A Bavarian Classic With a New Twist: Auntie Anne's Pretzels in China

12/15/2009 -  When they met in business school, Wen-Szu Lin and Joseph Sze decided they wanted to start a business together.  Now the two pioneers are bringing a favorite American snack, the Auntie Anne's pretzel, to the Chinese market.  

Interview Transcription

TCBN: With Wharton MBAs and backgrounds in strategy consulting, investment banking, and architecture, Wen-Szu Lin and Joseph Sze don’t come across as your average franchisee. But this duo left the corporate world to establish the international franchise group – a Beijing-based business that now has the master franchise for Auntie Anne’s pretzels. 

We caught up with them via Skype to talk about their experience thus far with bringing a new food and beverage brand to China.

Before we get into the questions about your business, I want to ask you both about why you decided it was so attractive to get into this sector in China so much, so you needed to operate instead of just advise and consult.

SZE: Wen-Szu came from the world of consulting, I came from the world of private equity. For a long time kept our eyes on foreign markets and saw China as major economic mover. So that’s a fairly obvious statement. But the question really pertains to “why F & B?” F & B in China over the past few years has done extremely well. So well, to the point where the majority of institutional capital for the past 2-3 years has been focused on it. A perfect example would be 85⁰C, which is brand that was rooted in Taiwan and recently just broke into the China market. Behind them is top dollar Goldman Sachs for probably 50 million – actually, what’s the quarter figure Wen-Szu?

LIN: I believe 200 million.

SZE: $200 million into a bread concept – bread/coffee concept – that is thought to go toe-to-toe with the Breadtops of the world and the Starbucks of the world. Institutional capital believes that F & B in the China market can be highly lucrative. In line with that, Wen-Szu and I saw the same opportunity as well. 

Why not just consult instead of operate? Operations had two benefits. One, there was higher equity and return play for us. Two, we fundamentally couldn’t consult without actually having hands on experience. Long term – we saw this not only as an investment in F & B in China but also in ourselves. With hands on, on the ground experience, we can actually branch out into a consulting business later on with proven experience. And that’s what we’re hoping to earn. Not only are we hoping to earn right now a return on capital we invest but also return on our time. And that’s the ultimate goal.

TCBN: Well let’s talk a little bit about what you’re learning. Adaptation is requisite for almost anyone bringing a business model into China. Food and beverage poses a particular challenge because it can be so vastly different from one country or culture to another. Can you guys comment on how Auntie Anne’s product offering is fitting into the food culture there in China?

LIN: Sure. So in terms of the food itself, the product line itself, we did have to make some initial adjustments just in terms of flavors. For instance we came up with mala flavor, which is a very spicy flavor, for Beijing market. Also once we’ve gotten in here we start looking at what other types of products would be fit for the local culture. The reason being is the menus here for most of the restaurants or food selection is quite high. You’re not going into Chipotle’s and only find one thing, one thing only. Very similar to pretzels in US, which they have one pretzel, one pretzel dog in different flavors. People see that as one or two products. So here we actually have to expand the product line and the menu quite a bit. So we’re going to be launching several new products coming up soon. A lot of products they don’t have in the US. A lot of that is to satisfy the varietal needs the customers demand. A lot of the adaptation we had to do wasn’t really from that in terms of products. It was actually a lot of it from operations side. Anything from how we manage staff and how we teach someone how to make a pretzel, I felt we had to lock down the processes a lot more so we can make it more consistent. Down to marketing, of course, we had to adapt. Marketing in the US for Auntie Anne’s is very much a “mom and pop’s,” reminds me of my grandmother’s fresh baked cookies type of concept and that type of concept obviously is not going be the same in China where people’s ideas of their grandmother’s house and her cooking. It’s not fresh baked cookies, it’s not fresh baked pretzels, for that matter. So we had to change and localize the marketing as well. So we look at adaptation and localization, it’s actually the full circle in terms of every aspect in business we have to do.

TCBN: So is there a pretzel-perfect quality policy in China?

SZE: I love how you used our tag line! (laughs) There certainly is. One thing that will not bend in terms of our consideration is food quality. Our brand is famous and, I guess, famous for a reason. We are able to deliver consistent quality regardless of where we are in the world. Currently we’re in over 20 countries with over 1000 installments worldwide. That is one promise that we made to corporate and to ourselves. We bought the brand for a reason. It’s because it represents great food quality. And we want our customers, old and new, to experience the same thing.

TCBN: So customers – there are two types for you: current ones that come to your stores, and the future ones, if you consider subfranchising this concept. I wonder, looking at the first generation of franchisees in China that are out there, can you paint a picture of what you find as you talk with potential subfranchisees and how they go about even achieving financing for these types of initiatives?

LIN: We are just in the very beginning steps of looking for franchisees. And then even right now as we – we’ve been approached by many people in terms of individuals who want to open their own shop versus people who want to take on entire regions as a regional franchisee. And one thing we’re learning is that individual franchisees are basically looking for business opportunity based on some type of local advantage they have. A lot of times they get a location they think will work well for some type of food, and they just want something in there – it doesn’t matter what. Very few times there is someone looking for a true concept that could sustain, in time. I think the mentality of franchises here is not 10-20 year type of businesses that we have in the US. A lot of the mentality is more “can I make back my money in 2 years, 3 years and make additional money in next 2 years? After that I don’t mind if it’s open or not.” So we’re looking for franchisees who have long term perspective. In terms of the regional ones, they obviously have to have financial capability and also F & B experience. So the people we’ve been talking to, been looking at, are people who have entrepreneurial spirit and they are usually a conglomerate of some sort. And we are looking at - chatting with them about taking on entire region because it’s not easy to bring in a concept when you have overhead expenses and things like that to take care of. So you have to spread that over many stores. So that’s kind of our first priority right now, to franchise out entire regions at a time.

TCBN: Now, some people when you talk about managing human resources in China, some people say anybody’s coming in China now has great benefit of base of individuals and expectations of what job functions and they roles that they play in whatever industry you’re in. And other individuals say it’s still really hard because everybody has higher aspirations and nobody likes to stay in one place. So even if you get good people they don’t stick around. What do you guys think about these two ways of looking at the opportunities or challenges human resources poses?

SZE: I think both statements are very, very true and valid. Also, it fundamentally boils down to who your employees are. The sophisticated working class is located in the metropolitans. If you’re hiring directly from the metros – Beijing, Shanghai – you will have a base of employees that are so sophisticated they know their role day one. But with that, they also know what they can demand. Because they’re so aware, their standards are high, which leads to actually higher turnover, once their requirements or standards are not satisfied. There are companies that actually hire from outside of the metropolitans, from waidi (out of towners), and those employees are less sophisticated by nature, and you actually have the benefit of economics. They are usually more affordable manpower, and two, they’re more loyal. The drawback from hiring from outside the metropolitans, because they lack sophistication, a higher investment is required to training them. Both statements you mentioned are applicable, but it really depends on the pool you’re drawing the employees from.

TCBN: You mention waidi, and I think it’s – I want to talk about that from another point of view. When you look at the future and you look at expansion, of course, when you’re on the ground in China it’s not just about Beijing, Guangzhou, Shanghai, or in your case, Tianjin. There’s a couple hundred cities out there you’re going to hopefully have the opportunity to target someday. And when you look at that type of scale and complexity it brings a lot of challenges to mind, maybe even more so than in the US market because of infrastructure challenges in China. How do you go about trying to choose what locations to expand to next?

SZE: That’s a good one. I mean, we’re going through those challenges currently. I can only speak to our current efforts. So far we’ve been looking at opportunities on a case by case basis. Outside of Beijing and Tianjin, fundamentally our expansion strategy is dictated by the people and corporation that partner with us. We have direct, hands on experience in the north, and we realize that expansion to other cities will require help of people that actually have on-the- ground experience. For our next step, regardless of where the GDP is the highest, we will base our decision for the brand on the people that will cooperate with us. So we are looking for local operating partners that actually have not only integrity, but also proven execution experience in their local markets.

TCBN: As we come to the close of this discussion today, I want to ask a little bit about the regulatory environment you’re operating in. The laws on books, I believe, aren’t even really a decade old, and they keep evolving. How is the environment right now for franchise operations, and what changes do you see upcoming which will benefit the industry?

LIN: in terms of actual franchise laws, that’s something we have not dealt with yet because we haven’t started franchising. The only requirements that we’ve seen so far are just the basic requirements: you have to have a certain number open for a certain amount of time, all which we qualify for already. And then I think we’ll pass that as we get there. Other regulatory affairs we’ve been dealing with have been more basic in terms of firm registration, health bureau, environmental bureau, and things like that. And the type of issues that we deal with are exactly the same as any other F&B businesses. So, I believe that’s more of city by city case and also even a district by district case. Just a regular process everyone deals with, so it’s no big deal there.

TCBN: We’ll I’m sure you’ll have no lack of opportunities in your future. It will be a challenge of determining which to pursue. I appreciate you both taking some time out of your schedule today to share with us some of your experience and brining Auntie Anne’s to market and about your own path for building a franchise model in China.

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	Joseph Sze is a Managing Director at International Franchise Group, LLC. Before bringing the Auntie Anne’s franchise to China, Joseph held positions in investment banking. He has an MBA from the Wharton School of Business, and a BA from UC Berkeley.
	WenSzu Lin is a Managing Director at International Franchise Group, LLC. Before bringing the Auntie Anne’s franchise to China, Wen-Szu held positions in strategy and consulting between the US, Asia, and the Middle East. He has an MBA from the Wharton School of Business, an MS from Georgia Institute of Technology, and a BS from the University of Maryland.