Levendary Café is a quick casual dining experience that is expanding into China. The new CEO, Mia Foster, took over the company and began looking into the eighteen-month expansion that was occurring in China. She discovered that the Levendary Café China President, Louis Chen, was up to no good. He was given free reign from the previous CEO and he needed to be handled with. First, Foster is going to have to take a look at China and what it has to offer, and then figure out a way to negotiate with Chen accordingly. Foster will need to make an analysis of the environment of China to determine what kind of society she will be doing business with. Then she will need to look at an analysis of the economy and demography. After that she will need to establish that there are going to be cultural differences between the two countries and she can use Hofstede’s Cultural Dimensions to help minimize the issues. A quick look at the financial analysis of China and Mia Foster can start to begin her recommendations for change. Case Summary
Levendary Café is a publicly traded, franchised brand of about 3,500 stores in the United States that is expanding into China. Known for their wholesome soups, salads, and sandwiches, Levendary Café offers high-quality organic ingredients to satisfy customer demand. They are committed to serving their customers in comfortable, friendly environments. Levendary Café is a combination of Quick Service Restaurants and Casual Dining. They offer a Quick Casual dining experience with an average check in the $8 to $12 range. Levendary Café is distinguished by their willingness to takes risks, a key trait of the original founder.
This is also a trait of the President of Levendary China, Louis Chen, possesses. With the expansion into China, there have been changes and adaptations to the store design and menu selections in the 23 new stores located in different cities in China. Mia Foster, the new CEO of Levendary Café, has been looking into the Chinese operations that have been successful for the last eighteen months. Foster has been comparing the companies menu, store look and feel, as well as what other companies are doing worldwide to find the appropriate approach for Levendary Café and how they can stay consistent across borders (case study). Environmental Analysis
China has a political environment of a communist state led by one party. In other words, China has a moderate form of collectivism in which there is government ownership of institutions, and where profit is not the ultimate goal. There is a high level of governmental interference as well as strict labor and tax laws/requirements in China. Corruption is something that happens often within the Chinese negotiation process, so when Levendary conducts business, Foster will need to keep this in mind. The reason that China is still considered a communist country is because of the limited political freedom that its citizens receive. As new businesses enter into the market, government regulations increase on Multinational corporations, while decreasing for those domestic companies that are locally owned.
Since China has a highly developed level of technology, there is a high use of manual labor as well. With the use of this advanced technology, Levendary can use it to their advantage to help get brand awareness (case study).
When Foster is extending the contracts of those Levendary China employees, she needs to consider what form of law that the Chinese adhere to. China follows Socialist law, which influences countries regulations that were formerly owned by the Soviet Union. Property is owned by the state as well as enterprises. Therefore this creates issues for Foster and the expansions of Levendary Café. Economic and Demographic Analysis
China’s economic freedom score is 52.5, making its economy the 137th freest in the 2014 index, according to the Heritage Foundation. China has moderately improved in its investment freedom, business freedom, and monetary freedom over the past 20 years, outweighing its declines in freedom from corruption, labor freedom, and the management of government spending. China has a population of 1.4 billion, with a $9,162 per capita GDP and an overall GDP if $12.4 trillion (Heritage Foundation). There is a 14.5% growth in China’s GDP. China has an urban population that rose from 36.2% in 2000 to 46.6% in 2009. There is a strong middle class that emerged whose per capita income surged from RMB 6,282 to RMB 17,175 (article). There is an affluent middle class, with an increase of women in the workforce, therefore creating a growing lifestyle to eat out. The unemployment rate in China is 4.1% (Heritage Foundation).
Levendary’s customer base is white-collar professionals and upper-middle-class women. The heavy user attends the store 5-6 times weekly. The trade freedom in China has improved by over 50 points, but score for investment freedom, financial freedom, property rights, and the control of government spending have all suffered double-digit declines. This could limit Levendary from their ability to give freedoms to their employees while they are back in the United States and it needs to be considered by Foster. The state has tight control of the financial system as it primary means for managing the rest of the economy; therefore Foster needs to be able to handle the decisions based on the amount of government leniency. (Heritage Foundation) Hofstede’s Cultural Dimensions Analysis
There are many cultural differences that Levendary will encounter when doing business with China, or any foreign country for that matter. According to the textbook, employees in the United States are factual and objective decision makers. They tend to make an early concession to prove to their counter party that they are flexible and reasonable. Deadlines are very important to Americans. When agreements are made they will be resolved quickly and they will do it immediately. On the other hand, Chinese employees seek for the room to be in agreement and tend to delay the specific details of the agreement. Their goal is to limit and focus the discussions to make them more efficient. Cultural differences are issues that can be overcome with the right set of analysis and focus tools.
Geert Hofstede created an analysis of cultural differences that can explain how the United States and China can work together to find a way to negotiate. The United States has a low power distance, where China has a high power distance (Hofstede). American employees tend to have larger inequalities amongst the levels of management while Chinese employees try to work together as a whole to achieve the decision. (textbook) The management team of Levendary Café will need to be very cautious when entering into China to do business. There are differences in management styles and it could be offensive if taken the wrong way. Foster needs to be knowledgeable in this to ensure the negotiation process goes smoothly.
American employees are more individualistic in their approaches (Hofstede). They tend to only be concerned about themselves and their immediate families. There is a greater individual initiate and promotions are based on market value. Chinese employees tend to be more collective in their approaches (Hofstede). Chinese people belong to a group that looks after each other in exchange for their loyalty (textbook). This is an easy cultural difference that Foster will be able to manage. By creating a consolidated team, Foster can help Chen better manage the cafes to ensure that there are no issues in the future.
When it comes to the masculinity/femininity approach to negotiation for both the United States and China are rather close on the masculine scale (Hofstede). Both societies have dominant values in success, money and things. There is a great importance on earnings, recognition, advancement, and challenge. Individuals are encouraged to be independent decision makers, and their achievement is determined by recognition and wealth. The workplace is often that of a high stress job, many managers believe that their employees dislike their work. When working with Chen, Foster should not encounter any cultural differences in this aspect.
China has a weak uncertainty avoidance that will be beneficial for Levendary to do business successfully. Low uncertainty avoidance societies have organization settings with less structuring activities, fewer written rules, more risk taking by managers, higher labor turnover, and more ambitious employees. Since Levendary is already willing to take risks (textbook). For example they took a risk by using only organic grains in its breads, or only hormone-free naturally raised meats in their sandwiches. By taking these risks, Levendary willingly had its customers paying premium prices, increasing revenues and margins. This boosted the customer trust, therefore promoting the brand. By taking these risks, Levendary has been successful at gaining customer brand awareness while making the customers “feel rich” while doing it. Financial Analysis
The cost structure for Levendary’s Café is more focused on the United States than it is for China. In other words, the overall income statement favors that of the United States approach, while the income statement for China needs some work. In the US the costs related to occupancy, such as real estate rental, common area maintenance, and energy and waste disposal are hovered around 10% of revenues. The overall income statement represents that of occupancy are around 6.5% and the Chinese statement reports 24%. There needs to be better control on the occupancy expenses and more focus on the labor expenses. In a typical American restaurant, labor is the largest cost element. That is why it is 25-35% of revenues.
The overall statement suggested that of only 12% for China’s labor, unlike the 27.2% for the United States. Levendary needs to put more focus on paying their employees the compensation that they deserve. Food costs accounted for 28-32% of expenses because of not only the ingredients, but also the amount of waste. China has an issue with this area because they have reported a 51% food and paper expense compared to the 24.3% American expense report. In order to become profitable, Levendary will have to minimize these wastes and decrease the expenses. Recommendations
I would recommend that Foster begin with a flexible market strategy for their joint venture. The original CEO had the idea of going with a joint venture with an established Chinese operator, and Chen would be that operator. I think that they should manage the operations equally between China and the United States. Chen needs to be told that he has to adhere to the rules of the home-based country. That is the only way that will keep all ethical issues from arising. While Foster is in the United States, Chen will manage the stores in China under the same principles and guidelines. The cultural issues that come up can he handled with accordingly and will ensure that no one is offended. The adaptations to the menus and store designs will benefit Levendary, as long as the wholesome, comfortable, friendly environment is upholded.
The adaptations that Levendary will face will come when entering into ant foreign market. The menu and the store design are the two main factors that are being dealt with. The menu has to be adapted for the Chinese style of food, but not to the extent that Chen took it to. Levendary Café is known for their wholesome soups, salads, and sandwiches. The menus should stick to this idea with the added dumpling on the side. The sandwiches will also be altered based on the tastes; such as instead of a turkey sandwich they can serve a chicken sandwich. Or instead of the cheese soup that is popular in Southern United States, change it to the Thai veggie soup.
The prices should be considered as well. The $8-$12 range is the typical price that any middle class person would pay at a quick casual dining experience. Therefore the prices of $10 for a meal are reasonable; on the other hand, in Shanghai they are only charging $2. This could be a reason for the negative net income. By increasing these prices, Levendary will be able to be more profitable in the end. Also Chen has proven the adaptation to seating. There is one restaurant that doesn’t have any seats, this should be considered. If there were seats, would it bring in more customers? Or do the customers enjoy this, and we need to offer more restaurants like that? These are all questions that Mia Foster needs to consider.
I believe that the management team will be able to succeed with the operations in China, but there are serious adjustments that need to be made. If both countries are willing to put in the work and there is enough funding, there is nothing that Levendary Café can do, but succeed. Summary
By having a flexible marketing strategy, Levendary can increase its brand awareness by promoting organic, healthy, tasty foods. Their position of better quality food is better than that of their competitors. Levendary is fast and cheap, but yet they have a comfortable, friendly store design that welcomes you. Because of the networks that Chen began with, there are an abundance of stores located in populated areas with high human traffic that are beneficial to becoming a profitable restaurant. Customers in these areas are low-income families seeking local fast food. Levendary China is serving the food according to the local tastes, therefore bringing in high competition with low margins. This is also increasing its brand awareness. Mia Foster will have her hands full with Chen and this case, but with these recommendations she will succeed. The current and future expansions into China will be adapted to bring in the same profits that the Unites States stores do.
China. (n.d.). Retrieved December 2, 2014, from http://www.heritage.org/index/country/china Commerce. (n.d.). Retrieved December 2, 2014, from http://www.ukessays.com/essays/commerce/levendary-cafe-case-study-commerce-essay.php THE HOFSTEDE CENTRE. (n.d.). Retrieved December 2, 2014, from http://geert-hofstede.com/china.html