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Extending the Master Kong Model

Ting Hsin's New Consumer Offensive in China

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Ting Hsin's New Consumer Offensive in China

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The Master Kong instant noodle brand has made it big in China through its common-man appeal. The brand's owner is now adopting a similar strategy at its convenience store chain.

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Ting Hsin's New Consumer Offensive in China

By Ming-Ling Hsieh
From CommonWealth Magazine (vol. 483 )

It's 7 in the evening, and a FamilyMart manager stands outside his convenience store on Shanghai's Tianyaoqiao Road, a small loudspeaker affixed to his head, busily barking out a spiel at the office workers on their way home.

"People's boxed meals for 6.8 renminbi. Come and give them a try!"

Many customers take the bait, grabbing up the boxed meals that have just come out of a microwave oven along with a mushroom soup sold cheaply as part of a package deal, taking a seat in the store and peering out at the Shanghai street scene as they enjoy their dinner.   

FamilyMart started selling these boxed meals at half their normal price at the beginning of September, and sales have soared ever since. More than 120 boxed meals are sold at each store daily, and the extra traffic they bring accounts for 20 percent of the sales of other fresh foods and beverages.

Through these "people's boxed meals," the Ting Hsin International Group has taken the formula of "embracing the masses" that has helped fuel the success of its Master Kong instant noodle brand and applied it to its convenience store and restaurant chains in China, with a clear goal in mind.

Ting Hsin wants its Convenience Store & Chain Restaurant Group, which has been around for 15 years, to emerge as its second aircraft carrier after Master Kong.

Wei Ying-heng, chairman of Ting Hsin International Group's Convenience Store & Chain Restaurant Group, decided to embrace "common-man economics" to fuel the initiative's takeoff, beginning with the first Master Kong Noodle shop that opened in Shanghai on a trial basis on Oct. 12.

Five years ago, Ting Hsin opened a slightly more upscale beef noodle chain, called Master Kong Chef's Table, where a bowl of noodles costs 30 renminbi to 33 renminbi on average. But the new restaurant will offer items for about half the price.

"In China, the common-man economy is king," Wei explains. Next year, the group plans to open another lower-end chain selling rice dishes, tentatively called Master Kong's Rice, he says.

"Ting Hsin conducts transactions with 100 million people per year at prices starting at half a renminbi and going no higher than 20 renminbi," Wei says. In the future, consumers won't have to feel conflicted over eating a bowl of noodles, with truck drivers and investment bankers alike able to enjoy "food for the masses." According to Wei, this common-man niche has yet to be satisfied in China and represents a good business opportunity.

His approach to attacking it is a simple price point formula – satisfy customers' appetites at a cost of half an hour in wages.

In the United States, Wei says, hourly wages are about US$8-10 per hour, and an average meal at McDonald's costs US$4-5. In Japan, where the average hourly wage is 900-1,000 yen, one can get a meal at Yoshinoya for 380 yen. The prices of these "national meals" fall right around half of their country's minimum hourly wages.

In China, the average hourly wage is 12 renminbi, so Master Kong's new rice restaurant will serve a dish of rice with either pork chop or drumstick for 6-8 renminbi. That same logic has driven FamilyMart's 6.8 renminbi "people's boxed meals."

But there is more than pricing that is fueling FamilyMart's increased traction in China's market.

FamilyMart: 8,000 Stores by 2020

Wooden floors, counters, tables and chairs; a coffee corner facing the street; an island-style heated counter full of fresh boxed meals and sandwiches; and two counters packed with steaming Kanto-style stew – this is the new look of two refurbished next-generation FamilyMarts in China, demonstrating Ting Hsin's ambition to build a beachhead and gain recognition in the competitive market.

Beyond pricing, China CVS Holding Corp., the Ting Hsin subsidiary that operates FamilyMart stores in China, has relied on a strong operating model and logistics network to build the brand there.

Among foreign-invested convenience store chains operating in Shanghai, FamilyMart has the most outlets and has generated the highest profit at a single store and the highest quarterly profit for any chain. Though it does not have as many outlets as home-grown Chinese chains, its daily per-store revenue and that of other foreign-invested chains is about 9,000 renminbi to 10,000 renminbi, double that at locally invested chains.

FamilyMart only has a presence in Shanghai, Suzhou and Guangzhou at present, but Wei has set the ambitious goal of expanding the network to 8,000 stores by 2020, 10 times the number of FamilyMart stores expected to be operational by the end of this year. (See Table)

The expansion will be financed completely by the group, which has ample capital to work with because of the strong cash flow generated by its retail businesses. In Shanghai alone, FamilyMart hauls in 150 million to 160 million renminbi in cash every month.

Another key to FamilyMart's growing presence is its strong fresh food section.

The street vendor culture in China is not as developed as in Taiwan, making it less convenient for salaried workers to catch a meal on the go. That and the increased awareness of food safety in China in the wake of a spate of food contamination cases have been favorable to the development of fresh food sections in convenience stores, says Chiang Jeongwen, a marketing professor at China European International Business School.

Notably, however, Japan-based convenience chain Lawson has been offering fresh food at its Chinese stores since entering the market in 1996, and other chains have gradually strengthened this product area since then as well. So what can FamilyMart do at this decisive moment to push ahead of the field? 

First, it has attacked the market based on a "flagship store" gambit. When it enters a market, it doesn't just open a store with limited support; it brings along its wholly owned food production and logistics "flagships," ensuring that none of its key products are contracted to outside suppliers. The company invests about the same amount in its support operations as it does in the stores themselves.

A Multinational Flotilla

A year after FamilyMart entered the Shanghai market in 2003, the company opened a facility to produce fresh food and baked goods in the city's Huangdu Township. In 2005, it got involved in the logistics business with the help of a Ting Hsin Group subsidiary. Wei described the process as "preparing supplies for when the heavy troops arrive."

In the past two years, the Ting Hsin Group has built a new multi-temperature logistics center and a food manufacturing and bakery center in Malu Township, about 40 kilometers from downtown Shanghai.

At present, all of FamilyMart's fresh food offerings are produced in-house, with the exception of Kanto-style stew, salads, fruit and desserts. The company also handles the distribution and delivery of more than 95 percent of its products, a critical element in its competitiveness.

"Chinese-invested convenience stores mostly get beat on logistics," says Arthur Wu, director and general manager of Shanghai Luxe Food Co. Ltd., which supplies food items to Lawson, Quik Convenience Stores and Shanghai 7-Eleven.

Wu explains that the division of labor in China's food processing industry is not as sophisticated as in Taiwan. To offer, for example, a chicken leg boxed lunch is challenging, as suppliers of high quality, reliable and reasonably priced braised chicken legs are hard to come by, so companies have no choice but to cook the chicken themselves.

FamilyMart's strong behind-the-scenes support team in China presents many advantages. It allows the chain store to control its pace of innovation – since July 2010, the company has introduced three to five new products every week, not including baked goods. It also helps keep a lid on costs, as logistics account for 8 percent of total costs of fresh foods. Ultimately, the complete support platform makes it possible for FamilyMart to quickly open new stores in China's large-scale market.

Shortening the Learning Curve

Another big edge FamilyMart has over its more established competition is a golden lineup of major shareholders, each one possessing its own area of expertise that has helped the company shorten its learning curve and get things right from the start.

"China CVS Holding is like the youngest son who's learned from all the setbacks of his older brothers and is lavished with love," says one market observer.

The Master Kong instant noodle business, for instance, has not only amassed capital but also provided its experience on tailoring flavors to local tastes. China CVS Holding president Hsueh Tung Tu explains that many people from Hunan, who love spicy hot food, live in Guangzhou, so kung pao chicken rice boxed meals served by FamilyMart stores there will have a "hot" spicy flavor. But when the same dish is served in a new FamilyMart store in Chengdu next year, it will have a more "numbing" spiciness.

Japanese retail giant Itochu Corp., which has a 20-percent stake in the Ting Hsin Group and therefore indirectly owns a piece of FamilyMart, has also contributed technology and resources. Through Itochu, FamilyMart was able to purchase huateng rice from Heilongjiang. Shikishima Baking Co., Japan's second-largest baking company, also helped the Malu Township baking center purchase a Japanese tunnel oven. 

Also, China CVS Holding's Japanese vice president previously worked as systems director for FamilyMart in Japan and only recently arrived in China, where he installed a new-generation POS (point-of-sale) system.

Professor Chiang cautions, however, that as convenience stores race to expand in China, a company's team and manpower have the potential to be a major bottleneck. But China CVS Holding seems to be aware of that.

The company has set up corporate classes with Shanghai SIPO International Business & Management Institute and a technical school in Kunming. Graduates get priority in landing jobs with FamilyMart. At the same time, FamilyMart also has an incentive mechanism that encourages internal entrepreneurship. At present, 65 percent of FamilyMart franchises have been opened by company employees. This system helps retain talent and makes it easier for the company to expand its network's scale.

China CVS Holding has also initiated a "potential dragon project," a systematic plan to cultivate management talent that has young employees work in a store for a year and then receive a year of training at company headquarters in Shanghai.

At present, two groups of new hires are being trained in Shanghai under the program: a group of more than 30 from Hangzhou, where FamilyMart will open in the fourth quarter, and another of over 40 from Chengdu, where the chain will begin operations in the first quarter of 2012.

With so many advantages, FamilyMart's plan to conquer China is clearly picking up momentum.

Translated from the Chinese by Luke Sabatier

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