Lan Kwai Fong: Expansion in China

STEVE YANG AMY YIP LAU YAN YAN

LAN KWAI FONG: EXPANSION IN CHINA

Successful entrepreneurs aim high. They are not content simply to improve on what already exists, or to modify it. They try to create new and different values and new and different satisfactions, to convert a “material” into a “resource,” or to combine existing resources in a new and more productive configuration.

- Peter Drucker [1]

Entrepreneurship has long been a subject of study in the academia, as entrepreneurship is a mechanism to improve business efficiency [2], stimulate and generate economic growth [3] and a driving force behind the social development through product and process innovation [4]. The research has tried to addresses three main issues: how and when entrepreneurial opportunities come into existence; how and when some people can discover and exploit these opportunities and why not other people; and how entrepreneurial opportunities are exploited [5].

This paper uses the case study of Lan Kwai Fong to show how an entrepreneur has made his strategic decisions in the different situational contexts to succeed in a number of entrepreneurial adventures over the years. It will shed some lights on our understanding of the existence of entrepreneurial opportunities, entrepreneurs’ recognition of opportunities, and entrepreneurial strategy.

To successfully do business in China, I must understand the culture of Chinese people and try to fit the attraction that LKF has in the culture of each city…. China is changing rapidly and we need to keep up the change.

- Dr. Allan Zeman, Founder of Lai Kwai Fong Group1

When you thought about where to go for a drink, party or nightclubs in Hong Kong, you would think of Lan Kwai Fong (LKF), an L-shaped street between Wyndham Street and D’Aguilar Street near the central business district. It is a trademark of food and beverages,

1 Zeman, A. Interview by the authors (19 October 2015).

To order this case, please contact Centennial College, c/o Case Research Centre, Centennial College, Wah Lam Path, Pokfulam, Hong Kong; website: http://cases.centennialcollege.hku.hk. © 2017 by Centennial College, an Independent College Established by HKU. No part of this copyrighted publication may be reproduced or transmitted, in whole or part, in any form or by any means, whether electronic, mechanical, photocopying, recording, web-based or otherwise, without the prior permission of Centennial College. This case was prepared for class discussion purposes and is not intended to demonstrate how business decisions or other processes are to be handled. Ref. 17/002

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LAN KWAI FONG: EXPANSION IN CHINA (Ref.: 17/002) and an entertainment and lifestyle icon for locals, expatriates, and tourists from around the globe. Dr. Allan Zeman, founder and often called the “father” of Lan Kwai Fong, first set foot in Hong Kong when he, at age 20, set up his fashion export business in the city. Frustrated with the lack of causal western restaurants to entertain his Western clients, he established California restaurant in a narrow street near Central in 1983. He then acquired other properties in the neighbourhood and expanded the area into a cluster of international bars and restaurants.2 Under Zeman’s management, the area was transformed from a notorious area for prostitution, flower stalls, and hawkers in the 1970s into a landmark of bars and restaurants, representing a unique Hong Kong lifestyle and nightlife in the past three decades. In 2013, the South China Morning Post named LKF as the most romantic place in Hong Kong.3 In 2014, CNN listed LKF as one of 10 things that Hong Kong did better than anywhere else.4

Armed with its success in Hong Kong, Lan Kwai Fong expanded into Mainland China. Chengdu, capital of Sichuan province, was its first site. LKF Chengdu started operations in 2010 and shortly afterwards, the group established other flagship projects in two Chinese cities: Wuxi and Shanghai.5

To grow in these Chinese cities, LKF had to overcome some unforeseeable challenges in the cultural, economy, and political areas. What factors played crucial roles when the LKF brand was established in China? What were its opportunities and challenges in these chosen cities? With all these challenges, how did this sophisticated brand deal with different partners and major competitors?

Literature Review

Entrepreneurship can be broadly defined as “an activity that involves the discovery, evaluation and exploitation of opportunities to introduce new goods and services, ways of organizing, markets, processes, and raw materials through organizing efforts that previously had not existed.”[6]

Origin of Entrepreneurial Opportunities

In the literature of entrepreneurship, it is often assumed the preexistence of entrepreneurial opportunities which was waiting for entrepreneurs to discover and reap the benefits [7]. This assumption is criticized on two grounds. First, it is doubted whether these opportunities are visible to potential entrepreneurs [8]. Second, some argue that these opportunities are not preexisting in the external world but are created endogenously through entrepreneurial agency [9]. Therefore, a realism argument states that opportunities are objectively existing but the discovery and actualization of these opportunities are very subjective and depend on entrepreneurs [10].

In relation to the origins of entrepreneurial opportunities, therefore, entrepreneurs may have one of three venturing processes [11]: First, entrepreneurial opportunities may always be out there for alert entrepreneurs to discover and exploit [12]. Second, entrepreneurs and social systems, including the sources of opportunities, can co-evolve during the venturing process, turning the business ideas into entrepreneurial opportunities [13]. Finally, new opportunities

2 Lo, A. (28 May 2015) “The Complete History of Lan Kwai Fong” Hong Kong Magazine, http://hk-magazine.com/article/insidehk/interviews/13532/complete-history-lan-kwai-fong (accessed 10 January 2016). 3 For details, see LKF’s website, http://www.lankwaifong.com/ (accessed 20 October 2015). 4 Wong, M.H. (4 January 2016) “Lan Kwai Fong: The Hottest Place to Party in the World?” The Cable News Network, http://edition.cnn.com/2016/01/03/travel/lan-kwai-fong-allan-zeman-interview/ (accessed 10 January 2016). 5 For details, see LKF’s website http://www.lkfgroup.com/index.php/about-us/history-founde/ (accessed 17 February 2016).

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LAN KWAI FONG: EXPANSION IN CHINA (Ref.: 17/002) may emerge as a result of the changes in external environment, which may attract entrepreneurs’ attention [1].

Entrepreneurial Opportunity Recognition

Research on entrepreneurial opportunities has changed from opportunities themselves to the processes that form and exploit them [14]. The identification of new business opportunities is a cognitive process through which entrepreneurs can find meaningful patterns in complex arrays of events or trends, a process in which cognitive frameworks acquires through experiences play a central role [15].

Experienced entrepreneurs have a clearer idea, richer in content and more aware of the factors and conditions related to actually starting and running a new venture than novice entrepreneurs [15]. As opportunity recognition is a necessary precursor to entrepreneurs’ efforts to evaluate available opportunities [16], executive entrepreneurs often have the ability of aligning the superficial features and structural relationships of technology and market [17].

Entrepreneurial Strategy

Different from well-established companies, entrepreneurial companies are facing some unique challenges, including resource constraints, market creation and opportunity recognition, and seeking their own ways to cope [18].

They often have few resources when they start. So, entrepreneurs may form partnerships to acquire financial capital [19] and secure social status [20], or recombine available elements to use for new purposes [21]. Entrepreneurial companies may also face the challenges of having no existing market for their new products and services. This requires entrepreneurs to create the infrastructure [22] and cognitive understandings [23] to enable new markets to emerge and grow [18]. Additionally, entrepreneurial companies are operating in an environment full of uncertainties, which requires entrepreneurs to look for the most valuable opportunities by learning and adapting to ambiguous environments [18]. They may develop simple rules to pursue growth opportunities [24] or test the market with their new products and services.

The Lan Kwai Fong Business Model

LKF was originally set up to attract Western expatriates, but it gradually became a hotspot for the younger generation in Hong Kong who came back from overseas studies as well as for visitors.6 After Zeman established California restaurant, he continued to open other bars and restaurants and invited other operators to join. Instead of paying rent, Zeman bought properties and became the major landlord of the LKF area.7 He leased property to carefully selected operators and tenants to make the place vibrant. Together, the restaurants held seasonal events at Halloween, Christmas, and New Year’s Eve as well as routine cultural events such as Beer and Music Festivals and the LKF Carnival. This innovative model transformed an ordinary street to one of the most famous entertainment districts in Hong Kong.

Zeman became the CEO of the Lan Kwai Fong Group (the Group) that operated under a conglomerate business model with members including LKF Properties, LKF Capital, and LKF Entertainment. LKF Properties dealt with property development, management, and operations. LKF Entertainments owned and operated bars and restaurants in Hong Kong. The

6 Lo, A. (28 May 2015) “The Complete History of Lan Kwai Fong”, Hong Kong Magazine, http://hk-magazine.com/article/insidehk/interviews/13532/complete-history-lan-kwai-fong (accessed 10 January 2016). 7 I Love LKF (25 February 2011) “LKF Interview: Allan Zeman”, http://www.ilovelkf.hk/articles/lkf-interview-allan-zeman (assessed 8 January 2016).

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LAN KWAI FONG: EXPANSION IN CHINA (Ref.: 17/002) group had ownership of LKF Chengdu since 2010. The group used to own, manage, and operate Shanghai Park 97, making it a top entertainment spot in that city from 2000 to 2008 before selling it.8

Opportunities in China

The LKF business model and accomplishments appealed to government officials who often invited Zeman to expand his success to the most populous country in the world, China. The following factors catalysed the Group to take the leap forward to China.

Economic Growth in China

With China’s rapid economic growth and despite its latest downturn, the new initiative was to 9 shift the Chinese economy from an export-driven to a consumer-driven one. That meant the growing middle class would look for quality and efficiency instead of quantity when they consumed domestically.10

Ranked as the world’s second largest economy, China has a population of 1.3 billion and half of its citizens lived in urban areas.11 As reported by the National Bureau of Statistics, China’s average per capita annually disposable income in 2015 was RMB 31,195 and was projected to be RMB 35,000 in 2016, an increase of almost 200% in 10 years from RMB 11,760 in 200612 [See Exhibit 1 for China disposable income per capita from 2006 to 2016]. Over the next 10 years, it is anticipated that 500 million Chinese would join the global middle class. By 2030, around one billion people, or 70% of China’s projected population, could be classified as middle class. 13 Their collective disposable income would mean enormous business opportunities for quality products and services.

Development Trends in Related Industries

Food and Beverages Retail In 2011, China overtook the US to become the largest consumer market for food and beverages (F&B) in the world, 14 due to the fast-emerging middle class in China. 15 The average urban Chinese annual income per capita rose 12 times in slightly more than a decade, allowing more spending on food (including imported products) and dining.16

8 Hong Kong Trade Development Council Research (20 March 2015) “Find Out How Hong Kong’s Most Famous Entertainment Brand is Further Expanding into the Chinese Mainland” http://hkmb.hktdc.com/en/1X0A1O2Y/first-person/Sky%E2%80%99s- the-Limit; Hong Kong Trade Development Council, “Lan Kwai Fong Entertainments - Hong Kong”, http://www.hktdc.com/sourcing/hk_company_directory.htm?companyid=1X036N9U&locale=en (assessed 8 January 2016). 9 McKinsey & Company (January 2013) “What’s Next for China?” http://www.mckinsey.com/global-themes/asia-pacific/whats- next-for-china (accessed 10 November 2015). 10 Canton, N. (11 November 2015) “China has Shifted to Domestic Consumption-driven Economy, Growth to Average at 6.5%”, Asia House, http://asiahouse.org/chinas-shift-export-led-domestic-consumption-driven-economy-will-see-6-5-growth/ (accessed 3 June, 2016). 11 The Economist (24 February 2011) “Comparing Chinese Provinces with Countries, All the Parties in China. Which Countries Match the GDP, Population and Exports of Chinese Provinces?” http://www.economist.com/content/chinese_equivalents (assessed 8 January 2016). 12 Trading Economics, “China Disposable Income per Capita”, http://www.tradingeconomics.com/china/disposable-personal- income (assessed 8 January 2016). 13 Yang L. (6 March 2015) “China’s Disposable Income Grow 8%)”, China Daily USA, http://usa.chinadaily.com.cn/epaper/2015-03/06/content_19737993.htm (assessed 26 November 2015). 14 Bayntun-Lees, A. (9 September 2015) “Intellectual Property in China’s Food & Beverage Industry”, China Briefing, http://www.china-briefing.com/news/2015/09/09/intellectual-property-in-the-food-beverage-industry-in- china.html#sthash.f3MRzZXZ.dpuf (assessed 8 November 2015). 15 China Internet Watch (18 March 2015) “China Online Shopping Market Over 10% of Total Retail in 2014”, http://www.chinainternetwatch.com/12685/online-shopping-market-2014/ (accessed 10 January 2016). 16 EU SME Centre (2015) “Report: The Food & Beverage Market”, http://www.ccilc.pt/sites/default/files/eu_sme_centre_report_-_the_food_and_beverage_market_in_china_update_- _july_2015.pdf (accessed 18 November 2015).

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Retail China was the world’s second largest retail market and was anticipated to overtake the United States (US) to be the largest economy in the world by 2018.17 According to a Deloitte report, total retail sales of Chinese consumer goods were RMB 26.24 trillion in 2014, an increase of 12% compared to the previous year. Luxurious products would be in huge demand.

E/m-commerce The traditional retail model had evolved into a form of e/m-commerce as online to offline integration platforms were sufficiently developed to seamlessly support consumption. The internet connected and facilitated consumers to shop online anytime anywhere. Going online by mobile phone or computer/tablet was the trend and retail sales of China’s m-commerce were forecasted to be 4.5 times higher than that of the US in 2015. That ratio was expected to reach 12.4% by 201918 [See Exhibit 2 for projected m-commerce sales in retail China (2014 to 2019)]. The seamless integration of online-offline retail sales would help enhance customers’ shopping experience and boost sales.

Entertainment Under the Chinese government’s 20th Five-year Plan, the value of entertainment and other 19 cultural industries would be doubled to around RMB 5,811 billion. Funds and capital were set up through state-owned banks and other branches of the finance industry to allow and encourage foreigners to invest in these sectors. One example was China Media Capital, a state-backed investment fund partnering with DreamWorks Animation and the LKF Group to form the DreamCenter in Shanghai,20 a project targeting the affluent middle class who were looking for quality entertainment and an elite lifestyle.

All these burgeoning industries fit the direction that the LKF Group’s expansion was following. The consumption market was vast yet the traditional model of spending in stores was not as prominent as before as customers were now more accustomed to purchasing goods and services via their mobile devices. According to Zeman, his business model was adjusted from 35% F&B and 65% retail to 65% F&B and 35% retail since many retail transactions could be conducted online. The future performance of the Group and its partners was auspicious but uncertain.

Lan Kwai Fong’s Expansion Strategy in China

Right location, Right partner, Right tenants

Zeman visited every site in China that LKF was likely to start a project. He stressed that it was important to have the local government as a partner which would “get things done a lot easier.” He identified three criteria in choosing a unique location for LKF:

1. The site was in the central business district with easy accessibility. 2. The land was clear. 3. The land price was reasonable.

17Ku, E., Shira, D. & Associates (2014) “An Overview of China’s Retail Industry”, China Briefing, http://www.china- briefing.com/news/2014/04/16/overview-chinas-retail-industry.html (assessed 8 November 2015). 18 Wang, A. (18 November 2015) “China M-commerce Retail Sales Market to Exceed $333.99B in 2015”, China Internet Watch, http://www.chinainternetwatch.com/14317/china-m-commerce-retail-sales-market-over-333-99b-2015/#ixzz3xrouj2kj (accessed 10 January 2016). 19 Burkitt L. (28 February2011) “China to More Than Double Entertainment Industry”, The Wall Street Journal, http://www.wsj.com/articles/SB10001424052748704615504576171743080635356 (accessed 8 January 2016). 20 For details, see LKF’s website, http://www.lkfgroup.com/index.php/1-01-ashanghai-dreamcenter/ (accessed 10 November 2015).

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The [local] government built 19 blocks there and originally they were used for retail, but they had problems. So government officials came to see me. At that time, I was thinking, “'Chengdu?” It didn't sound so exciting to me, but I thought I would go and take a look. For the government, it's quite a “big face” to attract the real LKF - there are so many copycat LKFs in China.21

In 2009, Zeman took the LKF concept into China. Instead of listing the company to raise money, the Group set up funds from investors in Hong Kong and China to support its development.22 With the fund, Zeman did not just transplant the LKF Hong Kong model with premier bars, restaurants, and nightlife for entertainment; he wanted each project to integrate with the key cultural feature of each city.

Frontline staff were hired locally and then sent to Hong Kong for training and to better understand the LKF culture. They were then sent back to China to implement LKF in their own way. The Group sent a general manager from Hong Kong to each city to supervise operations. The Chinese operation was equipped with a local marketing team while a Hong Kong team coordinated featured events to ensure their quality and professionalism.

Lan Kwai Fong’s Development Projects in China

Chengdu

Chengdu was the capital of Sichuan province with a population of 14.42 million. In 2014, its GDP reached RMB 1,005.7 billion, representing a year-on-year rise of 8.9%. Well-known as the hometown of the giant panda and spicy hotpot, it was ranked one of the fastest growing cities in China and with potential in luxury products sales. The government empowered and supported the city with many promising opportunities. The city established a strong transportation network connecting upcoming economic and trade zones, which then became western China’s financial and commercial hub that included a high-tech industry zone.23

Chengdu residents were considered laidback and carefree with a direct and spontaneous spending attitude. They loved hotpots, tea, spicy food, and travelling. Chengdu residents’ demand for luxury goods and shopping malls had surged, and the city had the highest concentration of international labels in west China. In 2014, Chengdu’s retail sale of consumer goods reached RMB 420.2 billion, the highest in Sichuan province. 24 Young Chengdu residents loved trendy and chic fashion, had high consumption of food and beverages, and were drawn to mid- to high end restaurants that provided tasteful environment and good services.

Lan Kwai Fong in Chengdu

Among all LKF’s ongoing projects in China, LKF Chengdu was the first of its kind. Zeman recalled the early days:

21 Zeman, A. Interview by authors (19 October 2015). 22 Wong, K. (9 July 2013) “Lan Kwai Fong Plans One China Project Annually Over 5 Years”, Bloomberg, http://www.bloomberg.com/news/articles/2013-07-08/lan-kwai-fong-plans-one-china-project-annually-over-5-years-1- (accessed 10 November 2015). 23 Hong Kong Trade Development Council Research (24 August 2015) “Chengdu: Profile of a Consumer Market” http://china- trade-research.hktdc.com/business-news/article/China-Consumer-Market/Chengdu-Profile-of-a-Consumer- Market/ccm/en/1/1X000000/1X0A3G2M.htm (accessed 10 January 2016). 24 Hong Kong Trade Development Council Research (24 August 2015) “Chengdu: Profile of a Consumer Market” http://china- trade-research.hktdc.com/business-news/article/China-Consumer-Market/Chengdu-Profile-of-a-Consumer- Market/ccm/en/1/1X000000/1X0A3G2M.htm; Hong Kong Trade Development Council Research (28 January 2015) “Chengdu (Sichuan) City Information” http://china-trade-research.hktdc.com/business-news/article/Fast-Facts/Chengdu-Sichuan-City- Information/ff/en/1/1X000000/1X0A120U.htm (accessed 10 January 2016).

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After I visited the city, I fell in love with it as people and culture are active. People love to go out, go party and eat out. Not as much money as other cities, but they love enjoying this lifestyle, such as hotpot. The lifestyle appeals to me, and I opened up LKF in Chengdu that became an instant success. Because of the case of Chengdu, many local governments call me.25

LKF Chengdu began operations in a 43,000 square meter complex about 18 times bigger than that of Hong Kong. It was a purposely built all-in-one entertainment complex and fine dining hub in 19 blocks of two-storey buildings interconnected by two open piazzas. It housed more than 30 local and international restaurants, private clubs, high-end bars, coffees and shops selling luxury goods such as wine and cigars. The Group brought in operators such as Starbucks, Tony Roma’s, Lee Garden, and local restaurants specializing in hotpot that appealed to local consumers although the target customers were middle-to-high end customers, both local and expatriate.26 Similar to LKF Hong Kong, the Group owned this complex and it hosted regular events during Halloween, Valentine’s Day and the summer.

LKF Chengdu became one of the most popular entertainment landmarks for both locals and expatriates in southwest China since its opening in December 2010, attracting over 10,000 visitors on weekdays and more than double that on weekends. It appeared to be such a successful model that many municipal and provincial government officials asked Zeman to set up LKF in their cities.27

Wuxi

Located along the Yangtze River Delta in Jiangsu province, Wuxi is on an important node at the heart of the Shanghai-Nanjing city cluster axis. With a population of 6.5 million, Wuxi people were affluent with strong consumption demands compared to its neighbours. Its GDP grew 8.2% year on year to RMB 820.5 billion in 2014 while per capita GDP was RMB 126,400 in the same year.28

Wuxi was considered “another Shanghai” and a home for entrepreneurs with extremely strong spending power who enamoured luxury cars and goods. Wuxi was ranked the fourth “best commercial city in China” by Forbes in 2014 with more than 90 Fortune 500 companies invested in nearly 160 projects. 29 Downtown Wuxi was connected by shopping malls displaying international brands such as Louis Vuitton and Hermes. Similar to Chengdu, Wuxi had a carefree and leisure lifestyle. Wuxi residents frequently dined out and ate well with friends and relatives, compared to predominately business dining in the past.

Wuxi’s per capita disposable income was RMB 41,731 in 2014 and per capita consumption expenditure rose 11.9% to RMB 27,358 in the same year, reflecting a high consumption level. As e-commerce developed, almost 30% of Wuxi restaurants offered online booking for their services, an indication that even he F&B industry was starting to link its business via online platforms. Retail sales of consumer goods in Wuxi grew by 10.7% to RMB 305.5 billion in 2014. Its retail market value ranked third in Jiangsu province, only behind Suzhou and Nanjing.

25 Zeman, A. Interview by authors (19 October 2015). 26 For details, see LKF Chengdu’s website: http://www.lkfchengdu.com/ (accessed 10 October 2015). 27 Zeman, A. Interviewed by the authors (19 October 2015). 28 Hong Kong Trade Development Council Research (3 February 2015) “Wuxi (Jiangsu) City Information” http://china-trade- research.hktdc.com/business-news/article/Fast-Facts/Wuxi-Jiangsu-City-Information/ff/en/1/1X000000/1X0A14L3.htm; Hong Kong Trade Development Council Research (2 October 2015) “Wuxi: Profile of a Consumer Market”, http://hkmb.hktdc.com/en/1X0A3VWJ/hktdc-research/Wuxi-Profile-of-a-Consumer-Market (accessed 10 January 2016). 29Ibid.

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Lan Kwai Fong in Wuxi

Planned to open by the end of 2018, Lan Kwai Fong Wuxi and Taihu New City Cultural Zone was a collaboration between the LKF Group and the local government of Wuxi Taihu New City.30 An RMB 1.2 billion project integrating high quality retail, F&B, art and culture, and entertainment and lifestyle, it was the Group’s third investment with 75% ownership of the property.21 The complex, spanning over a gross floor area of 168,300 square metres, aimed to attract the nearby residential community.

It’s a best kept secret place for business in China. People are affluent, with young population and have real purchasing power. They are specialized in IT. I believe it will be successful.31

Shanghai

Historically the largest city financial centre in China and with 24.25 million residents, Shanghai is situated at the core of the Yangtze River Delta. Its GDP reached RMB 2,356.8 billion by the end of 2014. The GDP per capita was RMB 97,370 in the same year. Shanghai was a major target of foreign direct investment. Investors came from Hong Kong, Japan, the US, and Singapore.

An international city, Shanghai was the largest consumer market in mainland China. With rising income and continuous inflow of tourists, Shanghai became a lifestyle and trendsetter in the country. In 2014, the number of domestic tourists reached 268 million, equalling a growth of 3.2% while overseas tourists increased by 4.5% to 7.91 million.32

Shanghai consumers, including expatriates and international visitors, were relatively higher educated and more sophisticated, with a higher income and living standards. The key consumer group was the post-80s generation who wanted to be seen as “trendy” and who sought individuality. They were known for deficit spending with a strong consumption impulse. The middle-class spending attitude was more towards brand-name products. In terms of dining out, they were more concerned with the unique characteristics and ambience of restaurants than the food itself. Entertainment and cultural interests had shown considerable growth in Shanghai due to better living standards and a desire for living a more pleasurable lifestyle.33

Among all the cities LFK was expanding into, consumers in Shanghai had the highest per capita disposable income: RMB 47,701 in 2014. Retail sales of consumer goods in Shanghai reached RMB 871.9 billion in 2014, equalling an annual rise of 11% on average from 2009 to 2014. This showed a continued growth in its residents’ spending power. Online shopping had also become an important component of consumption with an annual growth rate of almost 50%.

30 Lan Kwai Fong Wuxi website: http://www.lkfwuxi.com/ (accessed 10 October 2016). 31 Zeman, A. Interview by the authors (19 October 2015). 32 Hong Kong Trade Development Council Research (23 December 2015) “Shanghai: Market Profile”, http://china-trade- research.hktdc.com/business-news/article/Fast-Facts/Shanghai-Market-Profile/ff/en/1/1X000000/1X06BVOR.htm; Hong Kong Trade Development Council Research (21 August 2015) “Shanghai: Profile of a Consumer Market”, http://china-trade- research.hktdc.com/business-news/article/China-Consumer-Market/Shanghai-Profile-of-a-Consumer- Market/ccm/en/1/1X000000/1X0A3FYT.htm (accessed 10 January 2016). 33 Ibid.

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Lan Kwai Fong in Shanghai

Located along the Huangpu River, DreamCenter was an RMB 12 billion project spanning a gross floor area of 473,000 square metres, it is expected to be completed by the end of 2018.34 Apart from the LKF Group, key investors included CMC Capital Partners, DreamWorks Animation, and the China Development Bank. DreamCenter would consist of 12 cultural and entertainment venues dotted with premium restaurants and bars along with lifestyle retail shops. Planned by Shanghai's Xuhui District government, it would be the iconic attraction of the West Bank Media Port of the Huangpu River and it was anticipated that it would receive 20 million visitors a year. 35

The LKF Entertainment and Lifestyle District would be filled with year-round themed events and parties, bringing world class entertainment featuring creative media and performing arts. Target consumers were locals, expatriates, and international tourists. 36 The DreamCenter would be a “celebration of great theatre, great art, great culture, great music, all in one place, and 18- to 34-year-olds would be our target”, said Jeffrey Katzenberg, chief executive officer of DreamWorks Animation.37

LKF Shanghai locates in a prime location and it is a very important project. This will be the most iconic entertainment district in China where people can come to work, play, relax and watch shows. It is going to be the new media and cultural hub of Shanghai.38

Challenges

Even though LKF Group had a proven record of a success in Hong Kong over the past 35 years, it faced several challenges in China:

Competition from Nearby Bars and Malls

Chengdu was a vibrate city that offered a great variety of nightlife options. Different styles and types of nightlife locations such as Yu Lin and Tong Zi Lin where most foreigners lived meant that bars and clubs in the area were more “westernized”. Jiu Yan Qiao, Poly Center, Blue Caribbean Plaza, Shao Lin Lu Bar Street, and other similar areas hosted businesses in direct competition with LKF Chengdu, an entertainment complex in the city’s flouring Central Business District.39

Competition was also strong in Wuxi and Shanghai. Wuxi was a relatively green city. There were some 40 downtown complexes with over 70 shopping centres of all sizes as of January 2015. A number of commercial malls would soon to be completed, including MixC and

34 Lan Kwai Fong website, Shanghai DreamCenter, http://www.lkfgroup.com/index.php/1-01-ashanghai-dreamcenter/ (accessed 10 November 2015); Hong Kong Trade Development Council Research (20 March 2015) “Find Out How Hong Kong’s Most Famous Entertainment Brand is Further Expanding into the Chinese Mainland”, http://hkmb.hktdc.com/en/1X0A1O2Y/first- person/Sky%E2%80%99s-the-Limit (assessed 8 January 2016). 35Shanghai Municipal Government (8 August 2012), “Major Studio, Amusement Project Launched”, http://www.shanghai.gov.cn/shanghai/node27118/nod27818/node27821/u22ai68442.html (assessed 8 January 2016). 36 Lan Kwai Fong website, Shanghai DreamCenter, http://www.lkfgroup.com/index.php/1-01-ashanghai-dreamcenter/ (accessed 10 November 2015) Shanghai Municipal Government (8 August 2012), “Major Studio, Amusement Project Launched” http://www.shanghai.gov.cn/shanghai/node27118/nod27818/node27821/u22ai68442.html (assessed 8 January 2016). 37Shanghai Municipal Government (8 August 2012), “Major Studio, Amusement Project Launched”, http://www.shanghai.gov.cn/shanghai/node27118/nod27818/node27821/u22ai68442.html (assessed 8 January 2016). 38 Zeman, A. Interview by the authors (19 October 2015). 39 Tornoff, T. (9 August 2013) “Guide to Chengdu’s Nightlife I” The InternChina Blog, https://internchina.com/guide-to- chengdus-nightlife-i/ (assessed 10 January 2016).

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Coastal City. Other international brand restaurants and shops would move in and directly compliment and compete with LKF.40

Shanghai is always an international financial and cultural hub with many foreign-invested malls. With numerous newly built sophisticated bars and restaurants, retail shops, and entertainment zones, LKF faced stiff competition in attracting young consumers.

Government’s Inconsistent Policy

Instead of gradually evolved from a cluster of bars and restaurants as in Hong Kong, LKF Chengdu started initially as a government-directed project with Zeman’s input to finish. After it began operations in 2010, bars and restaurants picked up in business and were always packed. Bar owner Mr. Zou said that at one point in 2012, monthly turnover of his bar reached RMB 500,000 per night.

The scenery changed completely after 2013. That June, Chengdu hosted the Fortune Global Forum, which had been previously held in Hong Kong, Shanghai, and Beijing. Under Beijing’s long term “go west” strategy, Chengdu was important in attracting foreign capital to strengthen the country’s economic development. The event was held at the Shangri-La Hotel in Chengdu, a three-minute walk from LKF Chengdu. To ensure smooth operation of the forum, the city government and the district traffic control office kept all traffic out of the district and ordered all the outdoor furniture of bars to be cleared. The forum lasted three days but the control lasted for two years, severely cutting the crowds and food hawkers in LKF. Without traffic and crowds, even half of the street lights were shut off. “Now even bar owners complained the streets were too dark and worried about their own safety,” Zou said. Another restaurant owner, Mr Huang, said he was very confused with the government officers’ orders:

One day an officer came and said we should use the same color of furniture as Starbucks. Another day, another officer came to tell us to change our sign’s color because it did not look good. In Hong Kong the law rules, here people rule… All I know was that every year some government officials responsible for LKF would come to ask for subscription for the party newspaper. I said I already subscribed. He said my restaurant was so big that we should subscribe for 20 copies with RMB 365 each. I paid diligently but had never seen the paper.41

The government’s inconsistent policies caused the tenants to become disaffected. Tenants were not making enough money and had to close down their businesses. Besides Zou’s bar, Häagen-Dazs, Tony Roma’s, and a famous Chinese restaurant ended their ventures in LKF after a short period. At the end of 2015, 30% of LKF Chengdu was left empty.42

Lack of Professionals

Bar owners complained that the LKF Group could not help them because the Group itself had some talent problems: since LKF Chengdu started five years ago, there had been four general managers and none had had experience managing clubs in China.

40 Hong Kong Trade Development Council Research (2 October 2015) “Wuxi: Profile of a Consumer Market”, http://hkmb.hktdc.com/en/1X0A3VWJ/hktdc-research/Wuxi-Profile-of-a-Consumer-Market (accessed 10 January 2016). 41 He, X.Y. [何雪瑩] (12 November 2015) “LKF doesn’t fit China’s Market, Zeman faces challenge in China” [成都蘭桂坊水土不服，盛智文進軍內地受挫], Initium Media [端傳媒], https://theinitium.com/article/20151112-hongkong- lankwaifonginmainland01/ (accessed 10 January 2016). 42 Ibid.

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Zeman admitted that the tenants and management needed improvement. He said it would be difficult to find people who had experience working and managing clubs in China, understood the culture, could deal with Chinese officials and customers and not corrupted by poor practises. He said many restaurant operators treated it as a side business and had no idea how to run clubs.43

Discussion

Origins of Entrepreneurial Opportunities

Successful entrepreneurs do not wait until “the Muse kisses them” and gives them a “bright idea”; they go to work. - Peter Drucker [1] The case has shown entrepreneurial opportunities might emerge under different circumstances, and the common and critical factor is that Zeman proactively took action every time. In Hong Kong, he started with the opening of a California restaurant after he found the lack of appropriate western restaurants to entertain his Western clients. In order to open the first LKF project in mainland China, Zeman visited all the potential sites and decided to start the project in Chengdu. The huge success of LKF Chengdu encouraged many local governments to invite Zeman to open LKF in their cities. Both LKF Wuxi and the LKF Entertainment and Lifestyle District in Shanghai are collaborative development projects involving the LKF Group and local governments.

Opportunity Recognition

In this case, Zeman used different strategies to enter the local markets in different ways. When he started in Hong Kong, he bought the properties one by one in Lan Kwai Fong and selected suitable tenants to create a vibrant entertainment district to attract Western expatriates. In Chengdu, he designed and built an all-in-one entertainment complex with fine dining to target the middle-to-high end local and expatriate customers, which became a landmark in Southwest China. In Wuxi, which he regards as “a best kept secret place for business in China”, he is working with the local government to develop a complex to attract affluent and young local residents, most of whom are IT specialists with real purchasing power. In Shanghai, he was working with business partners and local governments to develop the LKF Entertainment and Lifestyle District, which was part of the DreamCentre, the future iconic attraction for young people in the city. Despite of the different targeted customer groups, business partners and market strategies, Zeman has his criteria for choosing the locations, that is, an undeveloped, reasonably priced land in the downtown business district with easy access.

Therefore, Zeman has benefited from his previous experiences of developing LKF and was able to align the strengths of the brand and business experiences with the resources available in the local markets to start new business adventures. While the existing literature has suggested that entrepreneurs’ ability to align the feature and structural relationships of technology and market to one another [17], this case shows their ability to align available resources, not limited to technology, to local markets.

43 Ibid.

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Entrepreneurial Strategies

Similar to other entrepreneurial companies, Zeman was facing a number of challenges, including the competition from well-established local competitors, the environmental uncertainties created by changing government policies and the lack of local talents.

The experiences of the LKF Group has demonstrated the importance of leveraging on a company’s existing strength to create competitive advantages. Zeman’s focus on using the brand strategy is such a critical success factor. When Zeman started his business in Hong Kong, he had the objective to develop LKF as an entertainment and lifestyle icon. Through buying the properties there and renting out to selected restaurants, he had successfully made LKF a trademark of food and beverages in Hong Kong. Similarly, in Chengdu, a financial and economic hub in Western China, Zeman followed an approach similar to LKF Hong Kong and developed LKF Chengdu into an entertainment landmark. The project also made LKF a well-known brand, which helped the group to further expand its businesses. Moreover, Zeman set the central business district with good accessibility as one of his criteria in choosing LKF’s location and all the projects are or will be local iconic attractions, both of which also help to attract the attention of the media and hence their targeted, high-income customers.

The Way Forward

Despite all the challenges, Zeman was optimistic and believed that business in China would be good in the long run. He said challenges were everywhere and he would keep the energy and desire to lead. He said he loved to make people happy and it was important to keep the standards and quality:

Once people know your brand, they would come after you.

He was satisfied with the business in Chengdu as property price tripled after the Group invested a few years ago. He said the Group would diversify its business opportunities to property investments and IT industries. Residential property development would be one direction for expansion. As e-commerce was surging, the Group was open to any opportunities, including young IT start-ups and gaming industries:

The first tier cities such as Tianjin, Shenzhen and others were always the aim. Location needs to be right. New businesses will set up investment capital, pump into young start up IT, gaming companies, residential properties … expand business in different directions … anything that makes sense.44

Zeman said LKF was about consumption and lifestyle. In the past a mall would consist of 70% retail and 30% F & B. With the increasing popularity of online purchasing, 60% in the mall would be entertainment and F & B with 40% retail. He said people still went out to shop and eat but retail business was getting difficult because people began to shop online.

So far people still cannot eat on the internet. Thank God!45

To conclude, we can summarize the following findings from this case study: First, to explore new business opportunities, it is important for entrepreneurs to take action and initiatives. If

44 Zeman, A. Interview by the authors (19 October 2015). 45 Chan, C.W. [陳正偉] (9 December 2015) “Allan Zeman Interview: Is 35-year-old Lan Kwai Fong Already Too Old?” [專訪盛智文：35 歲的蘭桂坊老了嗎?], Orange News [橙新聞], http://www.orangenews.hk/finance/system/2015/12/08/010025669.shtml (accessed 3 March 2016).

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Zeman had not spent the efforts on site visits, he would not be able to find the suitable locations to develop LKF. Second, entrepreneurs’ previous experiences can make it easier to identify new business experiences. Building on previous experiences, they have the ability to align available resources with local markets. Zeman’s experience of successfully developing LKF in Hong Kong has allowed him to identify the business potentials when expanding into mainland China. Finally, in terms of entrepreneurial strategies, Zeman has developed three simple criteria and combined with site visits and the assessment of local markets and available resources to determine market entry strategies for each city. Moreover, Zeman has leveraged on its brand advantages to create new local markets one after another, which shows that entrepreneurial companies need to identify and focus on its strengths and adapt to changing business environments.

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[18] Ganco, M., T.R. Holcomb and R. McDonald (2016) Entrepreneurial Strategy, http://www.kauffman.org/microsites/state-of-the-field/topics/management-organization-and- strategy/entrepreneurial-strategy, Accessed on 16 December 2016. [19] Katila, R., J. Rosenberger and K. Eisenhardt (2008) Swimming with sharks: technology ventures, corporate relationships, and defense mechanisms, Administrative Science Quarterly, 53(2), p. 295-332. [20] Pollack, T.G. and R. Gulati (2007) Standing out from the crowd: the visibility-enhancing effects of IPO-related signals on alliance formation by entrepreneurial firms, Strategic Organization, 5(4), p. 339-372. [21] Baker, T. and R.E. Nelson (2005) Creating something from nothing: resource construction through entrepreneurial bricolage, Administrative Science Quarterly, 50(3), p. 329-366. [22] Navis, C. and M.A. Glynn (2010) How new market categories emerge: temporal dynamics of legitimacy, identity, and entrepreneurship in satellite radio, 1990-2005, Administrative Science Quarterly, 55(3), p. 439-471. [23] Khaire, M. and R. Wadhwani (2010) Changing landscapes: the construction of meaning and value in a new market – modern Indian art, Academy of Management Journal, 53(6), p. 1281-1304. [24] Bingham, C.B. and K.M. Eisendhardt (2011) Rational heuristics: the ‘simple rules’ that strategists learn from process experience, Strategic Management Journal, 32(13), p. 1437- 1464.

Learning Objectives: 1. To learn the key incentives, competitive advantages, benefits, and risks of the LKF Group in doing business in China. 2. To understand the size, growth, and potential of the Chinese market in entertainment, retail, food and beverages industries. 3. To learn how a business model changed to fit the culture of China.

Suggested Questions Q1: Analyse the strategic approach the LFK Group took in China. Q2: How different was LKF in implementing its strategy in different Chinese cities? Q3: What were the elements of success in LKF Group’s approach in entering China? Q4: Discuss challenges faced by LKF in China.

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EXHIBIT 1: CHINA DISPOSABLE INCOME PER CAPITA

Source: Trading Economics.com (accessed 3 June 2016)

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EXHIBIT 2: PROJECTED M-COMMERCE SALES IN RETAIL CHINA (2014 TO 2019)

Source: China Internet Watch, http://www.chinainternetwatch.com/14317/china-m-commerce- retail-sales-market-over-333-99b-2015/ (accessed 3 June 2016)

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