How two men hope to improve US-China relations ... through pizza
California Pizza Kitchen is hoping it can stand the Shanghai heat by changing from a franchise to company-owned model.With fanfare, a pair of lion dancers, a remote control helicopter, the requisite models and lots of pizza, California Pizza Kitchen recently re-opened in Shanghai.
However, this isn’t a simple F&B success story. This is California Pizza Kitchen’s second attempt to crack the Shanghai market, illustrating something many have already discovered: setting up shop doesn’t necessarily guarantee a piece of the pie.
But Larry Flax and Richard Rosenfield are no strangers to a challenge. The ex-lawyers and old friends founded California Pizza Kitchen (called "CPK" by fans) 26 years ago. It has spread to 264 locations worldwide and includes novel menus, such as the first barbecue-chicken pizza.
So when the first Shanghai store, next to Tony Roma’s at the Ritz-Carlton hotel, failed after only a few years due to the city's lack of enthusiasm for the venue, it wasn't long before they were back at their desks planning their return.
They had learnt though, that while their bold California-style concoctions have solidifying appeal elsewhere, coming to Shanghai would require a new strategy. All of CPK’s restaurants outside the United States are franchises; this time the duo decided to get more involved.
“While we have restaurants around the world, [this is] the first we’ve opened as a company-owned restaurant,” says Rosenfield at the California Pizza Kitchen opening party for their new location in Sinan Mansions.
By being more hands-on, they hope to secure a system that will set a precedent for future company-owned restaurants in Beijing and beyond. "I hope China will “keep [us] busy for a long time,” says Flax.
He even feels their work may have positive effects beyond pizza. “I hope that later in a large way we can improve relations between China and the United States,” he says.
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To franchise or not to franchise?
Ultimately, taking the franchise or company-owned route gives no insurance to companies coming to China. Both models have seen success, both have failed.
How they maneuver the field is what will dictate the brand’s longevity here.
It wasn’t until after China’s accession to the WTO in 2001 that franchise laws were given an official framework. Franchising provided a way to test what many saw as a daunting market laden with complexities via the experience of regional operators.
While the popular model cut costs considerably, franchisees are often more inclined to put profit over preserving brand image.
Establishing a franchising system with set criteria for franchisees has proven a successful model for some.
Subway has over 33,000 examples of such a system in 92 countries, including their 207 locations in China.
“Subway runs on a global system of ‘development agents’ who have the right to select franchisees and oversee a territory’s development strategy,” explains Michael Johnsen, one such development agent in Shanghai.
“We have a strict selection process to ensure that franchisees -- who will be with us for decades -- are the right fit for the Subway brand, appreciating the values and the opportunity.”
Challenges of franchising in China
I hope that later in a large way we can improve relations between China and the United States.— Larry Flax, California Pizza Kitchen co-founder
Managing a global network of the magnitude of Subway is not feasible to everyone.
Warren Liu is author of "KFC in China: Recipe for Success," which details how the fast-food chain’s direct-investment strategies in China led to high profits and ubiquity.
Liu says that the difficulties in franchising stem from a lack of understanding the “different internal contextual elements and different perceptions of external reality that change far more rapidly [in China] compared to developed economies around the world.”
Therefore, coming into China unaware of trends, both past and present, will tint your window to the market on both sides, making transactions -- especially in franchise situations -- an opaque affair.
Poor standard operating procedures mixed with inexperience can also engender failure.
“It takes a long time to learn the lay of the land,” says owner of Scott Minorie, the managing partner of Element Fresh, a U.S.-style restaurant that opened in 2002. Minorie’s company-owned creation now has eight locations in Shanghai and two in Beijing.
“Finding the right locations, developing the product mix and building up a substantial following among local Chinese” have been the pillars of his success, says Minorie. Though Element Fresh is seeing expansion, Minorie remains hesitant when asked about franchising.
“The industry just hasn’t developed enough yet with regards to standard procedures and quality standards,” says Minorie.
“The typical story is of a franchisee that waits until the franchisor leaves the country and then they begin making changes that make them more money but ultimately damage the brand name.”
Steering a restaurant in the right direction is a “complicated business,” Minorie adds. “Take Applebee’s as an example, they opened up a company-owned unit in a below-ground location and never got any traction.”
Adam Minter visited the Applebee's location on Hengshan Lu after it opened in 2007 and became befuddled when he was “served an ice-cold beer in a chilled glass -- filled with ice cubes.”
“When I complained to my waiter,” Minter explains on his blog, Shanghai Scrap, “he rushed to find his supervisor, who patiently explained to [him] that ‘American beer is served ice cold [not on ice].’”
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CPK’s Shanghai pizza diplomacy
Avoiding this kind of cross-cultural catastrophe is just what Flax and Rosenfield are aiming for.
The manager of the California Pizza Kitchen in Sinan Mansions is a native Shanghainese, but has spent extensive time in Australia.
“We’ve created a bunch of new dishes just for the [Shanghai] restaurant,” expains Flax.
Patrons will be able to select from a menu that will continue to feature their innovative take on pizza, including pork belly and roast duck toppings.
Coming from someone who attests that “pizza keeps you young,” perhaps this kind of passion will produce favorable tastes with Shanghai diners this time around.
