CONTENTS 1.0 Executive Summary ..................................................................................................................1 2.0 History of BreadTalk Group......................................................................................................2 3.0 Financial Overview....................................................................................................................4 3.1 Revenue Generation....................................................................................................................4 3.2 Profit (Earnings).........................................................................................................................4 4.0 Industry Analysis (Food & Beverage): Porter’s Five Forces.....................................................5 4.1 Intensity of Rivalry.....................................................................................................................5 4.2 Threat of New Entrants...............................................................................................................6 4.3 Bargaining Power of Buyers.......................................................................................................7 4.4 Bargaining Power of Suppliers...................................................................................................7 4.5 Threat of Substitute Products......................................................................................................7 5.0 Overall Company Analysis – Corporate Level .........................................................................7 5.1 Corporate Level Strategy............................................................................................................7 5.1.1 Related Diversification: Economies of Scope.....................................................................8 5.1.2 Unrelated Diversification ..................................................................................................10 5.2 Corporate Level Strategy Evaluation .......................................................................................11 6.0 Business Level Analysis - Bakery Business............................................................................12 6.1 Competitive Advantages and Core Competencies ...................................................................13 6.1.1 Unique Concepts and Branding.........................................................................................13 6.1.2 Wide Product Offerings.....................................................................................................14 6.1.3 Strategic Locations............................................................................................................14 6.1.4 Strategic Partnerships and Liaisons...................................................................................14 6.2 SWOT Analysis of Bakery Segment .......................................................................................15 7.0 Strategic Issues Identified .......................................................................................................16 8.0 Recommendations ...................................................................................................................18 9.0 Appendices ..............................................................................................................................20
1.0 EXECUTIVE SUMMARY The BreadTalk Group is a young and promising company that is rapidly expanding its businesses locally and internationally. With its signature open-concept kitchen, the BreadTalk Bakery presented its products in attractive packaging that soon earned itself the repute of being a lifestyle brand. It has since franchised 73 bakery outlets overseas and more recently expanded into the Restaurant and Food Atria Businesses. 1
The objective of this report is two-fold. Firstly, an in-depth longitudinal analysis of BreadTalk to better understand BreadTalk in the context of the Food & Beverage Industry in which it operates. Secondly, strategic issues facing BreadTalk’s continued expansion and growth are highlighted with our team’s proposed solutions. To this end, a financial overview is conducted to highlight overall revenue, profit and growth trends to outline its financial performance across various business segments, which are found to be highly dependent on overall economic changes. In particular, the Bakery business experiences the most erratic changes in revenue and decreasing contribution margin to overall profit. This is followed by an industry analysis to create a landscape of BreadTalk’s external environment in the Bakery, Food Atria and Restaurant segments. To achieve our second objective, BreadTalk is then analyzed at the corporate level to construct a clear picture of its diversification strategy at the management level. Sources of cost savings and relevant value creation by the corporate office are also analyzed with our corresponding evaluation. To delve further into the business, the Bakery segment is scrutinized closely to recognize the core competencies driving BreadTalk’s success. Based on these findings, our team derived three critical strategic issues facing BreadTalk that may drastically affect its short and long-term performance, as well as its local and international financial outlook. These include whether the BreadTalk Bakery business is able to ensure consistent growth, how it can overcome problems of imitation in local and foreign markets and evaluation of the shortterm approach taken in managing their diversification portfolio. Our proposed recommendations aim to overcome the possible obstacles and challenges outlined in the abovementioned issues. 2.0 HISTORY OF BREADTALK1 GROUP BreadTalk Group was incorporated in Singapore in April 2000 as BreadTalk Pte Ltd and has since become a distinctive brand in Singapore that has gained international appeal. It was founded by the current Managing Director, George Quek and his wife, Executive Director, Katherine Lee. The first BreadTalk retail outlet opened on 1st July 2000 at Parco Bugis Junction. A second outlet opened 1
IPO Analysis: BreadTalk Group -- http://www.wallstraits.com/jungle/ipo/fipo_main.asp?id=iposg_BreadTalk
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within 5 months, in December 2000, at Novena Square, followed by the first HDB heartlands outlet in Bishan. In September 2001, BreadTalk invested $3 million to set up a central kitchen at KA FoodLink, Kampong Ampat to prepare for growth and franchise operations. Initially, BreadTalk outlets offered about 50 varieties of breads, buns, cakes and pastries, but this has grown to over 150 varieties today. In addition, during 2001, another five retail outlets were opened. As of April 2003, BreadTalk had 22 retail outlets in Singapore with staff strength at 434. In the same month, it opened its first franchise outlet in Jakarta. In June, BreadTalk underwent an initial public offering (IPO), constituting of 32 million shares (28.8 million by placement and 3.2 million by public offer) at an offer price of S$0.24 per share. In September, the Group diversified into the restaurant business by operating a franchise of the world-renowned Din Tai Fung brand of restaurants in Singapore. In 2005, BreadTalk penetrated further into the China market by acquiring Topwin Investment Holding Pte Ltd which owns and operates 13 food courts under the award-winning brand Megabite in China. In the same year, the Group entered a joint venture with Ristoranti Group to open 2 Food Republic food courts in Suntec City and VivoCity in Singapore2, both featuring retrospective style and décor, as well as one in Hong Kong’s Cityplaza in Tai Koo Shing. In addition, Toast Box, a traditional kopitiam-styled coffee house serving coffee and toast to customers in an atmosphere of pop culture in fashion and music reminiscent of the 1950’s-60s colonial era in Singapore3, was opened as a food stall unit of Food Republic in Wisma Atria Singapore. As of December 2006, the Group owned and operated 57 bakery outlets in Singapore, Shanghai, Beijing and Thailand. The BreadTalk brand has also rapidly infiltrated the region with 73 franchised outlets in Indonesia, the Philippines, United Arab Emirates, Kuwait, Malaysia, Taiwan, Hong Kong, India and China.4 BreadTalk Group now operates 5 Din Tai Fung restaurants in Singapore located in shopping centers which enjoy high human traffic. On 17 Dec 2007, BreadTalk Group Limited
2 3 4
Food Republic Singapore -- http://en.wikipedia.org/wiki/Food_Republic JobStreet.com: Toast Box -- http://siva-sg.jobstreet.com/_profile/previewProfile.asp?advertiser_id=33315 BreadTalk Annual Report 2006, downloaded from www.BreadTalk.com
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entered into a franchise agreement to acquire and manage the J. Co Donuts & Coffee, an Indonesian brand.
3.0 FINANCIAL OVERVIEW 3.1 Revenue Generation The revenue generated by BreadTalk Group has been on an upward trend since 2000. Since 2001, overall revenue has increased from $16.7 million to $156.6 million in a short span of six years. This increase of 837.7% in revenue in 6 years is remarkable for a local home-grown company. However, the revenue growth has been fairly inconsistent as illustrated in the table below. Revenue growth over the years is mainly driven by increase in number of F&B outlets locally and regionally and through diversifying into new F&B businesses over the years (Refer to Appendix A & B). 2002
2003
2004
2005
2006
Revenue
109.60
15.10
24.60
89.80
29.70
Growth
%
%
%
%
%
2007 26.70%
FIG 1: BREADTALK’S REVENUE GROWTH
3.2 Profit (Earnings) The overall net profit returns for BreadTalk has been rapidly growing from 2005 to 2007. Prior to that, we can see that BreadTalk started with a healthy net profit of about $3.4 million in 2002 (Refer to Appendix C). The SARS outbreak in 2003 caused the Group’s profits to drop to about $1 million in 2003. In 2004, BreadTalk’s net profits were expected to rebound to above 2003 levels since the SARS scare was over. In addition, the Din Tai Fung restaurant that had opened in September 2003 was expected to contribute to the overall net profits as well. However, BreadTalk turned in the red with a net loss of $30,000 instead. This was mainly due to large losses in the bakery business, which contributes to the bulk of BreadTalk’s revenue, in the first half of the year. This was due to intensifying competition amongst the numerous players in the local bakery industry. In 2005, BreadTalk turned around to post a $1 million net profit. This was supported by increasing revenue from Din Tai Fung and profit contribution of the food atria business that was acquired. In 2006, net profits increased more than three-fold to about $3.5 million. This excellent result was mainly driven by the highly profitable restaurant business and successful international expansion forays. This good run continued in 2007 when net profit doubled to $7.3 million in 2007. This
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double-digit growth was derived from all its business and geographical segments. New innovations such as the creation of a premium bakery outlet, BreadTalk Silver, at the Paragon Shopping Mall and the opening of additional ToastBox outlets had also led to increased local interest in BreadTalk’s offerings. This was evident in the 24.5% increase in bakery sales in Singapore to $39.1 million (Refer to Appendix C).. Looking at the trend of BreadTalk’s net profit, we see that initially, local bakery operations were able to generate positive net profits for BreadTalk in 2002. However, in subsequent years, strong local competition eventually pushed BreadTalk into the red in 2004. Regional expansion efforts and diversification into restaurant and food atria businesses helped to drive the net profit to positive levels again in 2005. In addition, innovative offerings such as BreadTalk Silver and ToastBox have helped to make local bakery operations profitable again and also set BreadTalk on a path of rising net profits from 2005 to 2007.
4.0 INDUSTRY ANALYSIS (FOOD & BEVERAGE): PORTER’S FIVE FORCES Porter’s Five Forces was used to analyze the food and beverage industry environment, including all the relevant businesses in which BreadTalk operates. In particular, emphasis would be given to the bakery business which forms a significant engine for growth for BreadTalk. Outlining the key issues in the external environment would allow us to understand and assess BreadTalk’s position within its respective businesses more accurately. For the scope of this report, we shall examine its businesses in Singapore, which represents the largest geographical market of its operations. 4.1 Intensity of Rivalry The food and beverage industry is characterized by intense competition. In the food court segment, BreadTalk faces competition from well-established food courts such as Kopitiam, Food Junction and Koufu, which price their food and drinks relatively cheaper. In addition, they have a wider reach to consumers as they operate a greater number of outlets in Singapore. Unlike Food Republic, all three food court chains have also introduced discount cards to build on customer loyalty. Its largest competitor, Kopitiam, has even tapped on the Muslim community by opening Banquet, a full-fledged Halal food court.
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In its restaurant business, its closest competitors are the Crystal Jade and Imperial Treasure chain of restaurants, both of which offer a similar dining concept (i.e. Shanghai and Cantonese cuisine) at comparable prices. Competition is highly intense due to high exit barriers and slow growth. BreadTalk’s direct competitors in its bakery business include large and diverse groups of bakery chains and individual operators. Competitors include Bengawan Solo, Delifrance, Four Leaves, Prima Deli Bakery, Crystal Jade Bakery as well as bakeries at various shopping malls, hotels and neighborhoods. Competitors provide similar product offerings at highly competitive prices. It is observed that neighborhood bakeries sell its pastries at a significantly cheaper price compared to other types of bakeries. Six bakeries, which are selected to be most similar to BreadTalk in terms of product offerings, price ranges and locations were documented in detail (Refer to Appendix E). Across all its business units, BreadTalk faces diverse competitors which rely on innovation and product variety to attract customers. It is important to highlight that most of these competitors, especially in the bakery segment, are not publicly listed. Instead, they are mostly family and established businesses which each have their distinctive and successful commercial formulas. 4.2 Threat of New Entrants Given the nature of the bakery industry, threat of new entrants is high as there are relatively low barriers to entry. Firstly, initial capital outlay is relatively low as compared to other industries as equipment cost is low and there is little research and development cost incurred prior to starting the business. Secondly, product differentiation is present though it is hardly a deterrent factor as many businesses sell the same products or imitate quickly. Lastly, the ability to access effective distribution channels presents a greater threat to new entrants. Strategic locations with high human traffic often translate to higher lease payments. As such, not all bakeries are able to situate themselves in prime locations to capitalize on high traffic areas. With regards to the food atria and restaurant businesses, there is a lower threat of new entrants as the capital outlay is significantly higher. To tap on economies of scale and build its brand name, these eateries tend to open more than one outlet. Also, relevant expertise in running a restaurant is required. Most of the abovementioned food atria and restaurants own a relatively large number of outlets each. 6
4.3 Bargaining Power of Buyers In the food and beverage industry, customers enjoy significant buying power as they incur low switching costs. In general, the demand for food is highly price elastic. Majority of the customers are sensitive to price increases and would not hesitate to change their tastes and preferences accordingly. This is especially pertinent during occurrences of high inflation as the general public switch to cheaper alternatives. 4.4 Bargaining Power of Suppliers Suppliers have relatively low bargaining power in the food and beverage industry, primarily due to the large number of existent suppliers. As they are located further upstream, they are not able to mark-up their products significantly as most of their customers are bakeries and restaurants that purchase in bulk. These bulk purchases suppress the bargaining power of the former. More over, ingredients such as flour, eggs and wheat do not vary largely in quality across suppliers, further lowering their bargaining power. 4.5 Threat of Substitute Products As mentioned, product substitutes are a strong threat in the bakery industry as their prices can be comparatively lower and customers face low switching costs. Any light takeaway snacks constitute possible substitutes which customers can opt for. Substitutes can be as diverse as snack joints such as Old Chang Kee, Mr. Bean and Jollibean, to traditional coffee outlets such as Ya Kun Kaya Toast and Wang Jiao. 5.0 OVERALL COMPANY ANALYSIS – CORPORATE LEVEL 5.1 Corporate Level Strategy BreadTalk’s corporate level strategy is characterized by an increasing level of diversification. In 2003, it diversified into the Restaurant and Food Atria businesses. As such, it currently has three separate business units, namely Bakery (and its associated franchised outlets), Restaurants and Food Atria. For the purpose of analysis, BreadTalk’s extensive franchise network internationally shall be regarded as a form of geographical diversification. The following diagram outlines the approach to analyzing BreadTalk’s corporate level strategy.
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FIG 2: CORPORATE LEVEL ANALYSIS
5.1.1 Related Diversification: Economies of Scope Leveraging on its core competencies through franchising With regards to its Bakery line, BreadTalk was able to expand quickly through franchising. As of December 2006, BreadTalk had a total of 73 franchises5. BreadTalk’s franchise contribution margin increased to 7% of total revenue in view of its base fee, store license fee and monthly royalty fees. This allowed BreadTalk to derive best practices where operating standards and recipes were supplied to BreadTalk franchisees, directly leveraging its existing core competencies of innovative products. Under the franchising guidelines, BreadTalk’s management team would provide support services in site selection, store equipment, design and layouts6. These core competencies provided a viable basis for synergy among its Bakery line and international franchises because they enhanced the competitive strengths of these overseas outlets. By combining the expertise of experienced food industry players in these foreign markets, BreadTalk was able to develop local adaptation in its products while lowering its costs through trading off a lower level of control over processes and activities through franchises. In October 2003, BreadTalk entered a master franchise agreement with Kuwait-based Al-Mejhem Global 5 6
2005 Annual Report BreadTalk – Franchise with us, http://www.BreadTalk.com/franchise.htm
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Group, which was a family-owned diversified food and beverage company, possessing ‘a network of contacts, firm financial standing and a sound marketing plan for growing the BreadTalk brand in the Middle East7’. Together with BreadTalk’s already strong brand name and unique concept bakery stores, these core competencies were not easily substitutable in foreign markets. Sharing related activities among business units Cost savings were derived from BreadTalk’s ability to utilize the same suppliers across their franchise outlets. In addition, BreadTalk seeks to achieve local adaptation to local taste and preferences as well. Crustum Products Private Limited, BreadTalk’s franchisee in India, uses the flour suppliers as its parent outlets in Singapore, while further differentiating the taste and packaging of its breads. Quoting Managing Director Mr. Reddy, "Our strength is food and their strength is bread. We import flour from Singapore and Japan. Indian foods are fused with breads to provide desi flavour to the varieties as well”8. Other relevant upstream activities like the procurement of other non-perishable raw ingredients for the production of their buns are assumed to be centrally controlled. This ensures minimum quality assurance of its products as well. Within its Singapore outlets, Toastbox’s menu spread of bread and other snacks are prepared in its parent BreadTalk bakery located in the same shop. A central kitchen located at KA Food Link, Kampung Ampat9 was set up to prepare large volumes of toppings and key ingredients before delivery to its retail outlets. Increase in Bargaining Position with its Growth As mentioned above, bulk purchases of raw ingredients across different business units would inadvertently increase BreadTalk’s bargaining power with respect to suppliers. This may explain the low level of vertical integration to secure supplies and overcome cost fluctuations, since they are expected to obtain raw ingredients at favorable prices. However, it should be noted that BreadTalk has chosen not to combine their marketing efforts across its different business units to increase outreach. This is because doing so may result in brand dilution. Moreover, as a franchisee of Din Tai Fung from Taiwan, cross-marketing may be restricted. 7
Asiacase.com, The Asian Business Case Centre, ‘BreadTalk: Managing Expansion Through Franchising’, Foo See Liang & Chung Sang Pok, Dec 2004 8 Crustum Products plans 40 BreadTalk outlets by 2010, M. Somasekhar , Hyderabad , Jan. 12 http://thehindubusinessline.com/2007/01/13/stories/2007011301610500.htm, Marketing 9 http://articles.wallstraits.net/articles/759, BreadTalk-A fresh and tasty IPO
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5.1.2 Unrelated Diversification Corporate parenting/restructuring BreadTalk has a strong and competent management that provides strong support to its strategic planning and budgets, financial functions and human resource management. i) Strategic and budget planning: With more than 30 years of experience in the F&B industry, Mr. George Quek was instrumental in establishing the BreadTalk brand name and identifying new business opportunities in restaurants and Food Atrias. His strong business acumen has historically brought unprecedented commercial successes. Quoting Mr Quek, ‘When BreadTalk merged with Megabite, 17 outlets in China adopted the name Food Republic. The experience gained at BreadTalk will be utilized to expand the Food Republic business10. ii) Customer perceptions and design layouts: Across the business units, all retail stores possess layouts that have been thoughtfully conceptualized to create a unique customer experience. For example, Food Republic aims to recreate a nostalgic atmosphere with 1900s memorabilia and aged wooden beams. BreadTalk utilizes a glass architecture and open kitchen concept to appeal to customers while Din Tai Fung Restaurant’s chic oriental style architecture distinguishes it from its competitors. These retail concepts have been formulated by the corporate office and can be applied within business units. iii) Human resource management: In December 2007, BreadTalk appointed Mr Goh Tong Pak, the deputy director for the Ministry of Education's (MOE's) school appraisal branch, to be made group chief executive officer (CEO). The newly created post will require him to oversee BreadTalk's entire operations, including those in China and Singapore. Quoting a press release from BreadTalk, 'He will also strategize on systems and talent development within the group’11. Again, it is assumed that top managers could be
10
‘Kneading his way to success’, Money Movers, BreadTalk- George Quek, Smart Investor, June 2007, pg 64 11 BreadTalk hires senior educator to be educator to be group CEO http://www.asiaone.com/News/Education/Story/A1Story20071226-42505.html, BreadTalk hires senior
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transferred to new business units like its foodcourt outlets, allowing BreadTalk to capitalize on their employees’ expertise. Portfolio Management BreadTalk’s strategic expansion of its bakery business and foodcourt business in highlighted in its choice between franchises and subsidiaries. In its expansion into China, it will only retain a direct operation pattern in Shanghai and Beijing. BreadTalk set up Shanghai BreadTalk Co. in order to reap higher profits. This is despite BreadTalk having to incur an approximate RMB2 million 12 cost of opening a shop instead of signing franchises.
5.2 Corporate Level Strategy Evaluation Based on the above analysis, BreadTalk’s corporate level diversification strategy has adopted an optimistic yet cautious approach in managing risk and opportunity. Effective expansion into foreign markets BreadTalk has successfully managed its bakery business abroad through franchising and direct operations. They have been able to replicate their core competencies overseas through strategic cooperation with partners and standardization through franchises. BreadTalk has successfully implemented a transnational strategy and straddled its pressures of lowering costs and local adaptation. An example would be how BreadTalk managed to enhance its revenue significantly and establish itself within China’s market in its embryonic stage. Most bakery stores in China average between 1,500 and 2,000 customers per day and 400,000 yuan (US$48,780) in sales 13. "China's bakery industry is growing at an annual rate of 10 to 20 percent," said Wu Zhande, president of the All-China Bakery Association (ACBA). It has harnessed the expertise of credible franchisees in these foreign markets and worked closely with them to ensure quality standards. This explains BreadTalk’s geographic revenue growth in China to increase from 7% in 2002 to 38% in 2007 (Refer to Appendix D). The possible benefits of multinational diversification include allowing BreadTalk to engage in cross-collaborations across businesses so that they can attempt to enter other food and beverage segments more easily. They can also leverage on their brand name to build up market awareness. 12
BreadTalk intends to open 500 stores in China- http://www.chinaretailnews.com/2006/09/14/335BreadTalk-plans-to-open-500-stores-in-china/, 13 Foreign competitors introduce new concepts to bakery industry, http://www.tmcnet.com/usubmit/2006/04/04/1535852.htm
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With a centralized HR and marketing system implemented, BreadTalk can reap the advantages of both economies of scale and scope. Over-reliance on the bakery business within Singapore Even though the bakery line was the founding business unit for BreadTalk and still contributes to 51% of its revenue today, BreadTalk faces strong competition and easy imitation of its products by competitors. In addition, rising flour prices have led to erratic revenues. To overcome these difficulties, BreadTalk has banked on continual product innovation and revamping of its existing outlets to draw in customers. Consumer preferences and their corresponding reaction to ‘fad’ items are difficult to gauge. In our opinion, there is a limit to BreadTalk’s ability to sustain a high growth rate in its bakery business. To address this pressing concern, the bakery segment would be analyzed in detail to further elicit relevant dynamics and trends in the business (Refer to Section 6.0 Business Level Analysis – Bakery Business). Short-term run in managing portfolio BreadTalk has relied on signing franchises for its restaurant line Din Tai Fung, and more recently J.Co Doughnuts from Indonesia. Din Tai Fung’s profit amounts to 38%, which is considered substantial for a franchise. BreadTalk would face limitations in trying to expand Din Tai Fung’s menu and refine its operation as it is a franchise. Also, royalty payments and license fees would have to be paid to the Din Tai Fung restaurant network. Similarly, J.Co Doughnuts could be viewed as an addition to complement BreadTalk’s existing bakery line. Heavy reliance on these franchises to further build BreadTalk’s brand in Singapore may be restrictive and highly subjected to franchisor’s regulations and standards. Given that BreadTalk’s core competencies lie in its unique and wide range of products at strategic locations, BreadTalk’s expansion strategy may be limited by the use of franchises.
6.0 BUSINESS LEVEL ANALYSIS - BAKERY BUSINESS
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The bakery business for BreadTalk achieved unprecedented success in the local bakery sector as the sleek design and open kitchen concept gained huge popularity. Between 2003 and 2005, the BreadTalk bakery business segment saw a rise in revenues with the increasing number of outlets set up regionally. Its performance is highlighted in the following chart: 34
25
33
24
$m
23 31 22 30
No. of outlets
32
21
29 28
20 2002
2003
2004
Year Total retail sales S$ million
Outlets Num ber of units
FIG 3: BAKERY BUSINESS – NO. OF OUTLETS & SALES
It is therefore important to understand the driving forces behind BreadTalk Bakery’s success by first identifying its core competencies. This is followed by a SWOT analysis to outline the Bakery’s external environment in detail. 6.1 Competitive Advantages and Core Competencies 6.1.1 Unique Concepts and Branding BreadTalk bakeries differentiated themselves from traditional bakeries with sleek and space-age looking store facades and an open-concept design. Unlike other bakeries, BreadTalk’s novel openconcept design allowed customers to view the bakers at work and generated a lot of customer interest in its products. In addition, BreadTalk came up with creative and fun-sounding names for all their buns. Some buns had a short anecdote to tell a story. New types of buns are introduced regularly as well to maintain consumer interest. Such unique initiatives by BreadTalk allowed them to differentiate themselves from other bakeries. BreadTalk is focused on its branding and has made great efforts to promote the BreadTalk brand. To ensure this, the modern and contemporary designs of the stores are standardized in all the BreadTalk outlets. Such is the devotion to a clear brand identity that when BreadTalk recently renovated and launched the “Niu” store layout for the CityLink Mall outlet, it also announced plans to renovate all
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its other stores around the world to the same layout concept14. Equipment such as bread tongs, trays and the uniforms that all store employees must don are also standardized in all bakery outlets. This new concept allows BreadTalk to continue projecting a fresh, clean and lively look that has become synonymous with their initial bakeries. Consequently, BreadTalk has garnered awards such as “Singapore Most Distinctive Brand Award 2003-2004” and “Singapore Promising Brand Award” for from 2002 to 2004. In 2007, more than 1000 respondents were polled in a market research survey conducted by Temasek Polytechnic Business School students. The survey findings showed that BreadTalk had the highest brand recall and is associated with creativity and innovation15. 6.1.2 Wide Product Offerings Challenging and revolutionizing conventions, BreadTalk bucked the trend by investing in an inhouse Research & Development Team to continuously develop new buns for their bakeries. About ten new items are introduced every four months. This allows BreadTalk to provide new products to the unsatisfied tastes of customers. BreadTalk currently offers more than 150 varieties of breads, buns, pastries and cakes16. Depending on the size of the bakery outlet, each bakery outlet offers 4060 different items daily. This creative flair for producing new and innovative products has set BreadTalk apart from its competitors. 6.1.3 Strategic Locations BreadTalk has strategically located its bakery outlets at accessible and high human traffic flow areas. According to the official website, these critical outlets tend to be located near public transport systems such as bus terminals, the Mass Rapid Transit stations and the Light Rail Transport stations17. Inevitably, this also translates to significantly higher rental costs. 6.1.4 Strategic Partnerships and Liaisons 14
BreadTalk Gets a ‘Bakeover’, Gabriel Chen, The Straits Times, 29 Jan 2008 Real-Life Client Projects, BreadTalk – The Branded Bread Project http://www-bus.tp.edu.sg/bus_home/bus_showcase/bus_studentprojects/bus_studentprojects_mkt. htm?popup=print&lp=BUS& 16 Competitive Strengths, Wide Range of Products http://www.listedcompany.com/ir/BreadTalk/web/show.cgi?content=strengths& 17 Competitive Strengths, Strategic Location http://www.listedcompany.com/ir/BreadTalk/web/show.cgi?content=strengths& 15
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The acquisition of Topwin Investment Holding Pte Ltd brought expertise and know-how of the workings of the F&B industry in China to BreadTalk. Leveraging on Topwin’s experience, BreadTalk did not need to depend only on franchise stores but was able to also operate its own bakeries in Shanghai and Beijing. In addition, with the knowledge from Topwin, BreadTalk was able to increase its presence in China’s Foodcourt business with the opening of new food courts in locations such as Chongqing and Shanghai. 6.2 SWOT Analysis of Bakery Segment To better understand the key issues and trends facing the Bakery segment, a SWOT analysis was implemented, as exemplified below:
• • • • • •
Strengths Market leader and the only public firm locally in bakery operations Wide product offerings Higher economies of scale Continual and successful innovation Regional ventures Strong Franchise Partnerships
• • • • • • •
• •
Opportunities Growing F&B sectors internationally Emerging markets regionally which share similar diets
• • •
Weaknesses Unpredictable consumer tastes No loyal customer base Business which relies heavily on volume-based sales Only 2 countries (Singapore & China) are the revenue drivers Innovative products can be easily replicated Restaurant division is a franchise which needs to be renewed No direct control over overseas operations Threats Market saturation in the local bakery industry Increasing competition in Singapore Existing competitors in new markets
FIG 4: SWOT ANALYSIS OF THE BAKERY SEGMENT
Based on our findings, despite BreadTalk’s attempt in differentiating its bakeries to ensure continual customer interest, its erratic revenues (Refer to Section 3.2 Profit - Earnings) may stem from the ‘Weaknesses’ and ‘Threats’ which far outweigh its potential benefits. However, it is important to differentiate this from BreadTalk’s diversification of the Bakery to overseas markets as that would
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be a corporate level decision. Therefore, the focus is on the unpredictable performance of the Bakery business within Singapore. 7.0 STRATEGIC ISSUES IDENTIFIED Our team has identified three key issues that are facing BreadTalk. They have important implications for its current expansion strategy, impacting its short and long term performance. Also, these issues involve critical decisions that have to be made at the business and corporate level that will ultimately influence operations locally and overseas. In particular, the first two issues relate specifically to the bakery business, while the third focuses on the corporate level diversification strategy. Issue 1: Can BreadTalk ensure consistent growth for its Bakery business within Singapore? Over the years, the performance of the bakery segment had been erratic and inconsistent. For example, the revenue increased by more than 100% from 2001 to 2002. This occurred as BreadTalk was embarking on a rapid expansion of numerous bakery outlets across Singapore.
The revenue
growth in 2003 dropped drastically as BreadTalk was greatly affected by SARS that year. However, they managed a reasonable revenue growth through more outlets in Singapore. 2003
2004
Profit from Ops
Profit %
$(‘000) Bakery * Restaurant Foodcourt
2005
from Ops
Profit %
$(‘000) 79.5%
257
20.5% 2 091 100.0% -
-
from Ops
N.M.
-
-116
2007
Profit %
$(‘000)
999
-
-802
2006
from Ops $(‘000)
N.M.
Profit %
from Ops
%
$(‘000)
1 829 24.4% 3 873 32.5%
3 283 67.4% 3 487 46.5% 4 571 38.4% 1 586 32.6% 2 185 29.1% 3 457 29.1%
FIG 5: BREADTALK’S PROFIT SEGMENTS (2003-2007)
Based on Figure 5, the bakery segment had been lost its edge as the main profit driver for the Group. For years 2004 and 2005, negative profits were recorded for the first time (Refer to Section 3.2 Profit - Earnings). This is a critical issue to be addressed by BreadTalk if it wants to rely on the 16
Bakery segment as its key revenue and profit generator. This issue also raises questions of whether BreadTalk is able to continue its innovation to ensure growth. If they are unable to do so, this may be a signal for BreadTalk to re-evaluate its diversification strategy to focus on other engines of growth. Issue 2: With its bakery products easily replicable, how can BreadTalk attempt to differentiate themselves from their competitors? BreadTalk continues to face a high intensity of rivalry in the bakery operations, both locally and internationally. Local bakeries have been quick to mimic its latest innovations as buns can be considered relatively ‘easy to reverse-engineer’. Internationally, concept stores have also tried to imitate BreadTalk’s success. This may seriously undermine BreadTalk’s foray into international markets via franchising its bakery. The illustrations below exemplify the extent to which the concept of BreadTalk has been emulated by its rivals.
FIG 6: BREADTALK & ITS COPYCATS
Our team agrees that the issue of imitation poses a significant obstacle of the Bakery’s sustainability in the long run. This is especially pertinent in markets like China and India, where intellectual property rights protection is generally weak.
Issue 3: At the corporate level, is BreadTalk’s expansion strategy short-term in nature? As previously mentioned (Refer to Section 5.2 Corporate Level Strategy Evaluation), BreadTalk’s diversification into new product lines have been primarily achieved through purchases of franchises like Din Tai Fung and J.Co Doughnuts. Even though these constitute low-risk ventures as they do not require R&D, further developing these product lines may prove challenging as they are 17
restricted by clauses of the franchise agreements. Moreover, if Din Tai Fung proves to be a successful and viable business model, they are not allowed to replicate or expand into foreign markets unless given permission by the franchisers. Yet, the latter constitutes complex negotiations and is subject to the franchiser’s discretion. As such, in the long run, BreadTalk may face severe limitations in its diversification strategy. 8.0 RECOMMENDATIONS The following recommendations represent broad strategic proposals which BreadTalk can consider to address the issues highlighted above. It should be noted that each recommendation may address more than one issue, depending on the context in which it is raised. 8.1 Refine existing Bakeries & Focus on the Restaurant & Food Atria Businesses within Singapore Given that the local bakery industry is saturated with competitors that can imitate original innovations of BreadTalk quickly, it is unlikely that they are able to continue sustaining its growth in the long run through the expansion of new outlets. However, BreadTalk Bakery should instead continue to ‘refine’ its current outlets. A case in point would be creating ‘BreadTalk Silver’ to cater to the high-end discerning crowds that throng Paragon. As there would be a limit to the number of outlets that BreadTalk Bakery can open, it should focus on developing and expanding its key drivers of profits, such as Din Tai Fung and Food Republic. 8.2 Leverage on Branding and Strategic Locations to create loyal customer base worldwide To counteract against the possible high imitation by its foreign competitors like bakeries in China, we suggest that BreadTalk rely on its international brand presence to charge its products at a premium. This would support BreadTalk’s key core competency in locating its retail outlets at strategic, high-traffic areas, which inevitably require high rentals. Yet, these strategic locations in office towers were played a critical role in allowing it to attract affluent and highly discerning customers who pay attention to the brands associated with their purchases. This would also enable BreadTalk to create a loyal customer base that will not be easily eroded away by competitors. As BreadTalk begins to build further scale in its operations in China, a similar strategy of using central kitchens and fixing key suppliers can be introduced to further lower costs.
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8.4 Remain highly selective in choosing Franchisees We propose that BreadTalk continue to be optimistic but cautious in its expansion of the Bakery, as the success of the franchise model is highly dependent on the quality of the franchisees, their ability to maintain the BreadTalk brand, product appeal and quality. Franchising works well for businesses with good track records of profitability, a unique or unusual concept, with broad geographic appeal and are relatively easy to operate18. Failing to do so would seriously undermine BreadTalk’s overseas expansion plan and its brand image, impacting its diversification strategy. Finding credible Chinese partners constitute a significant challenge to ensure BreadTalk’s long-term existence in China. Additionally, to support its rapid expansion, BreadTalk has to retain and train loyal employees to uphold product quality. 8.3 Use Franchises as test-bed for Future Self-Development Even though signing franchises with Din Tai Fung and J.Co Doughnuts may restrict the BreadTalk’s flexibility in further developing the business lines, they can be considered lower-risk ventures whereby BreadTalk can terminate these lines without incurring substantial costs (termination charges notwithstanding). These decisions can be viewed as a medium-term gauge of whether the franchise is a sustainable business model. As such, we suggest that BreadTalk continue this strategy in the short-term, bringing in successful business models that are potentially lucrative to ride on the current fads. A case in point would be how J.Co Doughnuts was only brought in after BreadTalk had ‘assembled an able team using J.Co’s well-oiled system of operations’19. If J.Co Doughnuts prove to be a sustainable business model in the medium term, BreadTalk can then consider developing its own similar outlet in Singapore, without the restrictions of franchise agreements. This would benefit BreadTalk given that it has already built up relevant expertise in operations in this area. However, these additions to the existing business lines must be carefully considered as to whether they enhance BreadTalk’s existing core competencies and the sustainable level of value creation that can be extracted from them.
18
Howard, T. (1996). Howard Johnson: Initiator of franchised restaurants. Nation’s Restaurant News, 30(2), pages 85-86 19 ‘Much a-dough about nut-thing’, Feb 10 2008, http://forums.hardwarezone.com.sg/showthread.php?t=1858520,
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9.0 APPENDICES Appendix A: BreadTalk Group Revenue Growth (2001-2007)
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Appendix B: Year-on-Year Group Revenue Growth (2002-2007) 120.00% 100.00%
Operating Profit Margin 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 5
04
07 20
03
06 20
02
2 00
20
20
20
80.00%
Operating Prof it Margin
Year-on-Year Revenue Growth
60.00% 40.00% 20.00% 0.00%
2002 2003 2004 2005 2006 2007
Appendix C: Group Net Profit (2002-2007) ($'000) 8000
7300
7000 6000 5000 4000 3000
3500
3400
($'000)
2000 1000 0 -1000
1000 2002
2003
2003 -30 2004
1040 2005
2006
2007
Appendix D: Comparison of Geographic Expansion of BreadTalk (2003 & 2007) 7%
Singapore China
93%
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2007
11%
Singapore China
38%
51%
Rest of the World
Appendix E: Key Competitors in the Bakery Industry Peer Bengawan Solo
Cyrstal Jade Kitchen
Business Analysis This cake and ‘kueh’ (traditional pastry) retail chain targets the premium market segment based on nearly everything from the sophisticated décor of its shops to the pricing of its products. It is generally perceived as having an authentic and traditional recipe. The quality of Bengawan Solo’s cakes and pastries are generally regarded as high and very consistent despite its long presence in the industry. It could threaten BreadTalk’s premium-priced products although Bengawan Solo generally has lesser varieties while BreadTalk keeps innovating new products. This bakery is unique because it actually takes up a small section of its other business which is the Crystal Jade Kitchen restaurant. It uses a complementary strategy of attracting customers who are already dining in the restaurant to savour treats from the bakery as a form of appetizer or dessert. Its products are generally quite similar in variety and price as BreadTalk, based on common Chinese delicacies hence making it a close competitor. Both companies also have restaurants as corporate strategies.
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Four Leaves
Prima Deli
Q-Bread
Sweet Secrets
A very close competitor of BreadTalk because it constantly innovates with new products and customers has a large variety to choose from. It sells popular local delicacies such as floss buns, it also has a comprehensive range of other products such as cakes, Swiss pastries and French bread. Its retail strategy is very similar to BreadTalk, having stores at high volume areas with attractive décor. It offers products very similar to traditional bakeries in the heartlands. Like BreadTalk, its products are priced at a premium. Most, if not all of its retail activities are concentrated in upscale places such as shopping centres. Its cakes and pastries could pose both as a close competitor and as a mainstay substitute to BreadTalk’s products which are primarily innovative concoctions. Like Four Leaves and BreadTalk, Q-Bread’s strategy is to locate in strategic upscale areas with a high volume of traffic. Retail space is generally small and many varieties of buns and pastries litter its shelves. Bread is a close competitor with BreadTalk because of similar prices and introduction of similar products which are reincarnations of previous ones. Sweet Secrets is synonymous with innovation and creative products. That is why it is probably BreadTalk’s greatest threat. Without resorting to hype-generating media coverage, Sweet Secrets competes from a different perspective. It incorporates technological processes such as its latest invention “Photocakes” where food colourings are used to replicate prints on cake surfaces. It also has licenses with Disney to use images of characters such as Winnie the Pooh in its products.
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