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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 MBA’s from the trenches of their businesses and from trial and error. Since he started his first company at age 25, he’s 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 café 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-café 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)  3

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 company’s 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 cafés 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 China’s 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) 4

and knew his experience running Au Bon Pain’s 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 Phid’s 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 people’s 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 world’s 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 franchiseesi.

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 model’s 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 you’re going to start a franchise anywhere, you’re going to first need a proven 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 restaurant’s 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 franchisor’s 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 you’re 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 marketiii.

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, MacDonald’s, and Century 21 as well as retailers like WalMart and Carrefour. According to reports published by the group on the U.S. Commercial Service website, China is expected to become the world’s 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 China’s 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 people’s rising living standards has coincided with an increased brand consciousness and desire for Western brands in the food and beverage industry especially. China’s gradual encouragement of a free market economy and socio-economic developments have also greatly increased the number of welleducated 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 McDonald’s, KFC, Pizza Hut, Athlete’s Foot, Century 21, and the leading global café 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 alone it is estimated that an average of 40 million people consume one of their coffees every weekv. This statistic is an impressive example of Starbucks Corporation’s 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 company’s Fiscal 2007 Year in Review where they have dubbed themselves “The World’s Coffee House”: “With more than 15,000 locations around the globe, Starbucks is acknowledged as the world’s coffeehouse. Our familiar green logo‚a symbol of one of the world’s most recognized and respected brands‚is 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 world’s 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. That’s not to say Starbucks avoids strategic partnerships and alliances to open locations in the most prime markets. According to Schultz, the company’s 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 corporationsviii.” 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 world’s 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 it’s in Asia that it sees its future. There’s 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 who’s there, what they’re changing, what they’re 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 they’d 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 they’d rather have a cup of tea that come free at any restaurants, but they’d 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 it’s 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 brand’s marketing slogan that encapsulates the company’s 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 Maxim’s, Hong Kong’s 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 Maxim’s 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 don’t 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 Shanghai’s 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 5th 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 you’re 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 you’re going to introduce a new brand, that’s where you have to be because that’s where all the high end brands are there, Gucci, ect.,” Phid tells me. “You might run negative cash flow (50% occupancy) but that’s your advertising. They’ll see Green Mountain coffee nestled into the big brand names so they’ll recognize it in Su Jo. Once they see the name on “5th Avenue” it’s 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 company’s new lines like of Tazo(R) Teas have sold well, the firm’s 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 gogetting 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 management’s 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 McDonald’s.

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, they’re afraid of beef. They’ll never sell you a steak unless it’s black inside. They won’t 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 Hut’s 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 shouldn’t 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 it’s 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 there’s 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. Phid’s 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 café 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 he’d 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 cafés 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 cafés 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 and Nelson 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, don’t 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 executive’s 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. “They’ll do anything to move ahead and their government would just ORDER it to happen,” that’s what so impressed him. To him, the communist party’s 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 you’re invited to a party, you better go. It’s 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). I’d 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; “Here’s 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 he’d want to Celebrate Christmas, so they procrastinate and stall until it’s 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 cafés.” Phid recalled, “If you didn’t support the party, they wouldn’t rent to top spaces to you. For every deal we were turned down on it was never a 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 didn’t have the support of the city officials, Phid couldn’t 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 didn’t 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 don’t 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 weren’t 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 he’d 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 wasn’t the reason I left and I didn’t even mind discovering Nelson and his cronies were out to screw me,” Phid told me with a smile, “But I just can’t do business with people who I can’t 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 can’t 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 MBA’s 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 you’re 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 can’t wait to experience it myself soon….

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Bibliography:

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i

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 The Marketing Genius behind McDonalds Franchise  Successhttp://www.franchisedirect.com/foodfranchises/themarketinggeniusbehindmcdonaldsfranchises uccess/14/25; Copyright 2003­2008 Franchise Direct iii  Qu, Tara. Shanghai International Franchise Exhibition, October 22­24 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 22­24 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.2008 vi  Starbucks Corporation Fiscal 2007 Year in Review www.starbucks.com/yearinreview/index.html Copyright ¬© 2007 Starbucks Corporation. vii  Godfrey, 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) ix  Godfrey, 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, 2008  Godfrey, Mark. Coffee With Cream On Published in: China Today, October 2005

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 Godfrey, 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 2008 xiv  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)