Harvard Business Review Case Study - Levendary Cafe´- the China Challenge

Managing in a Global Economy

Harvard Business Review Case Study: Levendary Café: The China Challenge

Just a few years before going public in 2011, Levendary Café (a quick service restaurant based in Denver) experienced a slump in domestic growth and a plateau in geographic expansion the U.S. Despite its 3500 restaurants in the U.S. (1200 company-owned and the balance franchised, the company was in need of a way to expand it’s business. Mia Foster, named CEO the same year Levendary spun out of private equity, realized that the future of the company was dependent on this growth. Wall Street was watching closely and at this point in time, the shares in Levendary Café were being traded at a discount. Being a new to the CEO position also played a part in Wall Street’s perception of Levendary business.

Three years before Foster joined, with Levendary under the helm of their founder Howard Leventhal, the company conducted research on opportunities for expansion in China. U.S. quick service chains such as KFC, McDonald’s and Pizza Hut had already penetrated the market and were proving successful. Aside from China’s 1.4 billion residents, China had a growing urban population of affluent middle class (with a per capita income 17,175 RMB); a large increase of women in the workforce (which meant less at home cooking) and a changing lifestyle trend to eat out. On top of that, Levendary Café’s focus on more wholesome choices than their fast food competitors could prove to be a niche market in China. It so happens, that through word of mouth, Louis Chen, a recent MBA graduate, was able to gain the attention of Leventhal and other key stakeholders at Levndary. Chen’s entrepenurial spriit appealed to Leventhal. And, although the board had first set its sights on entering this new market via a JV with an established Chinese operator, they decided instead to go the direct investment route and put Chen in charge of leading the company into China.

Chen’s charge was to establish a strong market position as a starting point for franchising. Franchising proved to be a successful model in the U.S. making up 2/3 of Levendary’s restaurant locations and Levendary received royalties for franchised operations. Aside from just establishing market position, Chen was given the instruction to “do right by the concept”. Concept was an integral part of how Howard Leventhal did business and at the crux of Levendary Café’s organization. The concept of was engrained in the administrative and operational structures. The company had a Chief Concept Operator (CCO) Lucien Leclerc, who managed the Food development group and Marketing team. Levendary’s Food development group boasted a fully scaled test kitchen and food science lab. They took CCO’s executive chef items and adapted it to supply components with quality and consistency. They also were responsible for conducting quality checks in the field. On the otherhand, the Marketing team worked with outside ad agencies to convey TFG concept (“Tasty Fresh Goodness- a well-known marketing slogan in the U.S. and word to live by in the company) through ad and copy images, logo, store decor and media images used earth tones to t communicate natural, wholesome goodness Their Distribution team handled banners, table tents, window decals and menu boards were properly placed in all 3500 company and franchised stores. The marketing teams job was to prep for local market difference in menu and pricing. And, they ensured that every Store’s (whether franchised or company-owned) had consistent decor: it was comfortable, welcoming and had a homey look and feel.

Even though, Chen, who interned in different parts of the company had access to this information and company resources, Foster found upon he evaluation of Chen’s success establishing marketing presence in China, he had diverged almost completely from the Levendary brand and all important concept.

In his first year, Chen succeeded in opening 23 stores and was on the verge of breaking even in sales (-143K as of 10/2010) when Foster sent Chief Franchise Officer, Peter Steele to investigate the situation in China. Steele’s investigation showed that