Levendary Caf: The China Challenge Levendary Cate was spun out from private equity ownership in January 2011, and the following month, Mia Foster was named as its new CEO. The departing CEO, Howard Leventhal, was the beloved founder of the popular chain of 3,500 cafes. He had grown a small Denver soup, salad, and sandwich restaurant into a $10 billion business, but after 32 years was moving on to new interests. This was Foster's first job as CEO. Previously, the 47-year-old had been president of the U.S. business of a large American fast food company for seven years. She had started her career at a major global accounting firm, leaving to earn an MBA from Wharton. Upon graduation, she had become a consultant at McKinsey before taking a job in product management at PtSzG, where she worked her way up the ranks. Foster was known for her frank communication style and strong execution. In spite of the promise held by the Levendary brand and Foster's strong track record, Wall Street was cautious about the stock. While the company's fundamentals were strong and its performance generally in line with management forecasts, its shares traded at a discount to comparable restaurant stocks. There were two reasons for this. First, analysts were concerned that Levendary's domestic business was nearly tapped out. Second, given Foster's lack of previous international management experience, they were skeptical of her ability to build a rnulti-national brand. Foster felt challenged by Wall Street's skepticism and wanted to address it head-on. In particular, she knew that Levendary's recent entry into the fast-growing China market would be closely Watched. So she was concerned by reports that recently opened China locations incorporated some dramatic departures from Levendary's US. concept, particularly in store design and menu selection. She was also frustrated by the apparent unwillingness of Louis Chen, Leventhal's hand-picked president of Levendary China, to conform to the company's planning and reporting processes. To address these concerns, Foster decided she needed to visit the Chinese operations. On May 25, 2011, Foster stepped out of the Limo that Chen had arranged to pick her up at the Shanghai Pudong airport. Heading in to tier first in-person meeting with Chen, she knew there were big decisions to be made. Indeed, they would determine the future of Levendary China. 13 The Multi-Unit Restaurant Business In 2010, the U.S. restaurant and contract foodservice industry was a $600 billion industry with 960,000 locations.1 Multiunit restaurant concepts represented approximately 30% of the industry by units, with independent operators as the balance. The restaurant and foodservice industry was highly fragmented, and even industry giant McDonald's generated just 2% of total revenues. Multi-unit concepts were generally categorized into three industry segments: a Specialty Establishments like Starbucks, Dunkin' Donuts, and Baskin-Robbins primarily served snacks and beverages under $5. - Quick Service Restaurants, or so-called \"fast food" concepts like McDonald's, Taco Bell, and Wendy's, provided counter or drive-through service with average tickets between $4 and $10. 0 Casual Dining included brands like Olive Garden, Applebee's, and Outback, and offered table service for dinner entrees priced between $8 and $20. Within this group, fine dining concepts like Ruth's Chris and Capital Grille featured entrees into the $40 range. While some concepts had bridged these categories for years (e.g., Friendly's offered casual dining coupled with a strong takeaway ice cream business), more recently several concepts had clustered around an emerging category often called "Quick Casual." For example, Panda Express was a quick service format of Chinese casual dining, while Chipotle offered a quick casual Mexican-American dining experience. Like other quick casual restaurants, Levendary promised more wholesome choices than its quick service cousins and a more informal self-serve dining experience than its casual dining relatives. Quick casual restaurants typically had average checks in the $8 to $12 range. Restaurant Cost Structure Restaurants had relatively simple cost structures which one industry expert defined as follows:2 0 Occupancy: These costs included real estate rental, common area maintenance, and energy and waste disposal. In the United States, they hovered around 10% of revenues. 0 Labor: Even at minimum wage, labor was typically the largest cost element. High turnover in the industry required restaurant companies to continually source and train new employees and to manage employee attrition. Labor typically represented 25% to 35% of total revenues. . Food: Food costs accounted for 23% to 32%. This expense was inuenced by not only the cost of the ingredients purchased, but also the amount ofwaste. . Supply: About 1% to 4% of revenues typically went to paper products at quick service restaurants or to linen and uniform cleaning at higher-end casual dining restaurants. E0 199 . Supply: About 1% to 4% of revenues typically went to paper products at quick service A u restaurants or to linen and uniform cleaning at higher-end casual dining restaurants. Q) In a best case scenario, a restaurant might make up to 35% gross margin, but 20% to 25% was more typical. Franchised restaurants also paid a royalty, adding a 3% to 6% cost line, and a marketing as fee which added a further 2% to 10% in costs. Depending on the size of the franchise organization, overhead might account for another 5% to 15% of cost. 1 \"Freedonia Focus on RestauranB," Fraedonia Group. February 2011. 2 http:// www bakerlly com/userfiles/BLRetaiLRestauranthnchmarksebjmall pdf 2 BRIEFCASES I HARVARD BUSINESS SCHOOL 3 Levendary Caft The China Challenge i 4357 ,3 A Restaurants typically operated on razor-thin margins, with profitability a direct function of their v ability to generate high traffic, execute consistently, and control costs. Traffic, in turn, was a function of the brand's appeal, marketing effectiveness, real estate location, and store experience. Levendary Caf: The Foundations 50 In the quick casual restaurant segment, Levendary Cafe was distinguished by two elements: A Wholesome soups, salads, and sandwiches using high-quality ingredients, and a commitment to service in a comfortable, friendly environment. Its corporate chefs were highly trained artisans from the Culinary Institute of America and other top cooking schools who took pride in creating everyday versions of gourmet fare. Customers raved, \"Eating at Levendary makes me feel rich.\" 919 Levendary was also distinguished by its willingness to take risks, especially those that helped Leven ary was a so mguis e y its gness to ta e ris s, especia y ose t at e pe evolve its concept over time. It was an entrepreneurial characteristic traced to founder Howard O u Leventhal. The most recent risky change occurred five years before Foster became CEO, when the J company decided to use only organic grains in its breads and hormone-free naturally raised meats in its sandwiches. To management's delight, customers willingly paid the premium price, resulting in \"'3' increased revenues and margins and a simultaneous boost in customer trust in the brand. The Organizational Foundation: Blending Concepts and Operations @ A complex organization supported Levendary's primarily U.S. business. The Denver headquarters housed the following activities (see Exhibit 1 for a basic organizational chart): 0 Concept: For 23 years, Howard Leventhal had relied on Chief Concept Officer (CCO) Lucian Leclerc to keep Levendary a top US. restaurant concept. Leclerc managed both the food development group and the marketing team that together determined what Levendary represented to the customer. With Leclerc's uncanny ability to sense nascent food trends and Leventhal's willingness to take calculated risks, the pair had kept the company at the forefront of changing tastes. Their shared commitment to healthful, wholesome eating was embedded in the company's Culture and reflected in its well-known advertising slogan "Tasty Fresh Goodness" or TFG as insiders referred to it. 0 Marketing: The Marketing group reported to the CC0. Its creative team worked with outside advertising agencies to convey the TFG concept through advertising copy and images. The 3 logo, store decor, and media images used a palette of earth tones to communicate natural, wholesome goodness. The distribution team ensured that banners, table tents, window decals, i3 and menu boards were properly placed in all 3,500 company and franchised stores, appropriately modified for differences in store size and layout. Preparing menus and menu A boards was complicated by variations in menu items to respond to local market preferences and by pricing differences to meet local competition. But the comfortable, welcoming, and homey "look and feel" of stores always remained consistent. V 0 Food: A fully scaled test kitchen and food science laboratory also reported to the CC0, taking the items developed by the CCO's executive chefs and making the adaptations necessary to supply their components with quality and consistency to each of Levendary 3,500 cates. The food team was also responsible for conducting quality checks in the field. EQ 0 Operations: Led by Chief Operating Officer (COO) Nick White, who had 30 years of operating experience in U.S. franchised restaurant companies, this group managed the day-to- day restaurant business. Store managers at the 1,200 company-owned rates reported to o district managers, who in turn reported in to area directors, then market vice Presidents. This structure allowed tight control of store level expenses and close monitoring of operations against the company's detailed and strict operating standards, policies, and practices. It also relayed any recommendations for modications to the menu or variations in the store "look and feel" to the Concept group for consideration and approval. Operations was also responsible for Operating Tools and Learning (OTL). As retail employees were often high school-aged or minimally educated, OTL set operating standards and provided materials to enhance employees' learning. Acting as a bridge between the Concept team and the stores, OTL also developed the training materials and processes to break down food preparation into steps that ensured quality local delivery of the chefs' gourmet creations. In general, OTL functioned as both an internal school and a standards enforcer. . Franchise: About two-thirds of Levendary's 3,500 stores were franchised. Headed by Chief Franchise Ofcer Peter Steele, the franchise team recruited new franchisees, supported existing franchisees, and enforced brand and operating standards in franchised stores. 0 Business Development: Staffed by former strategy consultants, this department sourced new revenue opportunities such as Levendary branded grocery items like coffee, cold cuts, and soups. This group also led research for the company's nascent international expansion and was responsible for an experimental licensing deal in Dubai. Launched in 2009, this opportunistic venture was run by a Saudi Arabian restaurant company owned by an old friend of Leventhal's. Aside from China, Dubai was Levendary's only international operation. . Administrative Staff Groups: Real estate, nance and accounting, legal, purchasing, and information systems all reported to an Executive Vice President (EVP) of Administration. Headquarters staff totaled approximately 300 in all. There was no separate international division. The Strategic Base: Serving the 11.8, Market Levendary was built on a culture that emphasized "delighting the customer." As founder, Howard Leventhal was fond of telling store staff, \"Forget today's prot. Have a positive impact on customers' lives. Make them want to come back. That's how we'll win in the long run." Day-to-day, this philosophy translated into a personalized approach that would accommodate customer requests such as removing sprouts from a sandwich or serving a soup extra hot. Such service appealed to Levendary's customer base of white-collar professionals and upper~middle~class women. "Heavy user\" customers in these groups visited Levertdary five or six times a week. But this approach taxed Levendary's store-level operations. The two key store operating metrics of speed of service and order accuracy were driven by standardization, and personalization threatened both. In response to store operators who questioned his relentless drive to pr vide ersonal serv l ' Leventhal's philosophy of delighting the customer also translated into local menu adaptions. With stores in urban, suburban, and rural environments across all 50 states, Levendary believed there was no such thing as "the American consumer." While McDonald's created one menu for its entire system, Levendary was more exible. It offered fewer soup items and more drink options in the South, allowed one or two regional specialties to be added to its core menu, and listed its menu items in order of local popularity, While appreciated by customers, the menu variations represented a challenge for the Food, Operations, and Marketing teams. 4 BRIEFCASES I HARVARD BUSINESS SCHOOL Levendary Cafe: The China Challenge l 4357 To keep the brand fresh in the eyes of the customer, the company was also committed to evolving menu choices, typically by featuring in-trend healthy ingredients like pomegranates or quinoa. The Concept team rolled out a suite of new products five times a year, often with minor variants adapted to the South's appetite for fattier, sweeter formulations, or the Northeast's love of turkey and cheddar cheese. Each new release was accompanied by a marketing program and new menu boards. In truth, the new items boosted the company's image more than its sales. Systemwide sales were driven by a small number of core items. For 80% of locations, those included such Levendary classics as its turkey and avocado sandwich with cranberry dressing, its award-winning cheese soup, and its chicken Caesar salad. For the other 20% of outlets, the core sales drivers could be as diverse as espresso beverages, Howard's Famous Cookies, or a local seasonal special. Expanding Abroad: China Dreams In 2003, the company's domestic growth was slowing. Its geographic expansion strategy (jokingly referred to within the company as "follow the mommies," later adapted to "follow the yuppies") had plateaued. Recognizing that its concept did not translate well into small towns, particularly in the Midwest and South, the board of directors began discussions about overseas expansion. At the board's urging, management instructed its strategy team to research opportunities in China, a market that had attracted a great deal of attention among U.S. restaurant companies. E0 199 Opportunities in China With a population of 1.4 billion people and annual GDP growth of 14.5% over the past decade, China was ripe for investment. Two additional trends attracted U.S. restaurants: China's urban population rose from 36.2% of the total in 2000 to 46.6% in 2009, and a strong middle class emerged whose per capita income surged from RMB 6,282 to RMB 17,175. (In 2010, RMB 1 : USD 0.15.) An afuent middle class, a large increase of women in the workforce, and a growing lifestyle trend to eat out all supported growth in the Chinese food services industry, which increased from RMB 1.106 trillion in 2004 to RMB 1.996 trillion five years later. Independent full-service restaurants still dominated the industry (there were 2,723,000 nationally), but the highly competitive quick service sector was growing the fastest, from RMB 254 billion in 2004 to RMB 471 billion in 2009. While foreign fast food companies attracted the most attention, restaurants serving Asian food, primarily Chinese, took the biggest share of the quick service segment. These mostly independent restaurants appealed to locals' preference for ricebased dishes and low prices. However, due to low margins, wide Variation in regional food tastes, and most of all, the difficulty independents had experienced in standardizing operations, there were few successful local chains. The most successful foreign fast food chain was KFC, which had more than 3,000 restaurants in 450 Chinese cities. In 2010 KFC opened on average one new store every day. Through its Chinese joint venture partners and local management, it had learned to adapt. It added a few items such as congee rice porridge and even altered the famous seasoning on its core fried chicken offering. McDonald's entered China in 1992, five years after KFC, and by 2010 operated 1,100 restaurants in 110 cities. Its restaurants retained a consistent worldwide look and feel, and a menu featuring its Big Mac, McNuggets, and french fries. While its core menu was the same, localized specials such as the China Mac with black pepper sauce, pork burgers, and red bean ice cream had been added. Despite the fact that a plate of six pork buns cost 25 cents at a Chinese street stall, McDonald still charged $2.50 for its large fries, appealing to Chinese youth's willingness to indulge in foreiga fare. Pizza Hut's China strategy was notable for its departure from its US. original. Its 560 outlets were positioned as high-end casual dining restaurants, and its menu extended well beyond pizza to include scallop croquettes and escargot. Wine was served, reservations were accepted, and a 45- minute wait for a table was not uncommon. Young affluent Chinese went to Pizza Hut to impress their dates. Despite these successes, many other American restaurants had struggled in China. When Applebee's replanted itself in Shanghai, the concept zzled. So too did California Pizza Kitchen, forcing the founders to personally intervene to relaunch the effort. Many attributed Pretzel Time's failure in China to its white tile dcor that reminded people of a bathroom. More recently, Chinese chains had begun to learn from foreign competition and began to focus on standardization and tight control of raw materials, food preparation, and in-store service. After overtaking McDonald's as Hong Kong's leading chain, Dar Iia Le (\"Big Happy House") took its tightly controlled operations to China. Other successful Asian chains in China included U.S.-listed Country Style Cooking (2009 Chinese sales of $495 million) serving Sichuan food, Hong Kong-based Little Sheep ($235 million) featuring Mongolian hot pot, and Japan's Ajisen ($256 million) ramen shops. Leaping into China After reviewing the research, Levendary's board and top management decided to enter China. The decision was hastened by the appearance of Louis Chen as a viable candidate to lead the effort. Chen heard about Levendary's interest in China through a Stanford MBA classmate who had become a partner at the private equity firm that had owned the company prior to its 2011 1P0. Chen gradually earned the confidence of CEO Leventhal and other key stakeholders. In time, Leventhal dropped his original idea of a joint venture with an established Chinese operator, and entrusted Levendary China to Chen, whose energy and entrepreneurial spirit reminded him of an earlier version of himself. Chen's formal contract provided a two-year term starting in September 2009 with an option for annual renewal, but his relationship with the company was best described as a handshake agreement. While Chen formally reported to Leventhal, the CEO managed hiJn with a very light touch. He asked Chen to establish a strong market position as a base for franchising outlets throughout China, but apart from a requirement to "do right by the concept," gave him broad latitude to execute. To prepare for his assignment, Chen became a rotational intern in each of the major departments in Levendary's Denver headquarters as well as in a handful of stores. Over six weeks, his mandate was to pick up as much as he could and replicate it in China. The Denver team invited him to tap into their resources and expertise, interpreting and adapting them for use in the local Chinese stores. Before his departure for China, the board asked Chen about his plans. He was confident: It won't be easy but others have succeeded and we can too. I believe we have a good chance of building a credible foundation of stores and breaking even within a year. We just have to be flexible. For example, Chinese eat few dairy products, so we should downplay our cheese soup. But a new generation now gives milk to its children, so tastes are evolving. And most people aren't familiar with turkey, but they love chicken, so we'll adapt the menu, just as we on on 50 919 soup. But a new generation now gives milk to its children, so tastes are evolving. And most people aren't familiar with turkey, but they love chicken, so we'll adapt the menu, just as we do in the States. It may take time, but I believe Levendary will connect with Chinese youth, and that's the future. In spite of the monumental work ahead, the board was convinced that Chen was the right choice. The 34-year-old was bilingual in English and Mandarin Chinese, and his decade-long experience as a retail property developer gave him intimate familiarity with neighborhoods in Shanghai and 6 BRIEFCASES I HARVARD BUSINESS SCHOOL Levendary Caf: The China Challenge l 4357 Beijingia Valuable asset given the powerful impact of store location on profitability. Chen also had a network of contacts to help speed up the process or permitting, incorporating, and staffing stores. Finally, he Was passionate about good food, and had long wanted to work in the restaurant industry. Chen opened his first location in the expatriate-heavy Fudong region of Shanghai in January 2010, just three months after returning to China in his new role. Occupying the corner ground floor location of a new high-rise office building, the first restaurant was both prominent and luxurious. It Was an instant hit among white-collar employees of the global nancial firms housed above it. Taking a page from Pizza Hut's China playbook, Chen positioned the new location as casual dining with table service and higher prices than local fast food concepts. But with the real estate markets in Beijing and Shanghai heating up, and KFC and McDonald's snapping up sites, Chen Wanted to move fast. His local knowledge and connections helped him lock in prime locations at good prices, and Within a year, his initial location had grown into a chain of 23 restaurants. Expansion in China: Key Decisions During her interview process, Foster heard much about the great hopes for Levendary China. However, she had not had the opportunity to meet Chen or to closely examine the China business. When she became CEO in February 2011, the new CEO was surprised to find that the Chinese subsidiary submitted all management and financial reports to Denver in its own format. The nance group then \"massaged" them :0 apply U.S. Cenerallv' Accepted Accounting Principles (GAAP) and group then \"massaged" them to apply U.S. Generally Accepted Accounting Principles (GAAP) and adapt them to Levendary's internal monthly reporting format. Foster felt strongly that this would not be a sustainable practice as the China operations grew into a larger portion of total revenue. The First Meeting: Raising the Questions In considering her options for bringing the China reporting in line with the U.S., Foster favored hiring an international financial analyst for the Denver finance team, and thought Levendary's auditor should also manage the China audit. Both steps were expensive but seemed necessary for a publicly traded company that intended to stake its future on growth in the China market. During a video conference that Foster set up to meet Chen in her first week at Levendary, she shared these thoughts with him. He bristled at her suggestions, claiming that both changes would not only incur urmecessary costs but would also greatly inconvenience his local operations. Chen's resistance struck Foster as either naive or antagonistic, and she responded firmly: \"You're going to have to make a change, Louis. We have to protect the integrity of our reporting structure." \"Fine,\" Chen shot back. "But to operate here, we have to be compliant with local tax laws or we'll get shut down. If you need those changes, you're going to have to spend the money to set it up right.\" Saying she would follow up, Foster left the virtual meeting with a nagging feeling that developing a productive relationship with Chen was not going to be easy. The next day, Foster added the China operations as an agenda item in the weekly executive meeting she held with her direct reports in Denver. The EVP of Administration agreed that using non-GAAP numbers from China in the financial reports was a risk, and that formalizing the reporting process was a necessary change. As the discussion broadened, coo Nick White, the person to whom Chen had reported since Leventhal's departure, spoke up: I talk to Louis every week or two. I'm oored by how quickly he got a couple dozen stores up and running. It's an amazing achievement. But the reality is that no senior executive has visited China since Howard officiated at the opening ceremony for the Fudong store a year ago. I'm sure a lot has changed since then, but I haven't been able to get Louis to give me E0 9/9 i3 much. Howard gave Louis a lot of freedom to establish the Chinese operations, and frankly, it shows. Louis is a great asset but I confess managing him has been a frustrating exercise. By the end of the meeting, the executive team had agreed it was time to obtain more information about the China operations. Chief Franchise Officer Peter Steele agreed to conduct a comprehensive review of the 23 Levendary Cafes in that market. White said he would advise Chen of Steele's plans, emphasizing that this was a routine process regularly undertaken in all franchised and licensed cafes in the Us. market, and that Steele had recently completed such a review in Dubai. Steele spent 10 days in China, and at a weekly executive meeting in late March, presented his findings. He provided detailed descriptions of the 23 China locations, all in or around Beijing and Shanghai. Chen had taken many liberties with the look and feel of the cafes. While the first location in Pudong largely conformed to Levendary's design standards and menu selection, other locations held surprising and sometimes alarming changes. For example, the second location, located in Shanghai's historic Yu Garden area, was a takeaway counter with no seating. The third location, on Beijing's embassy row, was similar to the first store in both design and offering, but the fourth, at the north entrance to Beijing's Forbidden City, not only had no salads on its menu, it replaced Levendary's classic wooden framed upholstered chairs with a plastic framed alternative from a local furnihire supplier. By the opening of the 23"1 location in a Korean expatriate-heavy suburb of Shanghai, all but one sandwich item had been removed from the menu, and replaced by a variety of local dumplings. lmrnediately after the meeting, an irate Lucian Leclerc appeared in Foster's office. She was not surprised, given his visible agitation during Steele's presentation. "Plastic chairs and dumplings! This is a pure disaster," he exploded. \"What's going on in China could destroy everything I've worked for over the past 23 years. Our customers travel a lot, and in one visit to just one of those places, our carefully nurtured concept and image will be ruined. Mia, you need to stop Louis now.\" After letting him vent, Foster reassured Leclerc that she would give the issue her full attention. She turned to examine a chart comparing several Levendary locations in the United States and China (Exhibit 3). Inwardly, she knew that resolving this issue would be a big test for her. Meeting Two: Confronting the Issues In early April, Foster sent Chen a copy of Steele's findings in advance of a second video conference to which she also invited W'hite. Foster opened the discussion by explaining that China was critical to Levendary's growth, so she wanted to be involved in discussions about its plans. She explained how concerned she and White had been about Steele's report. Chen's response sounded angry: I don't think you guys appreciate the difficulty of managing a business in this environment. We've worked like crazy this past year and half. And in a tough market with minimum support from Denver, we've built a business that works in China. But now that we've opened 23 locations in just over a year and are about to turn a profit, you want me to change everything? Why would you do that? Levendary as it exists in the US. simply will not work in China. Have you seen Denny's in Levendary as it exists in the US. simply will not work in China. Have you seen Denny's in Japan? It's wildly successful but it serves tankuisu [a Japanese breaded and fried pork cutlet] and yamen. They understand that nobody wants pancakes and ELTs in Tokyo. People want the food they know but with cool American branding. The only places where we can do what Levendary does in the US. are Pudong and Beijing's embassy row. Those locations are up and running using the American model. Everywhere else, B BRIEFCASES I HARVARD BUSINESS SCHOOL Levendary Caf: The China Challenge l 4357 we have to adapt our store design and menu. Otherwise, we won't be profitable. I think our performance speaks for itself (Exhibit 4). Having reviewed the research, Foster was keenly aware of the difficulties of localizing a chain restaurant concept: in a foreign market and the major tradeoffs entailed. She was aware that the Japanese company operating Denny's Japan had great success by radically changing its entire menu while keeping the stores' look and feel. But she also knew that the McDonald's approach was much more standardized worldwide. A McDonald's in Shanghai varied from one in New York City only in local marketing practices and some limited menu deletions and insertions. Indeed, Foster had been amazed to learn that McDonald's had even imported bricks to new markets it entered in Eastern Europe so that its restaurants would be as consistent as possible to its Us. standards. These were two opposite approaches, and Foster was not sure either model was appropriate for Levendary. She had yet to be convinced by Chen's assertion that growth in China required that the stores and menus be as different as they had become, and responded carefully: Louis, I think Peter's report gives us a good starting point to think about that issue going forward. You've provided us a great platform for our future growth in China. Now it's time for us to think through how we want to do that. The home office will probably need to step up and do more to support you. We'll also have to ensure the Levendary brand is positioned for growth, and that will require some consistency across borders. Nick and I will both commit to working with you to support your efforts. But we first need to fully understand your strategic H on on EC) 99 uworking with you to support your efforts. But we first need to fully understand your strategic plan for growth in China. A more conciliatory-sounding Chen responded: Mia, you speak from a place of ideas, best practices, and compliance. But I'm here in the trenches running 23 restaurants that I've built one by one by reading market needs and sensing opportunities. I'm proud of Levendary's presence here. When you send in headquarters analysts and start telling me things need to change, I don't think you have a good sense of what it took to get us to where we are. You asked me about my strategic plan. Well I don't have one. And frankly, if I'd had one, I don't think we would have grown so quickly because we wouldn't have been as nimble or responded as exibly to market needs. I'm willing to work with you to make some changes. But understand that I was given free rein for 18 months. If you start putting in new controls and tying local operations to the home office, I can't be held responsible if growth slows. If you make changes, we'll need to be very clear about what I'm responsible for, and what can I expect from Denver. Foster found herself annoyed at what she sensed to be Chen's continued resistance and negative attitude. But there was no time for that now. Thoughts racing, she thanked Chen for his candor and expressed a desire to visit China to see in person what he had built, and also to finally meet him face- to-face. Chen welcomed her planned visit and offered his sympathy for the pressure she must be feeling from Wall Street. "Mia, I love what I'm doing, and I hope we can work things out. I really want to stay on when my contract expires in a few months,\" he said. After ending the video conference, Foster reviewed the exchange with White. The conversation had raised some big issues that needed to be resolved: What strategy should Levendary adopt to drive its expansion in China? Who should have responsibility to make and implement those decisions? And what changes, if any, should be made in the roles, responsibilities, and relationships that linked China's management team to the home office? Acknowledging the importance of these issues, White agreed it was vital for Foster to get closer to the China business. A visit was set for May. Meeting Three: Deciding the Future on May 25, as her plane landed at Shanghai's I'udong international Airport, Foster felt a mix of excitement and concern. She was thrilled to nally visit this market that held such great potential for the Levendary brand and for her new role as CEO. But she was also grappling with some nagging doubts about whether Chen was right person for the job. An old mentor had once told Foster that there were three types of managers in a new business's evolution to greater scale: the go-getter, the local baron, and the professional manager. All three types could be entrepreneurial in spirit, but not all were equally weil suited for the various stages of a business's growth. Chen was clearly a go-getter who had evolved to become a local baron. The question in Foster's mind was whether he could transition to become a professional manager. Two hours later, Mia Foster got out of the limousine that Louis Chen had arranged to pick her up at the airport. As she strode toward the entrance of Levendary's Shanghai ofce, she felt confident and prepared. Foster was ready for this conversation. Exhibit 1 Levendary Organizational Chart Mia Foster CEO EVP, Administration Peter Steele Lucien Leclerc Nick White Chief Franchise Officer Chief Concept Officer VP, Business Dev. Chief Operating Officer VP, Fin/ Acctg SVP, Marketing SVP, Food Regional VPs, US Market VP, Legal Director, Creative Louis Chen VP, China VP, Real Estate Director, Distribution Director, Ops, Tools & Learning 11 VP, IS Director, Online Director, Catering 13 VP, Purchasing 4357 | Levendary Cafe: The China Challenge Exhibit 2 Levendary Income Statement 2010 (dollars in 000s Year Ending December 31, 2010 Revenues Sales 9,248,134 Royalties 03,365 Ingredient & paper good sales to franchisees 945,924 Total 10,797,423 Costs and Expenses Food & Paper 2,623,712 Labor 2,933,980 Occupancy 706,790 Total 6,264,482 Food and paper good inventory 776,902 Depreciation and amortization 480,711 G&A 710,458 12 Marketing 1,239,413 Pre-opening expenses 29,974 Total costs and ex 3,237,458 13 Operating profit 1,295,483 > Interest expense 4,725 Other expense 29,624 Income before tax 1,261,134 Income tax 480,571 Net income 780,563Exhibit 3 Comparison of Two Levendary U.S. and Two Levendary China Locations Metro U.S./ Suburban U.S./ Metro China/ Metro-suburb China/ NYC Denver area Beijing Embassy Shanghai Koreatown Annualized 2010 sales $10,320,000 $2,126,000 $806,000 $288,000 88 (USD) Square footage 2,500 4,000 1,500 500 Seats 84 120 80 0 (counter only) Staff (full-time equivalent) 24 26 20 13 Average traffic 3,210 560 260 430 guests per day) Average check (USD) $15 $12 $10 $2 Top 5 menu items Turkey sand. Denver Melt sand Chicken soup Chicken dumpling Cheese soup Cheese soup Chicken sand. Pork dumpling Salmon salad Turkey sand. Roast beef sand. Chicken sand. Chicken sand. Caesar salad BBQ chicken sand. BBQ chicken sand. Caesar salad Howard's cookie Thai veggie soup Pu-erh tea Outdoor seating? X Personalized service? X X X (simplified table service) Free WiFi? X X X Exhibit 4 Levendary China Income Statement (2010) Year Ending October 31, 2010 Sales (US$) $ 3,261,598 Costs and Expenses Food & Paper 1,663,415 Labor 382,720 Occupancy 782,784 Total 2,828,919 Depreciation and amortization 6,523 13 G&A 163,080 Marketing 65,232 Pre-opening expenses 391,392 13 Total costs and expenses 3,455,145 Operating profit -193,547 Interest expense Other expense 5.925