Chain operations in the food and beverage industry broke into the local market about two decades ago. They have not only caught on with the public, but are also providing a model for Taiwanese businesses.
"You'll find a shrine every three steps, a temple every five," so goes a Chinese saying, describing the people's devotion to religion. With some modification, the saying could be equally true in describing people's enthusiasm for eating out--a food stall every three steps, a restaurant every five. It is difficult to get an accurate tally of the number of food and beverage (F&B) businesses in Taiwan, since there are numerous neighborhood noodle stands and night-market snack vendors that neither register with the government nor pay taxes. But one thing is certain: Taiwan is a diner's paradise. The vast number of food shops ensures that people have a choice of every different style of Chinese and foreign cuisine in establishments ranging from the most expensive to those where a couple of US dollars can buy a meal.
In the past, most of these businesses were independent operations run by individual companies or families. Their competitive edge lay in those "secret recipes." It was not until the 1980s, when McDonald's made landfall in Taiwan, that the island was introduced to franchise and chain food outlets. "McDonald's makes a careful evaluation of the maturity of the economy when entering a market," says Viya Chen, executive director of the company's marketing department. "Taiwan, at the time, seemed to be a place where people had started to enjoy increasing spending power because of the economic growth, and society was becoming more consumption oriented."
When the first McDonald's opened in Taipei in January 1984, customers packed the place for weeks. The extremely enthusiastic response proved that the Taiwanese market was more than ready to welcome the Big Mac. Since then, McDonald's has opened 350 stores across the island, and accounts for 70 percent of Taiwan's quick service restaurants. Seeing the success of McDonald's, Kentucky Fried Chicken (KFC) set up shop in 1985, and several others followed. With 123 stores, KFC is now the second largest fast-food chain in the market.
Besides burgers and fried chicken, pizza was another Western food that proved to be marketable to Taiwanese diners. Pizza Hut established its first store in 1986, and Domino's came three years later. Each already has over 100 stores on the island. Pizza Hut has about ten dine-in restaurants, while Domino's focuses solely on the takeout and delivery market. The competitive advantage of offering only delivery or takeout services is that each shop needs less space, and thus it is more suitable to Taiwan's crowded cities. In addition, the high density of households also makes it possible for one neighborhood outlet to have a huge customer base. Deliveries, moreover, are generally made by the ubiquitous motor scooter, which can zip in and out of congested traffic, ensuring speedy delivery.
Chain coffee shops, such as Manabe Coffee Shops, Dante, IS Coffee, and Starbucks, tried to replicate the success of the fast food joints. Food was one thing, but would coffee sell in a land of tea drinkers? "Most people here thought of coffee as part of a meal, and they seldom drank coffee for the sake of coffee itself or just to enjoy the atmosphere of a coffee shop," says Henry Hsieh, merchandising and marketing director at President Coffee Corp.--Starbucks' Taiwan partner. "There's no right or wrong in this. It's just a cultural difference."
To draw customers in, Taiwan's coffee shops offered snacks and meals, which played an equally or even more important role than the coffee. This approach, however, conflicted with Starbucks' business philosophy. "At Starbucks, we believe coffee and coffee-related products are the leading characters, and everything else--cakes, snacks, and so on--should only act in a supporting role," Hsieh says. "We're actually promoting a coffee culture rather than just selling coffee, beans, and cups."
Selling a culture is never an easy task. Starbucks therefore chose urban areas where residents might be more open to new things. Since launching its first store in Taipei in 1998, Starbucks has opened 105 shops in cities along Taiwan's west coast. The company has yet to expand to east coast cities, such as Taitung and Hualien. Judging by the fact that the company's annual revenue grew by 30 percent in 2002, it seems that there is room even in a tea-drinking society for coffee drinkers.
The hallmark of a chain business is standardization. And shops in Taiwan have tried to retain the character and quality of the originals, while at the same time adjusting to the tastes of local consumers. Perhaps only in Asia can one find pork burgers with Japanese-style sauces, pizzas with Thai flavorings, and coffee cakes that are less sweet. McDonald's has even started to sell rice dishes. "Consumers here like new flavors, and we try to meet that demand. But new flavors are not the primary reason people come to McDonald's," Viya Chen says. "Our core value is to provide food with speed, convenience, and safety, which stays the same whether we're serving burgers or rice, and which is why people choose us." Chen also points out that developing new products requires more time and higher costs and thus may have an impact on McDonald's quick service. The company is seeking the right balance of standardization of preparation and diversity on the menu.
Certainly not every chain has found the success of McDonald's or KFC. Burger King and the Japanese chain Mos Burger, for example, have been expanding much slower. Hardee's, Wendy's, and Dairy Queen failed altogether to get a foot in the market and eventually left the field. Yogurt vendors and ice cream parlors, meanwhile, have not been great successes because the island's hot and humid climate makes its residents thirst for water-based beverages, such as iced juice drinks.
Significantly for Taiwan, the success of Western F&B chains has introduced a new way of doing business. Alex Chiou, an advisor to the Association of Franchise Promotion, Taiwan, points out that chain and franchise operations were not some thing local food and beverage merchants were familiar with. The association, founded in 1995 by a number of chain franchisees, now has about 200 members representing 2,000 stores in more than 60 different trades, and an increasing number of them are domestic chains. Chiou explains that the uniform taste and quality that resulted from standard ingredients and procedures were not the norm even for franchises in Taiwan. "They had their own character, purchased their own ingredients, and sold different products," Chiou says. "Basically, the only thing they had in common was the logo of the brand. But the brand owner allowed the franchisees to operate independently, and the franchise owners went their own way."
Even today, Taiwan still does not have any laws that regulate the operation of chain stores. The Taiwan Chain Stores and Franchise Association (TCFA), a nonprofit private organization, has been trying to fill the void by encouraging chain operations to modernize and standardize their businesses and promote better services for consumers. The association has also tried to define chain businesses by the number of franchises and the amount of business they do. According to TCFA statistics, as of April 2002, there were more than 160 brands with 17,000 stores in Taiwan's F&B market.
Whether there is a local definition or not, the business model certainly caught on after Western operations proved that the use of standardization and the opening of franchises could be a sure way to cut costs and expand business. Local businesses have been interested ever since. Taiwanese companies often work with established foreign brands, such as the cooperation of President Group with Starbucks. They have also applied the model to businesses where an understanding of the local market gives them an edge, such as operating Chinese fast-food restaurants and breakfast bars that offer dishes suited to local palates. According to the TCFA, however, businesses that sell Western-style fare still dominate the market. By last April, there were 15 hamburger, fried chicken, and pizza chain brands with more than 1,000 stores, while there were only 14 Chinese-style fast food brands with 565 stores. Moreover, there were 15 Western-style restaurant or steak-house chains with more than 320 stores, but only six Chinese-style brands with 48 stores.
Perhaps the most successful adaptation of the chain-business model to the local market is found in the market for tea -based drinks. For example, Easy Way, a local chain established in 1992, sells takeout tea-based drinks for between NT$20 and $25 (US$0.58 and $0.72). The inexpensive drinks have been a traditional favorite on the island for years, and the investment in setting up the takeout drink shops is much lower than that needed for restaurants or coffee shops. Easy Way now has 535 stores in Taiwan, 62 in China, and more than 200 in America, Australia, Canada, Japan, and Malaysia.
Alex Chiou believes the key factor in deciding whether a food or beverage chain can be competitive is how it standardizes its management and production process. For example, there are more "human factors" involved in the preparation of Chinese cuisine, making it more difficult to set up a standardized process so that every branch offers the same food quality and taste. "There isn't one dish that can satisfy every palate, but what consumers want from a chain operation is uniform taste, whether it's served in Taipei or Kaohsiung," he says. "This is how McDonald's, Easy Way, and any other successful chain operation in the F&B market built up their reputations and won over customers."
To ensure uniform quality, many brands prefer to run their chains directly instead of in a franchise form, or allow franchises to open only after the brand has established a solid reputation in the market. Statistics from the TCFA show that except for breakfast store chains where there is no direct management, and the soft-drink shops where the standardization process is easier, three quarters of all other chain stores in the market are run directly by the headquarters.
Henry Hsieh of President Coffee points out that during President Group's negotiations with Starbucks, the group suggested opening franchises as a way to expand business, just as they had done with the 7-Elevens in the local market, but Starbucks insisted on central management. "It's not some small amount of capital to set up a store, and it may take a long time for the store to start making money," Alex Chiou explains. "Large enterprises can afford longer-term investments, but individual franchisees generally want to get the investment back as fast as possible--even if that means compromising a little on quality."
Quality, along with service, cleanliness, and value, are the aspects of Western chains that have most influenced the way the Taiwanese do business. The owners of local eateries have grown from "running food stalls to managing restaurants," as some put it--the former being a place where people eat, and the latter, a place with the right atmosphere and high-quality food that is properly served. The rich variety of local food seems to guarantee a place for independent restaurateurs, who can still turn out dishes like no one else. But chain food businesses are meeting the demand for standardized food and fast service. It would seem that there are plenty of hungry consumers to keep both happy.