UPDATED: Why Krispy Kreme is Doomed in Mainland China

In the Hutong
Breathing those little airborne cotton balls
2056 hrs.

Via Danwei, China Economic Review is quoting Krispy Kreme's HK CEO explaining why the confection pushers are planning to start their invasion of the People's Republic of China in Shenzhen.

"Shenzhen is a migrant city, many are from the north, and the people are more receptive to fried products."

Krispy Kreme is doomed in China.

Write it off.

It's going the way of Jack-in-the-Box. Or Wendy's.

You Don't Really Want to Be Here, Do You?

First, any company that would stoop to concocting such a nonsense justification for locating a high-value franchise somewhere is engaged in some high-level self-delusion. I would bet that real reason they're going to do Shenzhen first is that the HK CEO is getting stuck with the job on the mainland, probably likes his mid-levels flat, and doesn't want to be flying to Beijing or Shanghai all the time. Shenzhen, on the other hand, is 45 minutes from Central by car.

Second, if Krispy Kreme was really serious about China, they wouldn't hand the responsibility to a guy in Hong Kong. They would do their research and put a guy on the ground in Shanghai, Beijing, or somewhere else in China to act as representative, get to know the local government, and find local franchisees. Behaving like you need to enter China from Hong Kong, then Shenzhen, is a modus operandi far more appropriate to China's circumstances circa 1990.

Third, if Krispy Kreme really understood the way into China, they would start someplace where there are a lot of people who already like donuts, can't get them, and will form long, slavering lines outside their door each morning. If you're afraid of Shanghai, go with Beijing. Call me crazy, but tens of thousands of American and Canadian businesspeople, students, diplomats, and families seem like a built-in market for a store or ten, better (especially initially) than a million or two migrant workers and their factory bosses.

Alas, Krispy Kreme appears content to sit in Hong Kong and wait for the franchisees to come to them, and then invade the market slowly.

Watch the Other Guy Feel the Stones

Time to study the tactics of companies like Starbucks, McDonalds, KFC, Pizza Hut, Dominos, and Papa John's. They knew where their ready markets were, started with those places, put people on the ground in the mainland separate from Hong Kong, and have insanely thriving businesses today because of it.

And, as The Village Grouch correctly points out, Krispy Kreme can also build on the experience - and failure - of Dunkin Donuts in Beijing. In the late 1990s, Dunkin rolled out about 10 stores very quickly, many located in the same space as their Allied-Domecq sister company, Baskin-Robbins.

However, they did little or no consumer education, and when faced with the choice between something they knew and liked - ice cream - and the cakey things they found too sweet for their palates, the uneducated consumer went with what they knew.

Beijing is without a franchised donut store today. But that has as much to do with timing as anything, and it could be argued that the timing is far better today than it was a decade ago.

Where Giants Have Trod

American-born, Thai-based billionaire Bill Heinecke helped to bring Pizza Hut to China in the early 1990s. (If you ate at Pizza Hut in Beijing back then, thank Bill.) However, the going was slow, the joint venture arrangement difficult (as they are), and Heinecke's group sold their shares after a few years and went back to selling pizza in Thailand, which they did quite well.

After a spat with Yum Brands, the parent company of Pizza Hut, Heinecke founded his own pizza chain, The Pizza Company. Seen any of those popping up in the Hutong lately? Right.

Now, after Pizza Hut, Domino's and Papa John's (not to mention the superior product at Kro's Nest) have all established a foothold, The Pizza Company comes to a market where it must fight for a crust, rather than cut itself a large slice of the pie.

So heads up, Krispy Kreme. You have neither the money nor time to burn on timid, ill-conceived strategies in China.

A Last Word

The above said, I must add the caveat below.

Many of us still remember the days when "experts," Chinese and foreign, were saying that pizza would never sell in China because Chinese lack the enzyme required to digest cheese and other milk products. The aforementioned chains give lie to that.

Beware of people who give you reasons why something will work someplace and won't work another. There is no substitute for ignoring all of the naysayers and getting in there and trying.

Fortune in China usually tends to favor the brave and the wise. Be both.

Comments

[Ronald McD]

Surely, you are not advocating that KK open in Beijing because North Americans will buy their donuts? I hope this is not the type of advice you give to your clients. If you want to build a successful company in China, don't build it on the business of non-Chinese. Also, I guess you have failed to notice that KK is closing stores left and right in NA and that their share price has dropped 70% over the past year. North Americans are not interested in eating unhealthy donuts anymore. You also fail to mention the big reason why Pizza Slut and other Western fast food chains have done well in China - they changed their products to suit local tastes. You won't find canned corn on a pizza in Columbus. And you fail to mention that a massive percentage of northern Chinese eat donuts every day for breakfast - have you ever heard of youtiao? They might be wrong to start KK in Shenzhen but maybe not if they decided to add congee to the menu, too.

[China Law Blog]

@Ronald McD,

1. Businesses all the time follow their clients. Why not start out in a place where you know you already have a large mass of customers and potential customers. Maybe Krispy Kreme will never get past ex-pats, but that would certainly not be a bad place to start.

2. My firm has a large number of clients who have gone to China following customers and have been very successful with just those customers. Probably every day, some big American company tells one of its small suppliers that the small supplier must go to China to keep the business. Are you saying they should not go?

[The Village Grouch]

Ronald McD,

You are absolutely dead wrong. Look at the history of most major Western restaurant chains in China, and you will see two things: a big opening in Beijing leads to greater success than opening in any other city; and, Western consumers who know and like the brand can lead the way and introduce their upscale Chinese consumer friends to it.

The best example of this is TGI Friday's. When it first opened in 1996, its clientele was about 90% foreign. Ten years later, before Chateau Edinburgh knocked down their Beijing flagship location, the percentage had gone the other way. As any business knows, there is no better advertising than word of mouth, and in this way, Westerners in China are a terrific conduit for this.

Beijing's mix of foreign residents, university students, and tourists make it the ideal place to launch a Western food franchise in China. Beijingers regularly enjoy cuisines from around the country. They are not snobbish about their own "cai" the way that the Shanghainese and Cantonese are.

Simply follow the data and look at the chains that have launched in China, where they have, and their level of success. Taco Bell: Shanghai. Result? CLOSED. Burger King: Shanghai. Result? Still languishing with only a handful of stores. Pizza Hut: Beijing. Result? Gangbusters. McDonald's: trialled in Shenzhen, followed by massive Beijing-based expansion. Result? So successful they are almost a Chinese restaurant chain now. There is absolutely no comparison.

[Ronald McD]

First of all, David feels KK is doomed because they have chosen to open in SZ first and not BJ. Schwank argues that one shouldn't even consider SH and just start in BJ. How come these two donut-crazed long-term BJ resident Yanks weren't able to sustain the Dunkin' Donuts biz? I bet you two were "salivating" outside the store every morning waiting for the doors to open. You are arguing my point here - don't build your China business on the backs of laowais. Do you think KK success in Japan was built on the patronage of foreigners there?

Check out this money quote from Amcham http://tinyurl.com/5s567d

"Many entrepreneurs have poured heavy finances into buying a franchise and launching it in Beijing, only to become casualties in the revolution. Chili's, Schlotsky's Deli, and Dunkin' Donuts are just a few of the food chains that failed to meet with the same success as their U.S. counterparts. "Although we found good acceptance for the product, ­we were not able to deliver Dunkin' Donuts' high quality standards and brand expectations cost-effectively under the current operating model to either the consumer or investor," says Scott Chorna whose company also represented Dunkin' Donuts."

[Geez - you can't mix together sugar, flour and water cost-effectively? Maybe there was something else wrong with the business.]

Schwank even goes further and provides us with a great example - my own company, the Golden Arches, was trialled in SZ, under the watchful eyes of the people who built and fine-tuned our successful business in HK, and, when we knew we had the secret formula right, we expanded across the country.

I also think I've spotted the real reasons behind your faulty advice for KK. You've spent too much time in BJ - you now hold all the biases that northern people have. If you want a true test market for China, there is no better place than SZ, a city that was built on migrants from all over China.

China Law: Point taken on companies following their clients. Certainly, if I made widgets for Westinghouse nuclear power plants I would want to make sure that I was in China so I could sell my widgets to them here, too. My comments really relate to companies whose target markets are ultimately the 2 billion plus armpits.

[Kevin S.]

I wrote to Krispy Kreme back in 2003 and told them then they'd make a fortune if they opened up shop in Beijing or Shanghai and marketed their products properly.

By properly I mean that they should suggest to the consumer that buying two dozen donuts to bring to the office for your colleagues to share in is the modern equivalent of buying cartons of cigarettes for coworkers with whom you want to keep the guanxi greased.

They also need to build shops where the donut production line is on full display, as is the case with some of their shops in the US. This will attract lots of gawkers, which in turn will increase interest and awareness of the Krispy Kreme brand.

Finally, they need locations near large foreign populations where, as you point out, they will have foreigners forming "long, slavering lines outside their door each morning."

Krispy Kreme ignored me then. Now reading your post about how they are going about entering the mainland just makes me sad. I'd love to see KK do well there, but I have to agree with you that they are going about entering the wrong way.

[JP]

Dunkin' is preparing its a mainland comeback through its Taiwan franchise partner, prepping a conquering of the Shanghai sweet-tooth first, and with more a strategy akin to the David's recommendation.
And hey, Dunkin' is a better donut. Let's hope they don't adjust too much to 'local tastes' vis-a-vis the cardboard confections they serve up at Shanghai's Mister Donut.