FOCUS: Struggling U.S. restaurant chain flourishes in China

Asian Economic News, July 10, 2000

BEIJING, July 5 Kyodo

With McDonald's hamburgers and Kentucky Fried Chicken (KFC) rapidly becoming standard fare for urban Chinese, one could be forgiven for assuming Chinese diners would welcome additional U.S. restaurant chains with open arms.

But China did not take a liking to American-style breakfast pastries, Dunkin' Donuts' China operations went belly up in the past year. Tex-Mex did not appeal to the cheese-wary Chinese diner either, Beijing's only chili's restaurant recently closed its doors.

Unrealistically ambitious expansion plans, poor management, and finicky Chinese customers have crushed the dreams of many starry-eyed entrepreneurs, anxious to sell donuts or burritos to 1.3 billion expanding waistlines.

But for one struggling U.S. restaurant chain, the China market has provided one of its few success stories.

In 1998, Kenny Rogers Roasters, which calls its core product the ''World's Greatest Chicken,'' filed for Chapter 11 bankruptcy in the United States.

Harried American families, abandoning their home kitchens by the millions, were supposed to flock to Kenny's, whose roasted chicken and home-style side dishes were at the cutting edge of what industry wags call the ''home-meal replacement'' trend.

Fierce competition and overly rapid expansion overwhelmed the company, which was bought out in 1999 by Nathan's Famous, a Westbury, New York-based restaurant conglomerate for a mere $1.25 million.

Where there were once more than 300 Roasters, there are now only 90, with more than half of those outside the U.S.

Seven of those overseas restaurants are in China, managed under the watchful eye of Tony T. Wang, 56, the man who orchestrated Kentucky Fried Chicken's successful entry into China in the late 1980s and along the way becoming the subject of countless business school case studies.

Wang, a Chinese-born U.S. citizen, opened the first Chinese Kenny Rogers franchise in 1995, only to see the parent company -- and its product distribution network -- unravel over the next few years.

But after five years in business, Kenny's now boasts six restaurants in Beijing and one in Xian. Stores in Kunming and Harbin are due to open by this year's end.

Moreover, the chain is profitable, and the newest restaurant, in the diplomatic district in eastern Beijing, is one hundred percent internally financed, Wang said.

The odds seemed stacked against Wang.

A set meal at Kenny Rogers Roasters starts at about 40 yuan ($4.80), far more than most Chinese customers are willing to pay, yet expatriates make up less than 1% of Roaster's patrons.

The menu, eclectic by Chinese standards, necessitates sizable purchases from U.S. suppliers. Everything from baked beans, corn, barbecue sauce, and muffin mix must be imported.

But Kenny Rogers, named after an American country music star, has become a haven for young Chinese -- mostly women -- going out for the occasional business lunch.

Wang found that, rather than going down-market to attract the famously frugal Chinese customer, his diners preferred a setting much more upscale than its U.S. counterpart.

''I see a major opportunity not to introduce another fast food chain but to introduce a family 'dining out' experience as opposed to 'eating out,''' said Wang, whose stores are festooned with portraits and photos of musical celebrities.

Solid financial backing, years of experience, and a deliberately slow expansion plan have allowed Wang to succeed where others have failed.

American International Group (AIG), a U.S. insurance and financial services company, owns a majority equity stake in China's Kenny Rogers Roasters. AIG's Asian investment chief Cesar Zalamea said Wang's success at KFC convinced the firm to make a long-term commitment to Kenny's.

''The main reason we made the investment is because of Tony's track record...we made a bet on him,'' Zalamea said.

Many other franchisees are trapped by overly ambitious development plans mandated by parent or holding companies anxious to see royalties come streaming in.

''Many of the franchisees, not only in China but throughout Asia, get caught in a Catch-22,'' Wang said.

Wang notes many franchisees face the competing pressures of a China market where training effective managers and employees requires considerable time, and parent companies threatening to revoke their franchise rights if they fail to expand at a fast clip.

In contrast, Wang has orchestrated a tortoise-like pace of expansion for Roaster's in China, with the blessing of AIG.

After five years, the company still has only seven restaurants in China, but boasts a well-trained corps of 30 general managers and about 400 employees -- all, Wang excepted, Chinese.

Nevertheless, Wang still faces enormous hurdles in his quest to make Kenny Rogers Roasters a long-term success. While profitable, it ''is not extraordinarily'' so, said Zalamea, who would not elaborate on the company's financial situation.