Survivorship in International Chain Restaurant in Korea Woo Gon Kim Oklahoma State University, [email protected]

Survivorship in International Chain Restaurant in Korea Woo Gon Kim Oklahoma State University, Null@Okstate.Edu

Hospitality Review Volume 21 Article 3 Issue 1 Hospitality Review Volume 21/Issue 1

January 2003 Survivorship in International Chain Restaurant in Korea Woo Gon Kim Oklahoma State University, [email protected]

Kye-Sung Chon The Hong Kong Polytechnic University, [email protected]

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Recommended Citation Kim, Woo Gon and Chon, Kye-Sung (2003) "Survivorship in International Chain Restaurant in Korea," Hospitality Review: Vol. 21 : Iss. 1 , Article 3. Available at: https://digitalcommons.fiu.edu/hospitalityreview/vol21/iss1/3

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Abstract Several western chains have done well in Korea, while others have withdrawn from the market. The uthora s summarize the current operational results of western chain restaurants in Korea, report positive impacts of western foodservice firms, and analyze the key elements leading to their survival and non-survival. Some lessons could be used as tools to establish entrance strategies of western chain restaurants in Korea as well as in other Asian markets

Keywords Woo Kim, Food and Beverage

This article is available in Hospitality Review: https://digitalcommons.fiu.edu/hospitalityreview/vol21/iss1/3 Survivorship in international chain restaurants in Korea

by Woo Gon Kim and Kaye Chon

Several western chains have done well fn in Japan was approximately 25 Korea, while others have withdrawn from percent in the same period. In the market. The authors summarize the current operational resub of western the US., FAFH expenditures per cha;n restaurants in Korea, report positive household in 1996 were approxi- impacts of western foodservice ffms, and mately 45 percent compared to analyze the key elements leading to their 35 percent in Korea.' survival and non-survival. Some lessons could be used as tools to establish entrance strategies of western chain Western chains enter restaurants in Korea as well as in other It was not until the 1980s Asian markets. that Korean food service became a modern enterprise with strong management emphasis. In 1982 he food service industry in Burger King signed a franchise Korea has grown consider- contract and started operations T ably in size and changed in Korea. In the following two to significantly in composition over seven years, American chain the last several decades. Within restaurants such as Wendy's and a decade the number of restau- Kentucky Fried Chicken (KFC), rants increased more than three both in 1984, Pizza Hut in 1985, times, compared to the figure of McDonald's in 1986, Denny's in 154,000 units in 1988. Many of 1987, Coco's in 1988, and them are family-owned and are Domino's Pizza in 1990 pene- small conlmercial restaurants. trated the Korean food service Food away from home market. (FAFH) expenditures per house- In the 1990s, the Korean food hold in 1990 represented 21.6 service firms that made joint percent of total food spending ventures or franchising agree- expenditures, while that figure ments with western food service

22 FIlJ Hospitality Review /Spring 2003

Contents © 2003 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. firms shifted from their previous Table 1 summarizes the concentration on fast-food opera- status of American food semice tions toward more diverse chains operating in Korea at the concepts such as family restau- end of 2000. Of the top 25 restaurants and dinner houses. Some rant chains ranked by Nation's of those restaurants are TGI Restaurant hrews in terms of U.S. Friday's that arrived in 1991, sales, only 10 were represented in Ponderosa in 1992, Sizzler in K~rea.~Baskin-Robbins had the 1993, Popeye's in 1994, Tony largest number of units in Korea, Roma's, Bennigan's, and Planet but most were very small. In Hollywood in 1995, Chili's and terms of the number of units, Hard Rock Cafe in 1996, McDonald's with 244 units was Outback Steakhouse in 1997, the second largest U.S. chain in and Starbucks in 1999. By Korea, followed by KFC and Pizza providing casual and friendly Hut, with 206 and 199 units, service and a nice atmosphere respectively. not usually found in Korea, Within the segment of family western restaurants became the and dinner house, Coco's with food service equivalent of Levi's 29 units was the leading Jeans or Coca-Cola.2 restaurant, followed by TGI Friday's and Bennigan's with 17 Chains are varied units and 10 units, respectively. There were also some In terms of sales volume, successful chains that are non- McDonald's was the number one western restaurants. Lotteria, a chain with US$206.4 million, Japanese hamburger restaurant followed by Pizza Hut and chain, was the first chain restau- Kentucky Fried Chicken with rant company introduced to Korea US$156.3 and US$145.3 million, in 1979; its performance is ranked respectively. Among family and at the top of the fast-food segment dinner house restaurants, TGI in terms of the number of units and Friday's was the leading chain sales. Skylark, a successhl family with US$46.9 million, followed reskaurant in Japan introduced in by Bennigan's and Coco's with 1993, emphasized a lower-end US$31.5 million and US$23.4 market positioning strategy by million, respectively maintaining a lower average check It is interesting to note that of US$10. The average check of Coco's, which commands a most western family restaurants in relatively tiny market share in Korea ranged from US$13 to the U.S. restaurant industry US$18. Marche, introduced in and which falls behind TGI 1997 fro111 Switzerland, became a Friday's and Outback Steak- strong competitor against the house in terms of the number of rapidly expanding American food units operating in the U.S. was service chains. ranked as one of the top 10

Kirn and Chon

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Table 1 U.S.-based food service chain restaurants in Korea in 2000 Brand Rank in Number Korean U.S. U.S. U.S. U.S. sales number ol units sales volume units units sales volume of units in Korea (US $Millions) rank number rank (USSMiI) Korea McDonald3 2 244 $206 4 2 12.629 1 $19,006 Burger King 8 93 67.3 4 8.139 2 8.659 Hardeep 10 23 15.6 16 2.673 13 2,139 KFC 3 206 145.3 8 5.182 6 4.300 Popeye's 6 160 108.6 32 1.165 35 986.4 Pina Hut 5 199 156.3 5 8,084 5 5,000 Domino's Pina 7 149 39.1 11 4.629 9 2,560 Little Caesars Pina 14 6 NA 12 3.850 26 1.200 Coco's 9 29 23.4 88 NA NA NA Ponderosa 17 3 NA 56 465 58 560.2 Siuler 15 4 6.3 76 253 90 315 Tony Roma's 15 4 9.0 85 157 100 297 - Benn~gan's 12 10 31 5 79 237 71 460.3 Chili's 18 2 NA 43 626 21 1.555 Piueria Uno Chicago 18 2 NA 86 155 94 308.4 OulbackSteakhouse 13 8 11.7 47 574 18 1.729 TGI Friday's 11 17 46.9 58 452 24 1,334 Dunktn Donuts 4 200 19.5 13 3.650 15 2.007 Baskin-Robbins 1 460 29.7 18 2,438 57 573.3

Source of units and sales in Korea: Korean Restaurant Associaton. 2000 5o:ce cl .S .I adno s,~sodlo \al ons &slz .rail h~hs..re 26 2:3C Trs hRh u?la r6ronc'~dr~l!r IIIC 10~-'0010~oser.CL cnanscii Oalal:r"rnro.lra.~m?~:o IOOaresio:.nas'hA

FIU Hospitality ReuiezulSpring 2003

Contents © 2003 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. Managers of the three different mom-and-pop establishments segments of Korcan restaurants, found they could not compete traditional Korean food, fast food, effectively against a huge local and family and dinner house, were restaurant, international chain, selected for an interview. The 12 or domestic chain restaurant. restaurants included one tradi- Regardless of the rapid increase tional Korcan food restaurant, two in the number of stand-alone hamburger fast food restaurants, restaurants, the proportion of two pizza restaurants, two chicken restaurants whose owners restaurants, and five family and directly participated in manage- dinner house restaurants. The ment decreased from 22.3 majority were western chain percent in 1982 to 12.9 percent in restaurants. 1991.This fact reflects that many small eating places had Positive impact recognized become large local restaurants Managers participating in the affiliated with prominent local focus group interview recognized restaurant chains. the following positive impacts of Some larger corporations western food senrice firms on the entered the food service industry Korean food service industry: as a diversification strategy by becoming master franchisers Enriching dining out: The of mostly western restaurant entrance of western restaurants companies. The conglomerate's enabled local diners toget new expo- motivation to participate in the sure to diverse choices in dining-out food service industry with multiple experiences,while encouraging local brands was the positive cash flow restaurant managers to benchmark created by restaurant operations from western restaurants. Many and real estate investments. Korean restaurant managers recog- Wealthy individuals, conglomer- nized that they were not able to ates, and institutions tend compete with their traditional to invest in land to benefit from management style. They thought the appreciation of real estate, that food taste and quality were the while they have to pay large keys for success, but they underesti- amounts of tax for unused land. mated other important factors such By building restaurants on the as atmosphere, interior design, vacant land, landowners were service, cleanliness, etc. They even- able to take advantage of both tually recognized that restaurants the constant cash flow and existed to cater not only to hungry people, but for social activity significantly reduce their tax burdens. purposes as well. The three typical firms partici- Stimulating growth: The pating in the food service iddustry average square footage of restau- were food-related companies, retail rants tended to increase. Many companies, and hotels. Food produc-

Kim and Chon 25

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Contents © 2003 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. tion, manufacturing, and supplier tional Korean fare that is rooted firms already had some business in traditional home-style recipes. relationships with the food service Nolbu Korean restaurant's industry; therefore, it was rela- success is attributed to the appli- tively easy to establish new finns. cation of western scientific Hotels had the expertise in oper- management techniques into ating upscale food and beverage Korean traditional food opera- outlets; it was therefore a natural tions. Its expansion in terms of strategy for them to expand by the number of franchised units establishing free-standing restau- and sales has skyrocketed. Since rants outside the hotels. Nolbu is not competing against many western chain restaurants, Effective management: its market position among Korean When western food service firms restaurants is superior. entered the Korean market, they were initially perceived as a Manuals and technology: threat to traditional Korean Traditional Korean food service restaurant operators. Korean operators were astonished by the food service enterprises learned introduction of manuals that clearly western ways of efficiently oper- explained the overall operational ating restaurants. Franchising processes! Stimulated by interna- played an important role in tional chain restaurants' sophisti- seeking replications of advanced cated operating manuals, management techniques and traditional Korean restaurants strategies. Management innova- started developing their own. In tion became an important ingre- addition, many Korean conglomer- dient for successful restaurant ates entered the food service operations even though Korean industry with franchise contracts food service managers tradition- with famous western restaurants ally did not place much emphasis because they considered food service on it. as a profitable business. In order to Included among the most survive the competition of famous successful local chain restaurants western restaurants, many local was Nolbu Korean traditional restaurants developed their own restaurant. Its history started brands and expanded with local with a small Korean restaurant franchising. Technological advances selling boiled pork in 1987, and of western restaurants have led to within two years it launched sophisticated business controls and its first franchise operation. established franchise systems. In Currently Nolbu operates and addition, well-organized manuals of franchises more than six different employee training, food production, concept restaurants featuring menu design and layout, and store traditional Korean cuisine. opening were important lessons for Menus consist of purely tradi- local operators.

FIU Hospitality Reuiew /Spring 2003

Contents © 2003 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. New market niche: Since costs and improved the bottom western food service chains intro- line figure. duced the take-out concept, the take-out business became more Survivor cases presented popular and a variety of foods were Despite the diaculty of identi- developed for take-out. Tradition- fylng primary reasons of success, ally, Chinese restaurants used to be some key factors of survival of the provider of most popular take- western and local chain restau- out or delivery food in Korea, but rants could be identified by restau- fast-food restaurants serving pizza, rant managers. chicken, and hamburgers expanded rapidly by offering take-out or Localization of services: dclivery services. In addition, TGIF translated more than 100 diverse local cuisines such as operating and training manuals Kimbap, a kind of California roll, into Korean to take full advantage and a variety of noodle dishes were of the expertise of the parent developed and served more often by company. TGIF succeeded in local- take-out izing its service standards by adjusting to local customs and Reduced labor costs: Tradi- culture. For example, TGIF tionally small eating places were crcoted a new ordering method, considered as one of the least "kneel-down" service, rather than popular places to work. The the traditional western stand-up restaurant industry was often ordering method. TGIF developed perceived as a gateway for many local menu items to appeal unskilled workers; as a result, the to Korean guests. Kimchi rice employee turnover rate in the pilaf, the Bulgogi set menu, and food service industry was known Bibimpap (a dish with rice and to be one of the highest. However, several vegetables) are the most this trend was reversed when popular items developed by TGIF western food service operators in Korea and sold throughout TGIF started offering effective training outlets in other countries. The programs, with trainees exposed success of Marche, introduced from to various functions related to the Switzerland, could be partly management of operations, sani- attributed to the effort of catering tation, service, human resources, to local taste preferences. basic equipment maintenance Marche has been very flexible in and operations, restaurant developing and changing its orig- cashing out, and record-keeping. inal recipe in order to improve The adoption of these ongoing guest satisfaction. employee training programs A success case as a local aided in reducing the high brand was Spaghettia, an Italian- turnover rate. A dramatic style restaurant. Its primary increase in the percentage of part- reason for success was the trade time employees reduced labor secret of its recipes that changed

Kim and Chon

Contents © 2003 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. original Italian flavors with some dramatic food cost reduction. Nolbu major adaptations, including was able to reduce food costs from 30 developing its thin sauce and percent to 20 percent by developing serving larger portions of sauces a database of recipes of Korean to cater to local preferences. In cuisines. Previously, local restaura- addition, Spaghettia consistently teurs adopted best practices from used the best quality ingredients the excellent western operational regardless of the relatively high systems. food cost ratio. service BBQ Chicken, Inc. originated Product and quality: from a fast food concept that Mister Pizza, a typical success specializes in providing quick, story of a local chain with sales of convenient, varied chicken entrees US$13 million in 2000, has built a such as fried, hot wing, barbecued, good reputation based on its tasty smoked, Cajun-style, nuggets, gold pizza. By implementing an exten- fingers, burgers, and side dishes. sive research and development The BBQ name does not represent program to better serve the local the traditional western-style taste, Mister Pizza succeeded in barbeque restaurant theme, but developing hand-toasted dough, more of a combination of several which was less greasy and tasted western style operations such as fresher. The chain also introduced KFC, Popeye's, and others. BBQ a new potato pizza menu that achieved enormous growth since became a popular item, and was 1994 and became the leading later imitated by Pizza Hut and Korean chain restaurant in the other competitors. number of units offering fast food All foods of March6 are selected chicken items. Its success was and produced in front of guests so mainly attributed to the develop- most employees have cooking skills ment of its appealing spicy hot as well as the ability to function as sauce which met the taste prefer- wait staff. The primary goal of ences of local guests, thereby Marche is to serve fresh food and to attracting repeat customers. have a consistent supply of fresh food items. The atmosphere is very - Cost controls: With the casual with old market styie; a completion of a central kitchen in variety of people like the open atmo- 1992, TGIF reduced food costs from sphere. Marche offers a wide variety 40 to 30 percent. Marketing activi- of items including fresh salad and ties such as sending birthday cards, baked goods, as well as Japanese, using coupons, and issuing mileage Chinese, Korean, and other ethnic and point cards were very foods. March6 is well known for successful. Nolbu Korean restau- keeping the menu lifecycle as short rant is a typical example of success as possible and taking advantage of by adopting an American manage- a wide variety of menus as compared ment technique, which led to a to other western family chains.

28 FZU Hospitality Reuiew /Spring 2003

Contents © 2003 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. Finding good locations: High pricing strategy: Slarbucks' success was attributed to Denny's concept adjustment efforts its strategies in locations, capital- with a high pricing strategy izing on locations with high traffic conflicted with its original American flow and easy access fmm mass concept. Many local guests had transportation such as subway and dined at 1J.S. outlets and their bus, which appealed to younger perception of reasonable prices did customers. A similar strategy not match the hgh pricing strategy worked well for other chains. in Korea. Denny's price positioning The BBQ chain was known to in Korea was close to the range of be good at finding the right loca- other U.S. family and dinner house tions and utilizing a unique posi- chains. Many clients preferred to go tioning strategy. BBQ opened to other restaurants aRer their first many small units in residential visit to Denny's in Korea because its areas and others were located close price-value relationship was much to educational institutes, while lower than what they expe~ted.~ Kentucky Fried Chicken (KFC) Poor management: Wait opened spacious units in relatively staffs service and cooking skills in established locations with a high the production area were not up to volume of traffic. RBQ expanded par partly due to lack of a consistent very rapidly in tern of number of employee training program by units, but the average size of the Denny's. Employee morale was unit was very small compared to its quite low due to ineffective compen- major competitor, Kentucky Fried sation and a promotion policy that Chicken. In 2000 BBQ operated was based on seniority. The capa- 1,320 units while Kentucky Fried bilities of management staff were Chicken had 206 units. not suficient enough to compete Effective investment against other major U.S. chain strategy: The success of Spaghettia restaurants in K0rea.l was partly attributed toits relatively Poor marketing strategy: efficient investment strategy. In Denny's marketing effort was not order to minimize costs, most units creative and oRen imitated other chose basement locations with competitors. The special events savings of almost half the rental Denny's prepared were not popular costs, while most other family chains due to lack of creativity. Failure of were located on the first or second its promotional effort was partially floor. Spaghettia offset its location due to the lack of harmony between disadvantages with massive employees in the marketing depart- marketing and promotion efforts. ment and each outlet's guest contact employees. Non-survivor cases presented Poor location: When Managers identified some key Planet Hollywood was first intro- factors for t,he failure of western duced in Korea, it had the mass restaurant chains. media spotlight even before

Kirn and Chon 29

Contents © 2003 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. opening with large crowds gath- Hollywood in Hong Kong. Korean ering for the ceremony. An inap- customers have very different food propriate location without a tastes from those of Hong Kong subway line and with heavy traffic even though they are located in the congestion was key in the failure of same Pacific Rim area. Most foods Planet Hollywood. This was a good were too salty and contained too example for US.-based chains to much oil for local taste preferences, learn from since it withdrew from but management did not catch the business within seven months. problem in a timely manner. Many guests visiting Planet Holly- wood complained about insufficient Competition exists parking spaces which inconve- The Korean food service nienced guests and prevented industry showed dramatic growth many from becoming repeat over the last several decades. Up customers. to 1996 all segments of the food Lack of thorough feasi- service industry grew because of bility study: Excessive capital the significant increase of food- expenditures without a thorough away-from-home expenditures, feasibility study implied the fore- increased incomes, and people's seeable failure of Planet Hollywood increased interest in food. In the in Korea. Its initial investment was 1980s western fast food chains approximately US$7 to 8 million. were forerunners in launching In order to attain break-even sales, brands in Korea, and in the 1990s daily revenue should have been at many western family steakhouse least US$50,000 or the equivalent and dinner house restaurant to 10 turnovers. Extremely heavy chains entered the market. initial opening costs and normal Western restaurant chains operating costs caused the high provided clean facilities, quality break-even point. services, great atmospheres, and Failure of cost control: systematic management that was Planet Hollywood management astonishing to local customers who failed to control labor costs at the had never experienced them outset. The restaurant opened with before. Beginning in 1998 the approximately 300 full-time Korean economy went through an employees, and labor productivity economic recession and the food declined as customer counts service industry faced stiff compe- decreased. It failed because of inad- tition. Some segments still show equate cost controls and lower- strong growth, but some exhibit a than-expected sales. decline. Failure to adjust to local Even though the overall food taste: Cooks in the production area service market is more competi- failed to adjust to local tastes tive than ever before, there is still because most food recipes were enough room for new chains to benchmarked from the Planet introduce concepts. Since most

30 FZU Hospitality Reuieur /Spring 2003

Contents © 2003 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. western restaurants were fast food cation with a high pricing strategy, or dinner house chains, new poor management and lack of concept restaurants such as theme consistent employee training, poor restaurants are expected to have marketing strategy, poor location, great appeal if introduced. Many lack of thorough feasibility study, other top American chains such as failure of cost control, and failure Applebee's, Olive Garden, Red to adjust local taste. Lobster, and International House Understanding the key non- of Pancake (IHOP) have not yet survival elements could help been introduced. The reason may western food service finns reduce be that some of those chains still their chances of business failure have ample growth opportunities during their expansion movement in in the United States, giving them Korea as well as in other Asian little motivation to expand into markets. Even in the same Pacific Korea. In addition, since they are Rim regions, for example, some very successful chains, their chains succeeded in Hong Kong and royalty fee structure may be too Singapore, but could not succeed in high for local partners. However, Japan and Korea. It is important for American chain restaurants may western restaurant chains to do a still have more expansion opportu- more in-depth analysis of each nities in Asia. Coco's and Tony country, even within the same Roma's found new life in Asia geographic regions. A more compre- when the brand's popularity began hensive understanding of unique to decline in the United States. cultures, food habits, and local A number of premier U.S. tastes of each country will be helpful chains keep dominating market for western chains to successfully share, while others are not market expand into Asia. Another impor- leaders; some chains have with- tant factor for Korea and other drawn from the market entirely Asian markets is the extent to which The key elements of survivors were newcomers can or should mow localization of services and opera- original concepts and recipes to tions, effective management, meet local needs and tastes! leading to cost control, product and Reviewing more accurate and service quality, good locations, and comprehensive success and failure an eflective investment strategy. cases could be invaluable resources The key elements of non-survivors for those restaurant finns planning were inappropriate concept modifi- to expand into foreign countries.

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