Lan Kwai Fong: Follow the Pary Line

AMY YIP YAN YAN LAU STEVE YANG

LAN KWAI FONG: FOLLOW THE PARY LINE

To be successful in China you must understand the culture of the people and try to fit the attraction that LKF has in the culture of each city…. China is changing rapidly, we need to keep up the change — One cannot pick up Hong Kong and just copy in China.1 -Dr. Allen Zeman, Founder & CEO of Lai Kwai Fong Group

When you thought about where to go for a drink, party or nightclubs in Hong Kong, most people would think of Lan Kwai Fong (LKF), an L-shaped street between Wyndham Street and D'Aguilar Street above the central business district. It was a trademark of food and beverages, entertainment and lifestyle icon for locals, expatriates and tourists from around the globe. It had so successfully entrenched its position in Hong Kong that the business was branching into China. But could it resonate the same effect in China?

Dr. Allen Zeman, founder and often called “father” of Lan Kwai Fong, originally from Montreal, first set foot in Hong Kong when he was 20 to set up his fashion export business. Frustrated with the lack of causal western restaurants to entertain his western clients, he established “California” in the LKF area in 1983. He then acquired other properties in the neighbourhood and expanded them into a cluster of international bars and restaurants. 2 Under the management of Zeman, LKF had transformed from the 1970’s notorious area for prostitution, flower stalls and hawkers where people considered Lap Sap (rubbish) and evolved into an iconic trademark of bars and restaurants, representing a unique Hong Kong lifestyle and nightlife in the past three decades. In 2013, the South China Morning Post selected LKF as the most romantic place in Hong Kong. 3 In 2014, CNN listed LKF as one of

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

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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10 things that Hong Kong did better than anywhere else. 4 In 2015, the new California Tower was priced at HK$4 billion. 5

Armed with its success in Hong Kong, Lan Kwai Fong expanded into 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 three Chinese cities: Haikou, Wuxi and Shanghai. 6 [See Exhibit 1 : A Chart Comparing LKF in different Chinese Locations], [Exhibit 2 : Map of China with LKF locations].

As it grew in these Chinese cities, LKF had to overcome unforeseeable challenges in 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?

The Lan Kwai Fong Business Model

LKF was originally set up to attract western expatriates, but gradually it became a hotspot for young generations who came back from overseas studies as well as mainland Chinese visitors. 7 After Zeman established “California”, he continued to open other bars and restaurants and invited other operators to join him. Instead of paying rent, Zeman bought properties and became the major landlord of the LKF area. 8 He leased the property to the right 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 LKF Carnival etc. 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) which operated under a conglomerate business model with members including LKF Properties, LKF Capital and LKF Entertainment. Besides Hong Kong and China, the Group engaged in business in Phuket, Thailand and Los Angeles. LKF Properties dealt with property development, management and operations. LKF Entertainments owned and operated bars and restaurants in Hong Kong. The group owned LKF Chengdu since 2010 and used to own, manage and operate the Shanghai Park 97, making it a top entertainment spot from 2000 to 2008 before selling it,9 while LKF Capital specialized in private equity investments. 10

Opportunities in China

The LKF business model and accomplishments appealed to many countries including China where government officials persistently invited Zeman to expand its success into the most

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 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).

6 For details, see LKF’s website http://www.lkfgroup.com/index.php/about-us/history-founde/ (accessed 17 February 2016). 7 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). 8 I Love LKF (25 February 2011) “LKF Interview: Allan Zeman”, http://www.ilovelkf.hk/articles/lkf-interview-allan-zeman (assessed 8 January 2016). 9 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). 10 For details, see LKF’s website, LKF Capital , http://www.lkfgroup.com/index.php/lkf-capital/ (accessed 10 November 2015).

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Lan Kwai Fong: Follow The Party Line (Ref.: 17/002) populous country in the world. The following factors catalysed the Group to move the leap forward to China.

New Government Policy towards Domestic Consumption

With China’s rapid economic growth and even the latest downturn, the new initiative was to 11 shift the Chinese economy from an export-driven to a consumer-driven one. That meant the growing number of middle class would look for quality and efficiency instead of quantity when they consumed domestically. 12

Growth of Middle Class with Enormous Spending Power

China was the world’s second largest economy with a population of 1.3 billion where half of its citizens lived in urban areas.13 According to the National Bureau of Statistics, China's average per capita 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 2006.14 [See Exhibit 5 for China Disposable Income from 2006 to 2016.] Over the next decade, 500 million Chinese were anticipated to enter the global middle class. By 2030, around one billion people in China, or 70% of its projected population, could be classified as middle class.15 [See Exhibit 4 for the Projection of Middle Class]. Their collective disposable income would mean enormous business opportunity for quality products and services.

Trends in Related Industries

Food and Beverages Retail In 2011, China surpassed the US to be the world’s largest consumer market for the food and beverage (F&B) industry 16 that grew rapidly as the fast emerging middle class in China increased by 30% between 2009 and 2014. 17 The average urban Chinese annual income per capita rose 12 times in slightly more than a decade, allowing Chinese consumers to spend more on food (including imported products) and dining. 18

Retail China was the world’s second largest retail market and was expected to surpass the US to be the world’s largest economy by 2018. 19 According to a Deloitte report, total retail sales of China consumer goods were Rmb 26.24 trillion in 2014, increased by 12% compared to the previous year. Luxurious products would be in huge demand.

11 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). 12 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). 13 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). 14 Trading Economics, “China Disposable Income per Capita”, http://www.tradingeconomics.com/china/disposable-personal- income (assessed 8 January 2016). 15 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). 16 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). 17 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). 18 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). 19 Ku, 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).

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E/m-commerce The traditional retail model had evolved into a form of e/m-commerce as online to offline integration platforms were sophistically developed to seamlessly support consumption. The internet connected and facilitated consumers to shop online anytime anywhere. Going on line by mobile phones or computer/tablets 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 2019. 20 [See Exhibit 6 for the m-commerce Sales in Retail, from 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 20 th Five-year Plan, the value of entertainment and other 21 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,22 a project targeting at the affluent middle class who were looking for quality entertainment and lifestyle.

All these burgeon industries fit the direction the LKF Group was heading. 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 purchase via their mobile devices. According to Zeman, his business model was adjusted from 35% F&B and 65% retail to 65% of F&B and 35% retail since many retail could be conducted online. Under this environment, how should LKF establish its market and grab market shares in Chengdu, Haikou, Wuxi and Shanghai? 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 sedulously visited every site wherever LKF would start a project in China. He stressed that it was very 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 price was reasonable.

The [Chinese] government built 19 blocks there and originally they were doing retail, but they had problems, so they 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. 23

20 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). 21 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). 22 For details, see LKF’s website, http://www.lkfgroup.com/index.php/1-01-ashanghai-dreamcenter/ (accessed 10 November 2015). 23 Zemen, A. Interview by authors (19 October 2015).

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In 2009, Zeman spearheaded the LKF concept into China. The Group set up funds from investors in Hong Kong and China to finance its developments instead of taking the company public to raise money. 24 With that fund, Zeman did not just transplant the LKF Hong Kong model with premier bars, restaurants and nightlife for entertainment; he carefully considered each project to integrate the crucial cultural features of each city.

Frontline staff were hired locally and then sent to Hong Kong for training and to understand the LKF culture. They were then sent back to China and implement LKF in their own way. The Group sent a general manager from Hong Kong to supervise each city of expansion. 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 in China

Chengdu

Chengdu was the capital of the southwest Sichuan province with a population of 14.42 million. In 2014, its GDP grew 8.9% year on year to Rmb 1,005.7 billion. 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 the most potential in luxury products sales. The government empowered and supported the city with a lot of forthcoming and promising opportunities that attracted 265 Fortune 500 companies to station in Chengdu as of June 2006. The city established a strong transportation network connecting uprising economic and trade zones, which also became the financial and commercial hub in western China with a high-tech industry zone. 25

Chengdu residents were considered laid back and carefree with a direct and spontaneous spending attitude. They loved hotpots, tea, spicy food, travelling and playing mahjong. 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. 26 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. Zeman recalled the early days:

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, like hotpot, mah-jong. The lifestyle appeals to me, and I opened up LKF which became an instant success. Because of Chengdu, every government calls me.27

24 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). 25 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). 26 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). 27 Zemen, A. Interview by authors (19 October 2015).

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LKF Chengdu began its operation in a 43,000 square meter complex about 18 times bigger than the one in Hong Kong. It was a purposely built all-in-one entertainment complex and fine dining hub in 19 blocks of two-story buildings interconnected by two open piazzas. It housed more than 30 local and international restaurants, private clubs, high-end bars, coffee bourses, 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 specialized in hotpot which appealed to local consumers although target customers were leaned to the middle- to high end customers, both local and expatriates. 28 Similar to LKF Hong Kong, the Group owned this complex and it hosted regular events in Halloween, Valentine and the Summer.

LKF Chengdu became one of the most popular entertainment landmarks for both locals and internationals in southwest China since its opening in December 2010, attracting over 10,000 visitors on weekdays and more than double of 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 other cities. 29

Haikou

Haikou, capital of Hainan Province, was located on the northeast of the largest island of Hainan in China. Just a short ferry ride from the coast of the southern Guangdong Province, Haikou served as a political, cultural and economic center of Hainan Province. Its population 30 was 1.52 million in 2010. Haikou’s GDP was Rmb 370.3 billion and GDP per capita was Rmb 38,747 in 2014. 31 Its most important industry was tourism as its tropical climate attracted lots of domestic and international tourists who could enjoy vacation and tax free shopping. In 2014, tourism revenue reached Rmb 48.49 billion, up 13.2% compared to 2013. 32

Mission Hill Lan Kwai Fong Haikou Opened in January 2016, LKF Entertainment Zone resort complex was a 150,000 square- meter entertainment component with cinemas, mid-market shopping and F&B facilities in a resort that included three hotels: Ritz-Carlton, Renaissance and Hard Rock Hotel. 33 It was originally jointly funded by the LKF Group and Mission Hill Group, a leading brand of golf and leisure tourism:

Mission Hill proposed me to open LKF. It is not easy because of where it is located: it is not the kind of project in downtown, but the duty free zone could help with some hotels. In the end, it will be good. 34

Zeman said in March 2016 that LKF no longer funded the project but act as a consultant although the complex would still include LKF Entertainment Zone. It was a replica of the Hong Kong LKF with the streets named after the Central District and featured the legendary California Restaurant Bar. 35,36 He said LFK helped with the design of the complex and it was nothing like it in China. 37

28 For details, see LKF’s Chengdu’s website: http://www.lkfchengdu.com/ (accessed 10 October 10 2015). 29 Zeman, A. Interviewed by authors (19 October 2015). 30 City Population, http://www.citypopulation.de/China-Hainan.html (accessed 10 April 2016). 31 Duetsche Bank Research (March 2016) “Province: Hainan”, https://www.dbresearch.com/PROD/DBR_INTERNET_EN- PROD/PROD0000000000247523/Hainan.PDF (accessed 10 April 2016). 32 China Knowledge (2013) “Haikou (Hainan) City Information”, www.chinaknowledge.com/CityInfo/City.aspx?Region=Coastal&City=Haikou (accessed January 10, 2016). 33 Hong Kong Trade Development Council Research (20 March 2015) “Sky’s the Limit: 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). 34 Zeman, A. Interviewed by authors (19 October 2015). 35 ETNet (8 November 2013) “LKF Haikou ‘copies’ Central street” [海口蘭桂坊「複製」中環街道], http://lifestyle.etnet.com.hk/column/index.php/management/executive/20805 (accessed 5 June 2016).

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Wuxi

Located along the Yangtze River Delta in Jiangsu Province, Wuxi was on an important node at the core 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 reached Rmb 820.5 billion in 2014, representing a year-on-year growth of 8.2% while per capita GDP was Rmb 126,400 in the same year. 38

Wuxi was considered a dubbed Shanghai and home for entrepreneurs with extremely strong spending power who enamoured luxury cars and goods. Wuxi was ranked the 4th “Best commercial cities in China” by Forbes in 2014 with more than 90 Fortune 500 companies invested in nearly 160 projects. 39 Downtown Wuxi were connected by shopping malls displaying international brands such as Louis Vuitton and Hermes. Similar to Chengdu, Wuxi adopted 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.

Wuix’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 F&B industry was starting to link its business via online platforms. Retail sales of consumer goods in Wuxi increased by 10.7% to Rmb 305.5 billion in 2014. Its retail market value was ranked 3rd in Jiangsu province, only behind Suzhou and Nanjing.

Lan Kwai Fong in Wuxi Planned to open by the end of 2016, Lan Kwai Fong Wuxi and Taihu New City Cultural Zone was a collaboration of the LKF Group and the local government of Wuxi Taihu New City.40 A Rmb 1.2 billion project integrating high quality retail, F&B, art and culture, entertainment and lifestyle, it was the Group’s third investment with 75% ownership of the property.21 The complex, with a gross floor area of 168,300 square meters, aimed to attract the nearby residential community, Taihu New City, designed to become Wuxi’s new city center with about 1 million permanent residents and tourists. 41

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, close to Shanghai. It will only take about 30 minutes away by train from Shanghai. 42

36 Weekend Weekly [ 新假期周刊] (14 April 2016) “Allen Zeman Leads the way to clubs in LKF Haikou” [ 盛智⽂帶路！去海口蘭桂坊蒲], http://www.weekendhk.com/bloggerspick/%E7%9B%9B%E6%99%BA%E6%96%87%E5%B8%B6%E8%B7%AF- %E5%8E%BB%E6%B5%B7%E5%8F%A3%E8%98%AD%E6%A1%82%E5%9D%8A%E8%92%B2/ 37 China Money Podcast (18 March 2016) “Allan Zeman Explains LKF's Role in Mission Hills Haikou Project”, http://www.chinamoneynetwork.com/2016/03/18/allan-zeman-explains-lkfs-role-in-mission-hills-haikou-project (accessed 5 June 2016). 38 Hong Kong Trade Development Council Research (February 3, 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). 39 Ibid. 40 Lan Kwai Fong Wuxi website: http://www.lkfwuxi.com/ (accessed October 10, 2016). 41 Lan Kwai Fong Wuxi website: http://www.lkfwuxi.com/ (accessed October 10, 2016); Hong Kong Trade Development Council Research (October 2, 2015) “Wuxi: Profile of a Consumer Market”, http://hkmb.hktdc.com/en/1X0A3VWJ/hktdc- research/Wuxi-Profile-of-a-Consumer-Market (accessed January 10, 2016). 42 Zemen, A. Interview by authors (19 October 2015).

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Shanghai

Historically the largest city financial center in China, Shanghai was located at the heart of the Yangtze River Delta. With a population of 24.25 million, 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 with Hong Kong as the largest source. Other major investors came from 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 grew by 3.2% to 268 million while overseas tourists grew by 4.5% to 7.91 million. 43

Shanghai consumers, including more expatriates and international visitors, were relatively higher educated, more sophisticated, with higher income and living standards. The key consumer group was post-80s who looked cool and seek individuality. They were known for deficit spending with a strong consumption impulse. The middle class spending attitude was more towards brand-name. Tours and vacations were very common with Hong Kong, Japan and Korea being favourite sightseeing and shopping destinations. In terms of dining out, they were more concerned with the special characteristics and environment of the restaurants than the taste of the food. Entertainment and cultural interest had shown considerable growth in Shanghai due to better living standards and a desire for living in a more pleasurable lifestyle. 44

Among all the cities LFK was expanding into, consumers in Shanghai had the highest per capita disposable income: Rmb 47,701 in 2014, increased by 8.8% from 2013. Retail sales of consumer goods in Shanghai reached Rmb 871.9 billion in 2014, an annual growth of 11% on average from 2009 to 2014. This showed a sustained growth in its residents’ spending power. Online shopping had also become an important component of consumption with an annual growth rate of almost 50%.

Lan Kwai Fong in Shanghai Located along the Huangpu River at the south of the famous Bund, DreamCenter was an Rmb 20 billion project spanning over a gross floor area of 463,000 square meter expected to be completed by the end of 2017.45 Apart from LKF Group, key investors included CMC Capital Partners, DreamWorks Animation and the Chinese Development Bank. DreamCenter would consist 12 cultural and entertainment venues dotted with premium restaurants and bars along with lifestyle retails. It would be the flagship attraction of the West Bank Media Port of Huangpu River planned by Shanghai's Xuhui District government and expected 20 million visitors a year. 46

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 .

43 Hong Kong Trade Development Council Research (December 23,2015) “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 Aug 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 January 10, 2016). 44 Ibid. 45 Lan Kwai Fong website, Shanghai DreamCenter, http://www.lkfgroup.com/index.php/1-01-ashanghai-dreamcenter/ (accessed November 10, 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). 46 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).

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The target consumer was locals, expats and tourists across nations. 47 The DreamCenter would be a "celebration of great theater, great art, great culture, great music, all in one place," and would target 18- to 34-year-olds, said Jeffrey Katzenberg, chief executive officer of DreamWorks Animation.48

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. 49

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, Tong Zi Lin where most foreigners lived bred a bit more westernized bar and clubs. 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. 50

LFK Chengdu’s routine events bored some customers who preferred free events. One party goer, 25-year-old Xu Junfeng, a designer returning to work in his hometown of Chengdu after graduating from university in Australia, pointed out that he used to party in LKF Chengdu and had spent over Rmb 20,000 per night for four persons. But he was no longer interested in going to LKF because “many uncles and aunts played there. It is not cool at all.” He preferred Poly Center where the music was more underground and the beer was cheaper at around Rmb 30. A student from Sichuan added that in LKF Chengdu “the events were repetitive and unappealing. It’s the same Brazilian girl every year at the Summer Carnival. This year she has wrinkles.”51

Competition was also strong in Wuxi and Shanghai. Wuxi was a relatively green city. As of January 2015, there were already some 40 urban complexes with more than 70 shopping malls of all sizes. A new batch of commercial complexes, including T12 Shopping Mall, Mega All in One and Harmony Plaza, would soon emerge. Other international brand restaurants and shops would move in and directly compliment and compete with LKF.52

Shanghai was 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.

47 Lan Kwai Fong website, Shanghai DreamCenter, http://www.lkfgroup.com/index.php/1-01-ashanghai-dreamcenter/ (accessed November 10, 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). 48 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). 49 Zemen, A. Interview by authors (19 October 2015). 50 Tornoff, T. (9 August 2013) “Guides to Chengdu’s nightlife I” The InternChina Blog, https://internchina.com/guide-to- chengdus-nightlife-i/ (assessed 10 January 2016). 51 He, X.Y. [ 何雪瑩] (12 November 2015) “LKF Chengdu Doesn’t Fit China’s Market, Zeman Faces Challenges 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). 52 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).

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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 operation 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 held by 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 subscribed for 20 copies with Rmb 365 each. I paid diligently but had never seen the paper. 53

The government’s inconsistent policies made the tenants become disaffected. Tenants were not making enough money and had to close down their business. Besides’ Zou’s bar, Häagen- Dazs, Tony Roma’s and a famous Chinese restaurant ended their ventures in LKF after short existences. At the end of 2015, 30% of LKF Chengdu was left empty.54

Lack of Professionals

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

Zeman admitted that the tenants and management needed improvement. He said it would be very 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 the poor practises. He said many restaurant operators treated it as a side business and had no idea how to run clubs. 55

53 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). 54 Ibid. 55 Ibid.

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The Way Forward

Despite all the challenges, Zeman was very 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 very important to keep the standards and quality:

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

He was very 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 and O2O retail was surging, the Group was open to any opportunities, including young IT start-ups and gaming industries:

The first tier cities such as Tijian, 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. 56

Zeman said LKF was about consumption and lifestyle. In the past a mall would consist 70% retail and 30% F&B. With the increasing popularity of online purchasing, 65% to 65% 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! 57

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 find out the challenges for LFK in China. 4. 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: What challenges was LKF facing in China?

56 Zemen, A. Interview by authors (19 October 2015). 57 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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EXHIBIT 1: LKF PRESENCE IN DIFFERENT CHINESE LOCATIONS

LKF Year Population Per capita Project Objective Landscape Central Government Target Customer Locations Establish(ed) 2014 disposable Business Involved (million) income of District urban residents in 2014 (Rmb)

Hong Kong 1983 7.24 257,394 Initially a place where westerners L-shaped street located between Yes No Locals, expatriates, and could dine casually Wyndham Street and D'Aguilar tourists. Street in Hong Kong’s central business district. Chengdu 2010 14.42 32,665 A purposely-built F&B and Built along Jinjiang River with an Yes Yes Local, expatriates, and entertainment complex in area of 43,000 square meters in tourists. Chengdu. Chengdu’s central business district. About 18 times bigger than the one in Hong Kong. An all-in one entertainment complex and fine dining hub with 19 blocks of 2- story buildings interconnected by two open piazzas. Haikou 2015/2016 9 18,368 (2011) Asia's new Capital of Hainan Island, not in No No Golfers and tourists from entertainment hotspot. central business district. China and overseas. Wuxi End of 2016 6.5 41,731 A high quality integrated cultural, Located in the central business Yes Yes Local, expatriates, and entertainment district. LKF Wuxi and Taihu New tourists. and lifestyle destination. City Cultural Zone consisted low density buildings interconnected by 3 open plazas with a transparent canopy. Shanghai 2017 24.25 47,710 DreamCenter, a key component Located on the west bank of the Y–es/no Yes Local, expatriates, and of the West Bund Media Port, Huangpu river in Xuhui district, tourists. would focus on creative and close to the site of the World Expo digital media, technology and 2010. Occupying an area of cultural industries. LKF 152,300 square meters entirely Entertainment and Lifestyle dedicated to entertainment. District would be filled with year- round themed events and parties, bringing world class entertainment featuring creative media and performing arts.

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EXHIBIT 2A MAP OF CHINA SHOWING LKF LOCATIONS

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EXHIBIT 2B LKF LOCATIONS IN FOUR CHINESE CITIES

LKF Chengdu Mission Hills LKF Haikou

LKF Wuxi Shanghai DreamCenter

Source: LKF’s Chengdu website, http://www.lkfchengdu.com/en/locations/ Hainan Tourism Development Commission’s website, http://en.visithainan.gov.cn/English/Explore/TouristAttractions/201602/t20160204_67880.ht ml LKF’s Wuxi website, http://www.lkfwuxi.com/#!/ch8 LKF’s Shanghai website, http://lkf2016.wix.com/dreamcenter#!location/c149j

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EXHIBIT 3: THREE CITIES (CHENGDU, WUXI AND SHANGHAI) COMPARISIONS

A. Per Capita Disposable Income and Consumption Expenditure

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B. Retail Sales of Consumer Goods

Source: Hong Kong Trade Development Council

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EXHIBIT 4: PROJECTION OF ANNUAL INCOME IN CHINA

(ANNUAL INCOME, THOUSANDS OF PEOPLE)

Source : Ernst & Young Global Limited

EXHIBIT 5: CHINA DISPOSABLE INCOME PER CAPITAL

Source: Trading Economics.Com

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EXHIBIT 6: 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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