturally required to sell

certain units a year plus growth in order to retain the excusive license. If they could

prove an ability to sell so many thousand pounds of coffee, they would be the exclusive

agent to sell it. Mr. Dantos has spent months planning everything that hed need to

grow the business through multiple channels-mail order, supermarkets, but most

important their own coffee shops where the Green Mountain experience would

emanate.

The new CEO of the young coffee company proceeded with drawing up the blue prints

for his future Green Mountain cafs in Shanghai. I planned to put full grown coffee

plants into the store with big sacks of coffee beans out for patrons the patrons to give it

the feel of an import-warehouse Phid told me excitedly. He had blue prints from

Panera Bread that were given to him to draw from by one of the Au Bon Pain founders

who started that franchise back in the states that allowed for a high volume of customer

intake and an express lunch coupled with a warm atmosphere and sophisticated menu.

He then complemented this layout with the style and ambience drawn from the many

popular Starbucks cafs he had visited. Phidias was confident that drawing inspiration

from both Starbucks and Panera Bread stores would result in the new design for the

coffee shop he envisioned possible in China. Art and culture would be fused with form

and function.

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As the central feature, I had it so adorning the walls of each store would be murals

painted of authentic scenes and images of the places Green Mountain harvests their

coffee from and the cultures that exist there. It would be a cultural way-station where

Chinese people can appreciate the setting as much as the coffee. Phidias and his

Taiwanese partner, Nelson, both agreed that corner shops (location) proved to be the

most effective, but they had to be in the most desirable locations, which Nelson

promised he had the necessary connections to deliver for the new Green Mountain Ltd

stores. However, as the months wore on and the anticipated deals to rent choice

properties ended with both Phid andNelson being turned down regardless of the money

they offered, Phid finally understood the most important currency in the China trade

Guanxi:

According to the background reading on Chinese and research done on the subject

dealing with the cultural aspects of Chinese business, everything is Guanxi

(relationships). Guanxi describes the basic dynamic in the complex nature of

personalize networks of influence and social relationships, and is a central concept in

Chinese society. These networks, in practice can range from families, companies,

industries and especially, political offices. If you wanted to go into Shanghai or any of

the major cities, dont kid yourself. You got to be in with the Communist Party, Phid

warned me. The party membership goes back generations. I learned that those who

were in with Mao thus their decedents would do extremely well through the

generations.

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From a patronage perspective like this, Guanxi describes a personal connection

between two people in which one is able to prevail upon another to perform a favor or

service, or be prevailed upon. To begin to establish Guanxi, franchisors that are new to

the country must go to the American Embassy to access U.S. business connections in

China. More important for an American executives quanxi is the influence of local

politicians. Phidias was very clear on his opinion on how important patronage from the

party is in successes: If you want any sort of substantial business, you must be in with

the Party. The Party is making things happen in China right now. He admired the

authoritative way the government system pursued economic development there.

Recounting his 18-months of experience dealing with their differing systems, Mr. Dantos

showed considerable understanding of the US government and the Chinese

government. Theyll do anything to move ahead and their government would just

ORDER it to happen, thats what so impressed him. To him, the communist partys

totalitarian practices have merit in a time when the economy needs to be developed and

things need to be done. They can move 200 million people in a matter of years.

In continuing to dine out and mingle with the business community there, Phidias also

learned a lot about how to get to know the Chinese socially around conducting

business. If youre invited to a party, you better go. Its extremely important for guan,

he would tell me. He assured me that when it came to the evenings in Shanghai,

everybody loves Karaoke. Phidias assured me that nights of karaoke were almost

standard in any business negotiation (which always run longer than American as used

too). Id be invited out night after night to these private clubs and here along with me

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were all the big deals of every big corporation. If one wishes to win the trust of their

Chinese counterparts it is important that you plan a big dinner and go out to Karaoke.

Phid learned a lot about Chinese culture and shared this interesting example; Heres a

story from an executive at Dow Chemical I met while I was there. The Chinese are

sneaky and crafty in a business deal and they know us well. For instance, they knew

this executive was a Christian they were doing business close to the holidays. They

knew hed want to Celebrate Christmas, so they procrastinate and stall until its

December 23rd. He recalled by the 23rd the businessman been going for 15 days and no

deal, just going out to Karaoke and club hopping until he was in a proper bargaining

position advantageous to the Chinese.

Guanxi also describes a network of contacts, which individuals can call upon when

something needs to be done, and through which he or she can exert influence on behalf

of another. This affects was is and is not possible for American businessmen and the

people they choose to partner with. This is why party patronage is very important and

why I was stuck when I eventually learned that neither me nor my Taiwanese partners

had the type of connections necessary to get into the right locations for our Green

Mountain Ltd cafs. Phid recalled, If you didnt support the party, they wouldnt rent to

top spaces to you. For every deal we were turned down on it was nevera question of

rent. It turns out it was a question of who Phidias had supported politically in the past

and who has was currently associated with. In both areas, Phid later determined, he

had poor Guanxi.

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Because he didnt have the support of the city officials, Phid couldnt get sites on key

streets in Shanghai (Nang Jing Lu ect). This is why Guanxi and location are two

important elements in the success of a China franchise in the food service industry.

Phidias tried to explain this serious dilemma to Nelson Lo, but he responded with stall

tactics and asked him to focus on other things, assuring Phid it would all work out.

When Phid tried to develop this Guanxi on his own he was discouraged by his

Taiwanese backers from utilizing the connections that the consulate recommended.

The Shanghainese are untrustworthy! Nelson always told me, and I believed him As

the months wore on, however Phidias began to see the truth of the matter: His

Taiwanese business partner had dressed up his capabilities a lot better then they

actually were. His partner didnt have Guanxi with the Shanghainese business

community and instead and tried to use Mr. Dantos and Green Mountain Ltd to provide

patronage to his own people by convincing Phid to bring in his own Taiwanese friends

on the company board. I had realized too late my big error in getting a Taiwanese to

open in Shanghai, Phid admitted, Taiwanese and Shanghainese did not trust each

other. Their two parties dont trust each other. When I went to meet with the financiers

Nelson and lined up for me in Taiwan, I was startled to find there werent flights allowed

from Shanghai to Taipei. I had to go to Hong Kong first!

He saw that this man was eventually out to use him. His wife, Alice, came over to visit

him shortly after. She fell in love with Shanghai immediately and wanted to sell the

house and stay in the country when Green Mountain Ltd. eventually launched its stores.

Rather than waiting for his Taiwanese partners to bleed him dry before his stores could

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ever open or vote him out of the company once they did, Phid decided hed had enough

and would return home while he remained whole financially. When he broke the news

to Alice, she cried.

When we dissolved the company and went back to New Hampshire, I actually came

out of it with $10,000 more than I started with, he recalled. The money wasnt the

reason I left and I didnt even mind discovering Nelson and his cronies were out to

screw me, Phid told me with a smile, But I just cant do business with people who I

cant have fun with in the long run.

So that was it. Two and a half years ago, Phidias Dantos, CEO of Northern Bakers Inc.

& Green Mountain Company Ltd. of Hong Kong, returned home from his last trip of his

China venture. On July 4th 2006, his plane touched at tiny Lebanon Airport in NH. 18

months after arriving to seek a new beginning on the streets of Shanghai, this lifetime

entrepreneur packed his bags to return another day. The global franchise venture on

behalf of Green Mountain Coffee was an experience not lost on Mr. Dantos, however,

nor should they be for anyone who chooses to follow in his footsteps. He realized, I

cant teach these people a thing. In fact, Phidias returned to the U.S. realizing that

China could in fact teach him a thing or two instead. Because I got burned and battered

and screwed, I learned, Phid said to me wistfully at the end of our talk, I earned my

MBA many times over in my career as a businessman not the MBAs like you got at

Union or Harvard, but just as good I think.

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Even as he told me of his past setbacks, Phidias Dantos retained sense optimism as

well as a great desire to return and to apply to many lessons he had shared with me.

He was just as excited about Shanghai as the day he experienced it for the first time.

He assured me, You can see the pictures, watch the movies, read the articles about it,

but you gotta go and FEEL Shainghai. Your entire body will shiver with electricity,

because youre a business man, I know you can appreciate the site of thousands of sky

rises, the buildings lit up in different colors and the energy of the enterprise. Phidias

was right, I can appreciate it and cant wait to experience it myself soon.

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Bibliography:

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i The Marketing Genius behind McDonalds Franchise

Successhttp://www.franchisedirect.com/foodfranchises/themarketinggeniusbehindmcdonaldsfranchises

uccess/14/25; Copyright 2003-2008 Franchise Direct

iiThe Marketing Genius behind McDonalds Franchise

Successhttp://www.franchisedirect.com/foodfranchises/themarketinggeniusbehindmcdonaldsfranchisesuccess/14/25; Copyright 2003-2008 Franchise Directiii Qu, Tara. Shanghai International Franchise Exhibition, October 22-24 2004, International Market

Insight [IMI] Report Date: 07/26/2004 published by U.S. & FOREIGN COMMERCIAL SERVICE

AND U.S. DEPARTMENT OF STATE, 2008.iv Qu, Tara. Shanghai Internatial Franchise Exhibition, October 22-24 2004, International Market

Insight [IMI] Report Date: 07/26/2004, published by U.S. Foreign & Commercial Service and U.S.

Department of State, 2008.v Starbucked: Background reading for a corporate reorganization, .W. P. Carey Jan.2008vi

Starbucks Corporation Fiscal 2007 Year in Review www.starbucks.com/yearinreview/index.htmlCopyright 2007 Starbucks Corporation.viiGodfrey, Mark. Coffee With Cream On Published in: China Today, October 2005

(www.chinatoday.com.cn/English/e2005/e200510/p32.htm)viii Starbucks Home Website (www.starbucks.com)ixGodfrey, Mark. Coffee With Cream On Published in: China Today, October 2005

(www.chinatoday.com.cn/English/e2005/e200510/p32.htm)

x Hanna, Julia.Making the Decision to Franchise (or not), HBS Working Knowledge, July 28, 2008xiGodfrey, Mark. Coffee With Cream On Published in: China Today, October 2005

(www.chinatoday.com.cn/English/e2005/e200510/p32.htm)

xiiGodfrey, Mark. Coffee With Cream On Published in: China Today, October 2005

(www.chinatoday.com.cn/English/e2005/e200510/p32.htm)xiii Quelch, John. Starbucks Lessons for Premium Brands. HBS Working Knowledge, July 2008xiv Takeuchi Cullen, Lisa Kentucky Fried Rice Published on Time.com, Thursday, Jan. 17, 2008.

(http://www.time.com/time/magazine/article/0,9171,1704688,00.html)xv Takeuchi Cullen, Lisa Kentucky Fried Rice Published on Time.com, Thursday, Jan. 17, 2008.

(http://www.time.com/time/magazine/article/0,9171,1704688,00.html)xvi Takeuchi Cullen, Lisa Kentucky Fried Rice Published on Time.com, Thursday, Jan. 17, 2008.

(http://www.time.com/time/magazine/article/0,9171,1704688,00.html)
http://www.starbucks.com/yearinreview/index.htmlhttp://www.chinatoday.com.cn/English/e2005/e200510/p32.htmhttp://www.chinatoday.com.cn/English/e2005/e200510/p32.htmhttp://www.chinatoday.com.cn/English/e2005/e200510/p32.htmhttp://www.chinatoday.com.cn/English/e2005/e200510/p32.htmhttp://www.starbucks.com/yearinreview/index.htmlhttp://www.chinatoday.com.cn/English/e2005/e200510/p32.htmhttp://www.chinatoday.com.cn/English/e2005/e200510/p32.htmhttp://www.chinatoday.com.cn/English/e2005/e200510/p32.htmhttp://www.chinatoday.com.cn/English/e2005/e200510/p32.htm

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