The Rise and Fall of Arby s Roast Beef in Brazil

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1 UNIVERSIDADE DE SÃO PAULO FACULDADE DE ECONOMIA, ADMINISTRAÇÃO E CONTABILIDADE DEPARTAMENTO DE ADMINISTRAÇÃO SÉRIE DE WORKING PAPERS WORKING PAPER Nº 00/009 THE RISE AND FALL OF ARBY'S IN BRAZIL MARCOS FAVA NEVES MARIA STELLA MELO SAAB ALAN DE GENARO DARIO Este artigo pode ser obtido no site: Os comentários, críticas e sugestões devem ser enviados ao mfaneves@usp.br 1

2 The Rise and Fall of Arby s in Brazil Abstract Marcos Fava Neves 1 Maria Stella Melo Saab 2 Alan de Genaro Dario 3 Food away from home represents almost US$ 15 billion each year in Brazil. And it is growing very fast (100% in the period ). Bahema, a Brazilian Group, bought the franchise of Arby s Fast Food in order to enter this market. The case study focus on the challenges to grow and acquire economies of scale, and also on the chain management, discussing where market, contracts or vertical integration should be used in this chain, in a transaction cost economic approach. How could the company grow faster in number of stores without losing control (the same mistakes of Pizza Hut and KFC)? What to do with the distribution center? How to compete with McDonalds? These are some questions discussed under the environment of The company was revisited in Keywords Chain management, fast food, Brazil, Arby s, Food Business, transaction cost economics Imagine yourself returning to 1998 Introduction: Back to 1998 Think that the succulent roast beef sandwich, that you savour between one and another period of work, accompanied by French fries and some juice is, in fact, a net of contracts. Expressed this way, all the charm of the sandwich would vanish, and the advertising agency responsible by Arby's account would certainly panic... But that is exactly what an authentic American roast beef, produced by the fast-food chain Arby's, is about. Its business doesn t consist in the preparation of fast meals. It s about the management of a complete productive system, by means of formal or informal contracts, simple or complex. Arby's firms a contract with the head of the consumer, where it convinces him to try and repeat the roast beef, prepared with the best quality conditions, hygiene, and served with speed and efficiency in any store of the chain, be it in Ohio, in Bali, or at Paulista Avenue, in Brazil. To be able to carry out this contract, the company has to guarantee the perfect functioning of the stores that make the last processing of the sandwich and the regular supply of a large number of items, which are daily sent to the stores, as well as the visual identity and marketing activities. Quality depends on the ingredients, that can t be acquired in any butchers or grocery 1 Professor Dr. of Marketing at FEA Faculdade de Economia, Administração e Contabilidade, Campus de Ribeirão Preto (School of Economics and Business) of the University of São Paulo, Brazil. Researcher of PENSA Agribusiness Program. mfaneves@usp.br. - Address: Av. Dos Bandeirantes 3900 Ribeirão Preto, S.P The authors would like to thank Profa. Elizabeth Farina for the contributions, and also Mr.Guilherme Ferreira, and Simone Galante, from Arby s. 2 Master of Science by FEA/USP. Researcher of PENSA Agribusiness Program 3 Undergraduate Student in Economics at FEA/USP Ribeirão Preto, Brazil. NEVES, M.F., SAAB, M.S.M. & DARIO, A.G. The Rise and Fall of Arby s in Brazil - Proceedings of the Maple Leaf Conference, Toronto, Canada, of May, 1999, p

3 store, because they have specificities recognised by the consumer. In this way, transfers of food technology contracts are necessary to obtain the specific products that give the chain personality. The quality patterns and supplies regularity also demand stability in the contractual relation with suppliers. Satisfying who pays the bill depends on the management of the whole productive system. This is the business of Arby s. Some of Arby's history The company holder In love with Arby s roast beef sandwiches, chain that he knew and started to appreciate in his travels abroad, Guilherme Affonso Ferreira, a production engineer by the Politechnical School from University of São Paulo, decided not to wait for the traditional "American roast beef" to come to Brazil, and, by means of Bahema, compromised himself to bring it. Guilherme is chairman of Arby's Brazil, that gained US$ 15 million in 1996, US$ 20 million in 1997, with his 21 own stores and 3 other ones, from regional franchise contracts to Brasilia, Goiânia and Fortaleza. Guilherme is also president of Bahema Participações S.A., member of the Administration Council of Unibanco Holdings and Manah Fertilizer Company. Two main preoccupations most worry Guilherme: how to be able to grow rapidly and with adequate partners to get scale, something fundamental to compete in the fast-food franchise business, and how to adequately manage the chain of more than 470 supplies obtained from 65 suppliers. Arby's in the World Arby's begins in the USA in July 1964, founded by Leroy and Forrest Raffel, called "Raffel Brothers", or "RB s - ar-bis", in Boardman, Youngstown suburb, Ohio. Soon later, in 1965, they opened their first franchise, in Akron, still Ohio. In 1976 the Royal Crown Cola Company bought Arby s, becoming the fast food division of the company. Royal Crown was late acquired by Chesapeak Financial Corporation (from the group DWG Corporation). A new change of propriety occurred in 1993, when Triangle Company that acts in the packing sector acquired Arby s. This acquisition process began in 1989, also involving Royal Crown. The new group has the name of Triarc (Triangle, Arby's and Royal Crown). Since then, the company has multiplied its operations, expanding across the USA, Europe, Canada, Mexico, Thailand, Indonesia, Australia and Japan. Nowadays (1998) headquartered in Fort Lauderdale, it counts with stores, around 116,000 employees and makes profits of more than US$ 2 billion, as the biggest roast beef fast food chain in the world, with 100% of the stores in the franchise system. In Brazil: Arby's and Bahema To begin its operations in Brazil, continuing with its worldwide expansion strategy, Arby's needed a partner for the master franchise contract, who could cope with the financial and technical requirements. This contract would hand over the exploration of the brand Arby's in the whole national territory. The master franchisee could then make new regional franchise contracts. The master franchise contract in Brazil was signed in 1992, with the Bahema Group, controlled by the Affonso Ferreira family. The Bahema Group was founded in 1952, in Sumaré, with the purpose of manufacturing compactors, compressor rollers and hoists. In the following year Bahema was constituted in Salvador, operating in the sector of agricultural machinery and implements in the Northeast region of Brazil. Nowadays, as a shareholder of Unibanco and Manah, the group gains US$ 50 million annually and counts with 800 employees. It appears in the 96/97 Annual Balance from Gazeta Mercantil as the 251st. biggest group, with equity of approximately US$ 37 million. 3

4 One year after the signature of the master franchise contract between Arby's and Bahema, the first store was opened, located at Paulista Avenue, with investments of US$ 2 million, and the second one, in September of the same year at Shopping Eldorado, both being carefully chosen places in São Paulo. Differently from the biggest fast food restaurant chain, McDonald's, that spends big efforts to attract children, the marketing focus of Arby's is directed to the young adults (people from 18 to 45). Because of this it has sandwiches with baked ingredients, like the roast beef and the roast chicken, and other products that intend to satisfy this segment. Notwithstanding, in order to be far from the child veto, it has lately begun to give a gift accompanying the child sandwich "combo kid". Arby's has almost 600 employees in the 21 own stores (18 in São Paulo, one in Campinas, one in Bauru and in Ribeirão Preto, these inside the Wal Mart Superstores), besides the franchised ones, two in Brasília and another one in Fortaleza. In these two last cities, the contracts are of regional franchise, foreseeing a total of 7 stores until In the contract between Arby's Inc. and Bahema (master franchisee), the first one gives the other the right and the obligation to install and operate restaurants, and to utilise the franchise system and the brands, inside the national territory, assuming all the responsibility by the business and the right to delegate this rights. For means of expansion, the master franchisee has in the contract a minimum number of restaurants to be installed, foreseeing 30 until 2002 (ten years after the contract signature). The franchise contracts signed for each restaurant have to be submitted to the approval of Arby's (worldwide), besides the supply of a package of information about the place. If necessary, a valuation is made in loco. The master franchisee (Bahema) paid Arby's a master franchise fee, for the right to use the territory (US$ 300 thousand), besides a fixed value for each restaurant opened (US$ 25 thousand), and royalties (4% of the total gross sales of each restaurant). The master franchisee also has to submit Arby's all the communication (advertising) prepared and pass over a value up to 1% of the total monthly gross sales, as a fee for material production. In terms of communication actions, each store also has to dispose resources never lower than 4% of its total gross sales for local actions. It means that, summing up, at least 9% of sales are compromised with royalties and marketing. The stores generally practise uniform prices, because the market (the competitors) also does it. The differences happen by promotions sometimes made by the stores and, rarely, in conjunction with the shopping centers they are installed in. The master franchisee (Bahema) obliges himself to supply the regional franchisee with orientation about the choice of the place, suppliers approval, appropriate use of the registered brands, adequate training of the employees, observance to the construction patterns, and fulfilment of the patterns and specifications about the functioning of each restaurant. It also gives the franchisee suggestions about the design pattern of the restaurants, including specifications for accessories, furniture, signs and equipment. The competitive environment Food services in agribusiness Arby's is located at the last stage of an agribusiness system and so, like the retail distribution, is in direct contact with the final consumer. The food services sector, which moved more than US$ 11 billion in Brazil in 1997, comprehends two big groups: the commercial businesses and the one of collective meals. Inside this first group, the main business categories are the chains, which include hotel groups, traditional restaurant chains, trains, airplanes or road food services, fast foods, cafeterias, automatic distributors, snack bars, pizzerias, among others, and the independent ones, which include the traditional and the walking restaurants, that have individual actions. On the other side, the collective meal establishments include the contracted ones and 4

5 the verticalized ones (managed by themselves), specially in the field of companies, education, health, entertainment, security and others. The trends of food outside of home The changes regarding food consumption have been leading to a considerable increase in food outside of home. Social-demographic and economic factors, such as urbanisation, bigger participation of women in the work market, the ageing of the population, growing percentage of single persons, the pressure of time, difficulties of moving across the traffic, and new forms of commercial restaurants are the main factors that lead to this growth. The share of expenditures in food away from home is increasing considerably, roughly representing, in Europe, more than 50% of the total of meals (against 11% in 1970) (Machado Filho & others, 1995). This tendency is also observed in the USA, where about 50% of total spent of consumers with food happen outside of home. In Brazil, almost 25% of food expenditures are outside home. These transformations are also associated with the growing participation of women in the work market. Since the beginning of the Plano Real 4, number of establishments of food outside of home has grown more than 70%, from 400 thousand to 756 thousand in According to a research made by PROVAR (Retail Administration Program from FEA/USP 5 ) in the city of São Paulo, between dec/96 and jan/97 (Siqueira & Souza Filho, 1997), 50% of the interviewed persons made their meals outside of home in an average of 5 times a week, and had very different demands when these meals were made at working time or for pleasure. In both occasions, cleanliness, good food and the pleasant environment are the most important items in the choice of the restaurant. Notwithstanding, in the meals made at the working interval, people prefer speed, convenience and easy access, and the medium spent is US$ 6, against US$ 16 at a meal for pleasure. The concept of fast food is developed mainly for this market (of the working interval). There are three main segments in food away from home in the USA. Franchise (selfservice), with meals at prices between US$ 4 and US$ 5 and annual market growth ranging about 3%, the traditional restaurants (meals of US$ 20 or more, served on the plate) and the segment known as "casual dining", with prices between US$ 12 and US$ 18 (examples in Brazil are America, Vivenda do Camarão, among others), with food-service, and that s the most growing sector, about 15% per year. From about 150 millions of the meals Americans make away from home every day, it is estimated that about 110 millions are in the segment of franchise, 15 millions in "casual dining" and 5 millions in traditional ones. Despite existing in Brazil since 1963 (Bob's, in Rio de Janeiro), franchising started to grow mainly in the decade of 80, together with the expansion of shopping centers. The regulamentation happened with a law in December 15th, 1994, under the denomination of business franchise. At that year, Brazil was already the fourth country in number or franchises in the world, with more than 60 thousand points in operation, behind the USA (250 thousand), Japan (140 thousand) and Canada (65 thousand). In 1997 it already occupied the third place in the ranking, either by units or by % of sales in retail. According to a research made by ABF (Brazilian Franchising Association), in 1994 Brazil had 688 franchisers, a number that grew to 968 in It is estimated that the sector gained US$ 2,6 billion in Brazil in 1995, about 70 to 80% in fast food. Only to compare, franchising companies in the same year gained US$ 90 billion in the USA. There has been constant expansion in Brazil, becoming also a more pulverised business, with the opening of more franchises in the Northern and Northeastern regions. To illustrate this 4 Plano Real - Economic stabilization plan run by the brazilian government since july, FEA/USP - School of Economics and Business Administration from the University of São Paulo. 5

6 potential, it is enough to say that it has been spent in Brazil, in 1995, about US$ 13 per capita in fast food, against US$ 317 by the Americans (Booz-Allen & Hamilton). Arby's competitors In the world, Arby's main competitors are McDonald's, with more than 20 thousand points of sale, Subway (12,5 thousand), KFC, Burger King (9 thousand), Taco Bell and Domino's Pizza, among others. Among the hamburger shops in the USA, which dominate fast food in this country, McDonald's has 42% of participation in the market, against 19,2% of Burger King and 11% of Wendy's. A recent research made by Selling Solution magazine showed that from the consumers, who chose McDonald's as the best chain in the USA, 30% made it by the convenience criterion, is because of the large number or the location of stores. In Brazil, Arby's main competitors are, in the fast-food field, McDonald's, KFC, Pizza Hut, Bob's, Habib's, among others, besides the uncountable restaurants by kilo and independent snack bars, and, somehow, the traditional restaurants. The distinction, undoubtedly, is McDonald's. The chain is in Brazil since 1979, and has stabilised for the consumers a high pattern of demand related to fast food, because of the impressive patterns and quality of the products. The amount spent in marketing is very high, and in the last 15 years it is estimated that it has invested more than US$ 1 billion, for gains of US$ 7 to 8 billion (about 15% of sales). It is a consolidated brand. This quality is mainly based on the management of the supply chain by its partnership policy. For the suppliers, the advantages are low risk, big volumes bought, regularity of buying, information and technology flux. Some examples show this efficiency, and, mainly, the operation scale. The main American lettuce 6 supplier of McDonald's produces about 20 thousand pieces by day, from which 15 thousand are for the fast-food chain and 5 thousand for the market, with the same quality pattern, having gains of US$ 60 thousand per month. McDonald's pays US$ 0,33 by lettuce foot, while the production cost is approximately US$ 0,17. Parmalat destines 30 thousand litters of milk per day for the manufacturing of the chain s ice creams and milk shakes. Braslo Meat Products produces 1,3 million kilos of meat for McDonald's. The meat has to be supplied in a temperature up to 4 Celsius degrees, or it will be sent back, what demonstrates the rigor on quality control. McDonald's expansion plans are amazing. It has foreseeing investments of more than US$ 500 million for the next few years in Brazil, intending to double the number of points of sales, from the present 339 to 795 in the year 2000, with more than 55 thousand employees. In spite of being in Brazil since 1979, it is believed that only in 1990 it started to have positive results in the country. Pizza Hut, controlled by PRI (PepsiCo Restaurants International), still has problems to take off in the Brazilian market. It is changing its shape, admitting individual franchises of the chain. Some time before only big business groups did it. It expects to have 250 stores in the year Pena Branca group, master franchisee from PRI in Brazil, decided to get out of the business and sold the stores, after having a great loss. In 1998, Bahema tried to buy Pizza Hut s operations in Brazil, mainly to have economies of scale in the distribution center. KFC, an international chain also controlled by PRI, with emphasis in chicken products, expects to arrive at year 2000 with 88 stores. It gained US$ 17 million in 1995, but had a problematic beginning because of the ambitious plans of growth in the country, which didn t happen, besides big problems with supplies. Bob's (a Brazilian fast food hamburger chain) sold 10% more in 1996, with revenues of US$ 77 million, increasing the number of stores from 79 to 126 and reducing costs in 15%. 6 A kind of lettuce used in McDonald s sandwiches. 6

7 Bob's sold around US$ 85 million in 1997 and opened 34 stores in many states, most of all franchised. The business of franchise demands products highly patterned, what demands large scale operations. The great challenge of the franchise chains, when they enter a new market is to develop suppliers and face the marketing costs, with a small operation scale. Irregular products or lack of ingredients bring deception to consumers, who will certainly think twice before consuming in the chain again. A franchise has advantages a real advantage only if all the fragile supply system always works adequately. McDonald's was able to develop in Brazil, without letting the consumer feel the product fluctuation. And established a quality and regularity pattern in high degree. The great majority of the other chains couldn t do it. That s why lacks of chicken happened at KFC, problems with irregularities on the disposability and the flavour of the pizzas at Pizza Hut, among many others. Many times, they have stabilised audacious growth plans, in order to soon get scale, without having adequately passed through the difficult "learning period", usually associated to negative results. Operation and growth of Arby's Arby's store The layout of the stores of Arby's is standardised. It s a style that intends to bring a visual identity with the American mid-west. The stores work with sanitised vegetables, presliced and packed. Some of them already come in the right proportion of the mix, like the lettuce and the cabbage of one of the salads. The store works as a manufacturing line. The French fries and the chicken come already pre-fried, being fried again only until it obtains the point required by Arby's pattern. The pies are cooked at the store and maintained in tarmac counters during some time, after which they are eliminated. All the products somehow processed inside the store have to contain a patterned seal with the processing date and time, and date and time of validity. The roast beef comes freeze from Sadia, and is maintained this way in the freezing rooms in each store. It has an unfreezing time of 24 to 72 hours and is baked for 4 hours. Then it is kept at rest for a determinate time, in order to guarantee the adequate temperature, after what it is weighted and packed, and goes to the thermal counter waiting to be utilised. In the moment of utilisation, when it is cut in the specific machines for this purpose, the slices are weighted to be at the right quantity for each sandwich. Arby's has a rigid quality control, daily made by the employees themselves, and supervisioned by a group of three food engineers (placed at the Distribution Center), who make the contacts and visits to the suppliers, besides regular and unexpected visits to the stores. On those, there are usually an operations director, two field managers (responsible for more than one store), and two training managers. Each store has about 40 employees. The product mix Having defined the young adults as the target public, Arby's tries to apply in the menu the concept of fast food with nutritional aspects. Its exclusive "American roast beef" is made with high quality beef, seasoned only with water and salt, cooked for 4 hours before being sliced and served hot. It results in a product with less caloric grade than hamburgers. Besides that, it serves chicken filet breasts sandwiches, salads, curly French fries, milk shakes with the taste of cappuccino, sodas and beers. The sale of salads is much higher in Brazil than abroad. Some stores even make 300 salads a day, representing from 8 to 12% of the store s gains, while in the USA the medium is 2%. The most active stores come to take in persons a day, and from each 100 transactions at the cashdesk, about 80 are sandwiches and 20 salads. From the 80 sandwiches, about 55 are roast beef and 25 are chicken. 7

8 Managing the supply chain: the Distribution Center (CD) Due to the high specificity of the products involved (the desired characteristics, or the perishability), Arby's had to make a backwards vertical integration, creating an intermediate phase between the food industry and other supplier and the stores, that is the Distribution Center (CD). This action intends to attain the concept of "one stop shop" to the shopkeeper (one stop for buying) and highly facilitating the management of the stores. It is a phase carried out by a specialised company. However, this cost doesn t exist for Arby's in the USA. They entered the distribution sector due to the absence of somebody who could carry out this service here in Brazil in a most efficient manner. The stocks of the stores have to be minimum due to the high cost of the spaces where the stores are located. The CD, by means of software, makes the control and administration of inputs used by the stores. The suppliers come with their trucks and make the delivery at the CD. This one controls tax notes, verifies mistakes and solves them directly with the supplier (in the case of devolution or any other problem), makes the stocks and then distributes the inputs among the stores, at determined times and according to the needs. It is placed at a hired building, in the neighbourhood of Santo Amaro, in São Paulo. For not being the company s core-business, they always try to minimize the spent used to make the CD work. There are 4 freezing rooms with different temperatures, where frozen products are stocked (meat, bread which will go the stores of Brasília and Fortaleza, pre-fried French fries, pies) and chilled food (bacon, cheese, orange juice, among others). The CD also manages all the direct supply for the franchisees, which pay an administration fee for that. Arby's counsels them about the transports, but they are chosen and paid by the franchisee themselves. Because of this their products are more expensive, what must be included in their planning. The administrative part is very slim, and the opening of new stores will not require contracting of extra personnel. On the contrary, it will dilute these costs, by sharing them among more participants. The logistics for the stores Arby's has two own trucks, provided with inside divisions, which permit the transportation of products at different temperatures. These trucks make the products distribution between the stores in São Paulo once a week. That s a very specific activity, where the controls are very detailed, including the labour used at the stores (in number of workers), the unloading time, times of delays, mistakes and occurrences, quilometers at the leaving and return, total quantity of boxes and items, total weight, total amount of the deliver, among others. The extra delivers are billed from the stores, by a fixed fee. The manager of the store has to worry about four kinds of orders: the ones from the CD, Coca Cola Company, the baker s, and the vegetables. The deliveries are made at times determined by store, so that the manager can programme and train the employees to the reception of the goods. Due to the high trust in the deliverance system, the managers make their orders 24 hours in advance, and the CD is one who worries to have the right logistics. The suppliers Because of the specificity of the products demanded by Arby's, it is necessary to establish partnerships (contracts) for the supply of products. Arby's works basically with big suppliers, in order to obtain products quality and image of the company, besides eliminating the necessity of financing, once they search for companies which already have the adequate machinery and believe the growing potential of the chain, specially when they analyse the experiences happening abroad. 8

9 Arby's has established partnerships with Sadia, Nestlé, Polenghi, Refinações de Milho Brasil, Santista Alimentos, Junior Alimentos, Unilever, Coca-Cola, Heineken, Cargill Citrus, Dixie- Toga, Poly Vac Embalagens, Islubart, Fresh Express, Trizi, Juliana Panificação, among others. It doesn t require exclusivity from the suppliers, only for the products, in Arby's pattern. In Brazil, most of the partnerships are successful. Among the companies whose buying by Arby's represent more than US$ 1 million per year, are Sadia and Coke. At the range of US$ 500 thousand and US$ 1 million per year in buying, are McCain (potatoes), RMB (dressings) and Cargill ("Yes" orange juice). Companies like Nestlé have created specific departments to attend these clients. Sadia has invested a great amount of time and resources in order to develop the specific kind of Arby's roast beef. There were months and tons of meat spent until they could reach the exact combination of cuts and the ideal weight and thickness of the authentic roast beef required by the North American chain. Some of the products that once were tailor made for Arby's have been incorporated to the product line of the companies, being already ready for the consumers (a special bacon, with patterned protein grade, for example). In 1996, about 400 tons, among roast beef, chicken and bacon were bought by Arby's. According to Guilherme Ferreira, Sadia is not the worldwide supplier of the chain because of restrictions imposed on Brazilian meat exports, mainly sanitary (foot and mouth disease). This follow-sourcing tendency is undoubtedly an important opportunity for the Brazilian agribusiness industries. In fast food, just like the automobile sector, there is a trend from the supplier industries to follow the clients (big chains), becoming their global suppliers, and reaching several markets. Brazilian bread is still a problem. It is around 75% more expensive than the American, and is now supplied by two bakeries, Trizi and Juliana. They are delivered at the stores at determined times. The stores of Brasília and Fortaleza have been working with frozen bread, and also the stores in São Paulo, to compose their security stock. Some horticulture items also work by the decentralised system, going directly from the supplier to the stores. In some cases they could use cheaper solutions, due to the harvest, but those impose greater risks. In this system the prices are fixed and there is the compromise to supply what the chain needs. However, it is worth to remember that these products (bread and vegetables) don t pass through the CD only physically. The negotiation, buying and management of the process are of the CD s responsibility. To the stores it only competes to make the order. Importing of products Brazilian legislation about importing is positive, what means that what is not written on the legislation can t be done. There is an extreme bureaucracy to import, but reducing each year. Even with these problems, there are inputs, which are still worth importing, even with a CIF price 100% above the American. After the opening offered by the government, some processes were made easier and, given Arby s increase in sales, it became possible to import a whole container of packages, what brought a great decrease in prices. Nowadays Arby's imports more than at the beginning of its activities, in The main imported items are potatoes, which come from Canada (McCain); the Cheddar dressing (imported by Nestlé for Arby's); packing and plastic films for sandwiches (Bag Craft and James River, from USA); besides the napkins, cartridges for French fries, and the gifts for marketing in general, like the Zé Colméia, given with the Combo Kid, Arby s sandwich for children. The crouton (small pieces of seasoned bread) for the salads was made manually by a Brazilian supplier, including the dosage and labeling (each package has from 8 to 10 grams). Due to the increase in Arby s amounts, however, it became impossible. The company went after the supplier in the USA, finding CPC International (controller of Refinações de Milho Brasil), 9

10 which today imports and labels it for Arby's in Brazil. Expansion plans: the real question Arby's, like McDonald's, has its strategy just like the one adopted in the USA and the main franchise markets. There companies, most of all related to the operational franchise companies, which execute the management functions, location and construction of the properties for the stores. Who plays this function for Arby s is Sybra, a separate company it has 35% of. This hire the land, spaces or points, builds the properties and gets some percentage as a payment. In the case of Shopping Centers, 9% of the store s sales has to be paid to Sybra, who passes 4% through to the Shopping, getting 5% to cover the investment made. For the stores on streets and avenues, the transfer value is not based on sales, but is a fixed value. Only as an example, for the store at Shopping Eldorado, Arby's annually pays around US$ 145 thousand in rent to Sybra that sends around US$ 68 thousand to the Shopping. Expansion plans: new stores The plan for Arby's Brazil until 2002, when the contract with Arby's worldwide ends, is to have around 200 stores, and then it shall happen the contract s renewal (it is foreseen a minimum of 30 stores until 2002). In Rio de Janeiro, plans are to open 30 stores, through a regional franchisee. Besides that, Arby's Brazil has established a partnership that permits it to open restaurants at Wal-Mart stores in Brazil. This strengthens the strategy to install smaller stores, in supermarkets and hypermarkets. The chain already has stores inside the Wal-Mart in Osasco, Santo André, Bauru, São Bernardo and Ribeirão Preto, occupying spaces of 60 square meters (the traditional chain s stores can have even 500 m 2 ), and will open as many others as the super centers opened by Wal Mart. In the beginning, Arby's had concentrated in big stores, with investments up to US$ 1,5 million each. The smaller ones, as the ones installed in hypermarkets, have costs estimated at US$ 256,4 thousand. The greatest challenge for the chain is to get scale, both in marketing as in supplies. In marketing, for example, to make a photograph for one store costs US$ 8 thousand (US$ 8 thousand by store). To make the photo for 100 stores costs US$ 80 per store. The chain estimates to spend around US$ 1,5 million in marketing activities (communications) in 1997, around 7 to 8% of sales. That s a small amount, but it is the possible. There are advantages for big boughts, and Arby's has to sell at a final price next to the competitors, who, depending on the amount, buy with bigger discounts. From Arby's costs, labor represents around 20 to 25% of gains and rent, from 10 to 15%. Rent, by its time, rose 50% on average, and labor, 70%, since the beginning of Plano Real Stabilization Plan. The input percentile dropped a little bit. For the American pattern, costs shall represent around 30% of the final product s price. They are at 33% at Arby's Brazil. Questions that bother Arby's 1. In 1993 Arby's made its expansion to Brazil through its master franchisee Bahema. It had the alternatives to come directly, installing its own structure, or to license its brand to be explored in the country (without a control structure). What are the advantages and risks for Arby's and for Bahema at the shape chosen for the business? 2. The question of the number of stores (scale) is fundamental for Arby's. There are scale economies on the products, on marketing, on the Distribution Center and even on the managerial capacity of the company. Arby's has to have 30 stores until 2002, on the renewal of the master franchise contract. Is the speed of growth through regional franchises and high 10

11 own investments adequate? How could Arby's grow faster, without missing the capacity to coordinate the system? 3. Has the supply chain been adequately managed by Arby's? The maintenance of a verticalized distribution Center represents a cost Arby's doesn t have in the USA. Is it the best alternative? Which would be the other viable alternatives for the management of the supplies? 4. Where shall Arby's position itself on the competitive environment of franchises in Brazil: compete directly with McDonald's, or search for market niches? Is the present targeting public the most adequate one? Facing its resources limitation, what creative actions could it take in terms of marketing? Use of this Case Study This case study can be used on marketing disciplines, mainly the ones linked to the area of products and services, and of company strategies, being a case of contractual organisation. It can also be used in the areas of agribusiness, supply chain management and production. Theoretical references used The main theoretical reference present in this case relates to the theories of marketing and of contracts, especially the following points: franchise businesses growing strategies distribution channels brand management services analysis segmentation, differentiation competitiveness management of product line production systems and channels References: DNES, A.W. The economic analysis of franchise contracts. Journal of Institutional and Theoretical Economics, vol. 152, 1996, p JENSEN, M.C. & MECKLING, W.H. Theory of the firm: managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3 305, JOHNSTON, R. & LAWRENCE. P.R. Beyond vertical integration: the rise of value-adding partnership. Harvard Business Review, July/August 1988, 14 p. KOTLER, P. Marketing Management. São Paulo: Atlas, 1995, 4ª edição, 676 p. LAFONTAINE, F. Agency theory and franchising some empirical results. Rand Journal of Economics, vol. 23, nº. 2 - Summer, MACHADO FILHO, C.A.P., SPERS, E.E., CHADDAD, F. & NEVES, M.F. Agribusiness europeu. São Paulo: Editora Pioneira, 1996, 132 p. SIQUEIRA, J.P.L. & SOUZA FILHO, J.C. Hábito dos freqüentadores de restaurantes na cidade de São Paulo. In Anais do II SEMEAD. São Paulo: FEA/USP, 1997, p TEJON MEGIDO, J.L. & XAVIER, C. Marketing & agribusiness. São Paulo: Atlas, 1994, 202 p. WILLIAMSON, O.E. The economic institutions of capitalism. New York: The Free Press, 1985, 449p. ZYLBERSZTAJN, D. Economia dos custos de transação: conceitos e aplicação ao estudo do agribusiness. Tese de Livre-Docência apresentada à FEA/USP, 1995, 237 p. 11

12 REVISITING ARBY S IN 2000 After discussing the questions that bothered Arby s in 1998, let s move ourselves to the middle of the year 2000 After this case study was written, presented and discussed, some important changes were made and the most relevant of all those was the end of the chain s history in Brazil. So we decided to revisit it in 2000 in order to account for those changes. In 1998 one of the major problems of the chain was to have, maintain and operate a distribution center, what consumed some relevant administrative effort, besides its costs. In 1998 it was possible to find a company that would take care of the supply function for Arby s. The Brazilian partners of Braslo, which had experience with McDonald s, owned the company found, named Logway. So Logway started to buy the products for Arby s, with the support of the fast food chain. Unfortunately some problems happened, as some delay in the payment of suppliers, and Arby s decided to continue making its own buying/negotiation process, and agreed with a new company, Fast & Food, to be responsible for the storage and transportation of the products. The big problem scale The great question for a fast food company and also for Arby s in Brazil has always been scale. And this happens for three main reasons: cost (buying volumes), overhead and marketing. The first store in Brazil was opened in When the chain closed its operations here, in 1999, with 25 stores, the buying cost of a Coca-Cola was still twice the cost of McDonald s, and it was already 25% less than in the beginning of the operations. Arby s Brazil always looked for scale to grow, but that required a high amount of capital, and they didn t want to expand the franchise system without a strong structure, because that would simply multiply the problems. So they tried to make alliances with other fast food chains in the US (Wendy s, Burger King), but they didn t work out right. Arby s head office in the U.S. was also contacted, but they denied making worldwide contracts with suppliers, that could make it possible for Arby s Brazil to negotiate better prices, and also they didn t want to open their own stores, with their own capital, what could give more scale to the Brazilian operations. Also, the agreement with Wal-Mart, which obliged Arby s to open a store in each hypermarket didn t give Arby s the expected scale. In 1998, they almost formalized an alliance with a part of Pizza Hut in Brazil, which was having some problems. They had 33 stores and about 80% of the sales volume of Arby s. With the alliance, the economy would be of more than US$ 10 million in 10 years, only catching the best price of both in common products (products that were the same for both chains, such as cleaning products, napkins and straws). But unfortunately this agreement couldn t be made real. They had agreed to pay growing royalties up to 6% per year, but according to the contract with the US head office, that would have to be used in communication and Bahema wanted to be free to use it as they found necessary. Also, Arby s Brazil wanted to be secure that no past debt would come from the past owners, and Pizza Hut didn t agree with that. Brazilian economy After the Plano Real, the economic stabilization plan created by the Brazilian government, it became viable to import products, since exchange rates were very favorable. So Arby s had some foreign suppliers where they bought their products and also to work as competitors of the Brazilian suppliers, where the prices would be compared. But in January, 1999 a great devaluation of the Real (Brazilian currency) face to the dollar, and so all the suppliers raised their prices by around 15 to 20%. At the same time, a big 12

13 campaign was being taken by the Brazilian government in order to make consumers inspect prices and not let them be raised by any company so the inflation, Brazilian economy s greatest fear, would not grow again. McDonald s, which had imposed a severe competitive pattern for fast food restaurants in Brazil, froze their prices not to lose sales and this way made it impossible for any other food company to make it different. So the owners of Bahema started thinking of which were the real reasons they had to continue in this market. Bahema, Arby s holder, is a company with participations in several open companies in Brazil (Manah, Unibanco, Metal Leve, and so on). All those companies were doing well and only Arby s was not. In April, 1999 they took the decision to close the stores and in May they began to make negotiation rounds with all the suppliers to make them aware of that decision and also to guarantee the franchisee from Brasília, who had decided to keep his stores. As for the franchisee in Brasília, Bahema offered their 3 best stores, which were all located in São Paulo, but they didn t accept it. So they gave him the equipment necessary to open his own 3 stores, wherever he wanted. He still works his stores, but in a more flexible way, in terms of supplies (napkins, straws and others).until when? The first store closed was Fortaleza s franchise in April, and in July, 1999 the master franchisee of Arby s in Brazil started closing its own ones. Mr. Guilherme s dream, at the beginning of the 90 s to have the roast beef of Arby s in Brazil was real for some time. We can say that it started as a dream, it came real, had evolution during the middle of the 90 s to a nightmare and is finished. Now, he and all of us that appreciate Arby s sandwiches will have them again only during our foreign trips... 13

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