85°C and Paris Baguette are foreign companies that are surviving in the competitive China’s market. Many foreign companies have attempted to enter China’s market but failed and withdrawn. The previous chapter described their strategy for surviving in the China’s market. News and reports from Taiwan, China, and South Korea make it easy to find these two companies’ accomplishments, but there are other essential facts that help understand how they achieved success. This chapter compares the differences in China's regions, particularly Beijing and Shanghai, and 85°C and Paris Baguette's stores and sales. The comparison leads to several findings. Before addressing Q5a and Q5b, the study describe result of Q1 to Q4 and the store location of the two firms.
5.1 Finding 1: Level of control and market expansion
The first research question raised in this study is whether a level of control influence the speed of market expansion. The finding to this question is as follows.
Both 85°C and Paris Baguette entered the China’s market with wholly owned subsidiaries (WOS). This decision was based on the China’s market’s specificity; the WOS system is more stable than the franchise system when entering the China’s market with many variables. Table 4 shows that both companies grew steadily each year and both companies have franchise operations in their home countries. They decided to enter the China’s market through their experience in the home country and failures in the case of other firms in China. They needed high control to maintain their skills and
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services. Therefore, both companies decided to invest in China directly; after an extended period in which they maintained the firm's foundation, they switched to the franchise method.
5.2 Finding 2: Firm size and market expansion
The second research question raised in this study is whether a firm size influence market expansion. The finding to this question is as follows.
85°C and Paris Baguette are both larger listed firms in each home country and both operated their subsidiaries through direct investment when they entered China market.
Thus far, both companies have been recognized as successful companies in the China’s bakery market.
According to China Enterprise Information Disclosure (http://www.qichacha.com), the total assets of SPC Investment Limited, a subsidiary of Paris Baguette in 2016, amounted to 2,281 million TWD and 1,146 employees. Meanwhile, Prime Scope Trading Limited, a subsidiary of 85°C, had total assets of 5,864 million TWD and 1,368 employees in total. 85°C is more extensive than Paris Baguette in terms of total assets and workforce; therefore, the comparison between the two companies shows that the larger the company, the greater its success in the China’s market.
5.3 Finding 3: Cultural distance and market expansion
The third research question raised in this study is whether a cultural influence market expansion. The finding to this question is as follows.
85°C is a Taiwanese company with a similar cultural background to China. In
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particular, these two countries have a better position than others because they have the same linguistic background. Using culture and language similar to that of a country is a significant advantage. In addition, many cases have already entered China, so it is easy to enter the China’s market by referring to such cases.
In the case of Paris Baguette, it can be said that it has made good use of geographical advantages and Korean-wave images. Although Korea and China use different languages, there have been many cultural exchanges for geographical reasons.
Furthermore, there is the advantage that it is easy to advance into the China’s market due to recent Korean-wave influences.
The commonalities of these two companies are that they utilize cultural advantages and provide each company's products and services appropriately to Chinese consumers.
It is difficult to succeed if the cultural distance and consumer demand are unsatisfied.
A representative case would be the French bakery brand “Fauchon” that withdrew from the China’s market without overcoming cultural differences (Go, 2016).
5.4 Finding 4: Competitive situation and market expansion
The fourth research question raised in this study is whether competitive situation influence market expansion. The finding to this question is as follows.
Looking at the sales figures of Paris Baguette in Figure 6, the difference in sales between the two regions is significantly different. This phenomenon can be confirmed by the status of the 85°C store distribution in Figure 9, and the distribution of China’s franchises in 2014 in Figure 10. It can be seen that the East China region, which is more competitive than other regions, can affect a company’s sales.
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5.5 Finding 5: A high-end positioning and sales
Table 8 shows that Paris Baguette pursues a high-end positioning and provide products at a higher price when compared with 85°C. This study further collects data of store numbers and sales.
Figure 5 shows the average sales per store for 85°C and Paris Baguette. Compared to the total sales of the two companies, the annual sales of 85°C is higher than that of Paris Baguette. However, as Paris Baguette pursues a high-end strategy and 85°C pursues a low-cost strategy, average sales per store should be compared, as shown in Figure 5.
Figure 5: 85°C and Paris Baguette sales revenue per store
Source: Data from SPC group annual report 2010~2016, Gourmet Master annual report 2010~2016
The average for sales per store was likely higher for Paris Baguette's high-end strategy, but sales at 85°C were higher for all years except 2014. Furthermore, unlike between 2010 and 2012, Paris Baguette's average sales declined between 2014 and 2016. Therefore figure 5 shows Q5a that high-end positioning related with store sales.
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This finding can be demonstrated through articles and annual reports on both companies.
The differences in the mode of entry into the China’s market
85°C studied Starbucks' strategy when they entered China. In Taiwan, the company operated through a franchise method, which had difficulty maintaining the brand image. If a franchisee makes a mistake, the brand’s entire image may be damaged (Tsai, 2013). Moreover, since China is not a domestic market but a foreign market, 85°C needed different strategies. Therefore, 85°C studied Starbuck’s strategy, finding that Starbucks operates as company-operated stores and licensed stores. Starbucks operates directly because it considers quality of service and consumers’ Starbucks experience (Ann, 2016).
Based on this Starbucks strategy, 85°C has been opened as a company-operated store from the start. The reason for the decrease in sales of 85°C in 2010–2012 is due to the expansion into other cities. According to the 2010 annual report of Gourmet Master Co. Ltd., 85°C has established subsidiaries and factories in Central China and South China; this is because 85°C has started to enter other cities in earnest.
The reason for the significant increase in sales in 2014–2016 is the change in strategy at 85°C. In 2014, 85°C changed its strategy of converting 70–80% of all company-operated stores into franchises; this means fewer burdens on store operations and staff costs, and 85°C will reduce its risk to changes in the China’s market (Yang, 2014). Since 85°C started turning company-operated stores into franchisees in 2014, there has been a steady increase in sales.
Paris Baguette entered China in a company-operated way similar to 85°C.
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Realizing the high-end strategy of Paris Baguette required directly managing the company and entering high-rent areas.
The company-operated method has the disadvantage that the company pays all costs for the initial investment, but the profits after opening stores is directly related to the company's sales. Paris Baguette has always pursued a company-operated approach since its inception, and by 2014 the proportion of franchisees was only 6% of the total number of stores (Park, 2015). However, as the proportion of franchisees increased to 16% in 2015 and 35% in 2016, Paris Baguette started increasing its franchise stores.
However, sales dropped sharply in 2014–2016 due to the limited number of cities in which Paris Baguette was able to advance due to its high-end strategy and because it had to be located in high-rent areas. Therefore, Paris Baguette has entered a period of change with its brand image that has been built up since its inception in 2004. The crucial difference from 85°C is that Paris Baguette did not switch from a operated store to franchises, but added additional franchises to the original company-operated stores; thus, there was no direct increase in sales.
Comparing the two companies' operations in the China’s market shows that the high-end strategy is not directly related to sales. Figure 5 also shows the difference between these two strategies with regard to whether they are switching from company-operated stores to franchisees or adding franchisees from the company-company-operated stores.
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5.6 Finding 6: Regional differences in China affect sales
Figure 6 shows the average revenue per region for Paris Baguette and indicate Q5b that the finding of regional differences brings different results. The reason for the lack of 2016 data is that Paris Baguette has merged with other subsidiaries since the establishment of the SPC Investment Limited Company in 2015. Paris Baguette has increased its stores in these two regions, mainly in Beijing in North China and Shanghai in East China.
Figure 6: Paris Baguette average sales in each region of China
Source: Data from SPC group annual report 2010~2016
Differences between North and East China
In Figure 6, the average sales in 2010 were higher in East China. However, sales in North China were higher starting in 2012. Findings can be explained through the annual report of Paris Baguette and the analysis report for the China’s franchise market.
2010
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First, Figure 7 shows the distribution of stores by region in Paris Baguette for 2012.
The right side is North China (Beijing, Tianjin, and Dalian) and the left side is East China (Shanghai, Jiangsu, and Zhejiang). The total number of stores is 20 in East China than in North China. However, the overall revenue is similar, so the average revenue per region is higher for North China.
Figure 8 shows the distribution of stores by region in 2014 in Paris Baguette. In 2014, the total difference in the number of stores was 20 between North China and East China. Since there were Paris Baguette-affiliated companies in Beijing and Shanghai in 2014, sales in both regions were consolidated. However, there is no significant difference in total sales compared to 2012, and the difference in the number of stores was also maintained. It can be inferred that the average sales in Beijing was also higher in 2014. Furthermore, when compared to the rest of the region excluding Beijing and Shanghai, the total sales in the North region were higher than those in the East region.
This allows us to identify the differences shown in Figure 6.
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Figure 7: Paris Baguette Distribution of stores and sales by region in 2012
Source: Data from SPC group annual report 2010~2016
Figure 8: Paris Baguette Distribution of stores and sales by region in 2014
Source: Data from SPC group annual report 2010~2016
Second, it can be confirmed by the situation in East China. Figure 9 shows each
Beijing
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company’s total number of stores in each region of China. 85°C has the highest percentage of stores in East China each year. Furthermore, Starbucks stores in the East area in 2014 accounted for 30% of the total (Ann, 2016). Furthermore, according to the China Franchise Business Yearbook (2015), 43% of franchise companies in the entire China region were located in East China (Figure 10). This fact indicates that the East China region is the most intensely competitive region in China. As East China is a highly competitive region, it is difficult to achieve higher sales there than in other areas.
As Paris Baguette is also competing in this situation, sales in the East are lower than in the North.
Figure 9: Paris Baguette and 85°C total number of stores in each region of China
Source: Data from SPC group annual report 2010~2016, Gourmet Master annual report 2010~2016
North
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Figure 10: Distribution of franchisees by region in 2014
Source: 2015 China Franchise Business Yearbook
85°C strategy is suitable for south China
This study extends the analyses of regional differences. Figure 11 shows Q5b that the finding of regional differences brings different results.. North China achieved the highest average revenue in 2012. However, South China's sales have increased significantly, starting in 2014. Even in 2014, there were fewer than 100 stores compared to the number of stores in East China. The China Statistical Yearbook and the China Regional Report can prove why the South China region is notably stronger than other regions.
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Figure 11: 85°C average sales in each region of China
Source: Data from Gourmet Master Co. Ltd annual report 2010–2016
Figure 11 shows Q5b that the finding of regional differences brings different results.. North China achieved the highest average revenue in 2012. However, South China's sales have increased significantly, starting in 2014. Even in 2014, there were fewer than 100 stores compared to the number of stores in East China. The China Statistical Yearbook and the China Regional Report can prove why the South China region is notably stronger than other regions.
According to the 2014 China Statistical Yearbook published by the National Bureau of Statistics of China, South China's urban consumption market (based on 2013) accounted for 19.7% of China's total (260 billion yuan). In addition, it ranked second in the seven major regions, and Guangdong province was the largest with 1.774 trillion yuan (first in China) by province.
According to the 2013 Analysis of the China’s Food Market and Opportunities for
2010
North China East China Central China South China
Sales
Unit: TWD million
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the Food Processing Industry in Korea published by the Korea Institute of Industrial Economics & Trade, South China’s cuisine features soft, clean tastes that combine traditional and Western cuisine. It features dishes that use abundant ingredients. This suggests a high degree of openness to Western foods. In addition, Figure 12 in the report covers the number of food businesses, sales, and percentages for South China.
According to the report, South China has a more developed food processing and provisioning industry and beverage manufacturing industry compared to other regions.
Thus, sales there are higher than in other regions.
Figure 12: Number of food businesses, sales, and percentages in South China
Source: An Analysis of Chinese Food Market and Opportunities for the Food Processing Industry in Korea, 2013
Guangdong Province and Fujian Province are significant regions of South China.
These two areas belong to the economic region in which industrialization is the highest in China. In addition, income levels are high, and there is active exchange with other countries there. In particular, Fujian province has significant recognition and imports of Taiwanese food due to its geographical and cultural proximity to Taiwan.
These factors mean that 85°C is able to make progress in the South China region.
The main reasons are the high level of consumption in Guangdong province, which is
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the largest in China, the high level of openness to Western food, the development of the food and beverage manufacturing industry, and the high recognition of Taiwanese culture.
Supplementary analyses
In the following analyses, we focus on two cities Beijing and Shanghai. Figure 13 compares the total number of 85°C and Paris Baguette stores in Beijing and Shanghai.
Shanghai and Beijing are the most critical areas for both companies. For Paris Baguette, the advancement of these two regions is essential to realize their advanced strategy. For 85°C, Shanghai has always had the largest number of stores from the beginning to the present.
Figure 13: 85°C and Paris Baguette total number of stores in Beijing and Shanghai
Source: Data from SPC group annual report 2010~2016, Gourmet Master annual report 2010~2016
Beijing
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Figure 14 compares the total sales of 85°C and Paris Baguette in Beijing and Shanghai. Figure 13 shows the total number of stores while Figure 6 shows the total sales for more specific comparisons. Unlike Figure 13, Figure 14 only shows data up to 2014 because of the integration of each company’s subsidiaries.
Paris Baguette unified the regional headquarters of Beijing and Shanghai in 2014 and consolidated the entire regional headquarters into the SPC Investment Limited Company in 2015. 85°C integrated the regional headquarters and production plant in Shanghai in 2015.
Figure 14: 85°C and Paris Baguette total sales in Beijing and Shanghai
Source: Data from SPC group annual report 2010~2016, Gourmet Master annual report 2010~2016
The difference in the store-to-sales ratio between Beijing and Shanghai for Paris Beijing Shanghai Others Unit: TWD Million
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When comparing Figures 13 and 14, the 85°C store distribution increase led to higher sales. Both the distribution of stores and sales account for a more significant proportion of Shanghai; however, the two figures are different for in Paris Baguette. In 2010, Paris Baguette's store distribution and sales were higher in Shanghai than Beijing.
The ratio of Paris Baguette's Shanghai to Beijing stores in 2012 was 49:26, but was 44:47 in the sales portion. Two conclusions can draw from the following two pieces of evidence.
First, Paris Baguette first entered Beijing using its experience in Shanghai.
According to The Food & Beverage news, Kim, 2006:
Paris Baguette, the representative brand of SPC, will open its eighth and ninth stores in Beijing, China on the 18th. Paris Baguette opened its first store in Shanghai in 2004 and has opened nine stores in China so far, seven in Shanghai and two in Beijing. The eighth store is in one of Beijing's three major shopping centers and the ninth store is a high-end commercial area with a high concentration of foreigners.
Paris Baguette was able to make strategic choices based on their strategy for two years in Shanghai. Paris Baguette, which pursues a sophisticated strategy, has to launch into a region of high consumption and has entered Beijing's central and high-end markets. Thus, Paris Baguette has made significant progress in sales because it has entered the right place for their strategy.
Second, Paris Baguette entered Hangzhou in 2010 with the start of Tianjin in 2008.
It has started expanding into the first and second cities based on Beijing and Shanghai.
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Paris Baguette set up subsidiaries in Tianjin, Dalian, Hangzhou, and Nanjing in 2012 with the start of its entrance to other cities. Thus, sales in Tianjin and Hangzhou, which occurred in 2010, were included in the Shanghai subsidiary. Thus, the division of sales of Paris Baguette Shanghai in 2010 and 2012 became clear, and sales were different.
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