A12-01-0005 International Pizza House in Brazil On a rainy fall afternoon in 1999, Fernando Silva prepared to write a letter to the International Pizza House (IPH) of Brazil. Fernando was General Manager of Maxxi Foods, the company that owned the International Pizza franchise in Rio Grande do Sul, the southernmost state of Brazil. Fernando s purpose in writing the letter was to recommend improvements in IPH s marketing strategy improvements that he believed would attract more customers and improve the profitability of the seven IPH locations currently operating in his territory. The Porto Alegre franchise was operating well below expectations and Fernando knew that he urgently needed to make major changes in the marketing strategy if the company was to be a long-term success. Fernando had led the business since 1992. At the beginning, the responsibility for the management of Maxxi Foods was shared with Mr. Marcos Stern. Stern initially held the position of operations manager, and then moved on to be the marketing manager until he left the company in mid-1995. Now the only company executive who had participated in the company s operations since the beginning, no one knew better than Fernando what had transpired. From his office, he stared out his window at the intense traffic on Avenida Ipiranga, a main thoroughfare of Porto Alegre. The decision to locate the company s headquarters in Jardim Carvalho, outside of the downtown area, was based on the desire to house all of the company s operations at one site. The location allowed Maxxi Foods to consolidate the company s administrative, marketing and training departments with the operational departments of central storage and ingredient processing and with the transportation department which housed the trucks used for deliveries to the stores. Fernando spent the entire afternoon thinking about all that had happened since 1991, the year the Stern Group decided to enter the restaurant business in a move to diversify its core business of engineering and construction. History: 1991-1994, Start-Up and Growth In 1991, Max Stern was the principal shareholder in a major construction company, Stern Incorporated. The company was based in Porto Alegre; the capital and largest city of the state of Rio Grande do Sul. Max began an effort to search for a food service franchise in order to diversify his business and take advantage of the rapid growth in the food service industry. International Pizza House was one of the companies that caught his attention during his research. One of the largest restaurant chains in the world, IPH was the leader in the pizza segment. At the time, there were about 8000 company-owned and franchised stores in the chain. IPH s operations in 63 countries grossed close to US$ 1 billion per year. International Pizza House opened its first store in Brazil in 1989 in a suburb of São Paulo, the largest city in South America. IPH controlled all of its South American operations from its office in São Copyright 2001 Thunderbird, The American Graduate School of International Management. All rights reserved. This case was prepared by David Gertner, Clinical Associate Professor of Marketing, and Dennis Guthery, Goodyear Professor of Marketing, for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.
Paulo. By 1992, IPH had opened 15 stores in Brazil and a total of 100 in South America. That same year, one of the Brazilian stores established a Latin American record of 3,200 pizzas sold in a single day. International Pizza House divided the massive country of Brazil into 13 franchise territories. The territories corresponded to the 13 largest population centers in Brazil (see Exhibit 1). São Paulo is the most economically developed state and is also the most densely inhabited, with a population of nearly 34 million. This state was divided into four franchises, one for the capital of São Paulo and three others that covered the remaining portions of the state. One of the 13 franchise territories was Rio Grande do Sul. In February of 1992, IPH opened the bidding for the Rio Grande do Sul franchise. The Stern Group decided to bid on this franchise because of IPH s rapid pace of expansion and brand recognition. In April of 1992, the Stern Group bid against three other firms for the franchise for Rio Grande do Sul, a state with a little over 9 million inhabitants. Porto Alegre, the capital of the state, with a population of approximately 1.2 million, was the real prize in this territory. It was a cultural center for the southern portion of Brazil and had a metropolitan area population of nearly 3.1 million. IPH awarded the franchise to the Stern Group in May of 1992. Although the Stern Group had no previous experience in the food industry, the company was strong financially and managerially. The franchisee had to pay initial fees of US$10,000 for each of the 20 stores it was authorized to open in this territory and a fee of US$25,000 for each store that actually opened. The franchise agreement also required the franchisee to pay 6% of gross sales, less direct tax. The Stern Group formed Maxxi Foods S/A in June of 1992 to operate the IPH franchise in Rio Grande do Sul. The plan was for Maxxi Foods to manage the new IPH operations, while the financial and accounting functions would be performed by the Stern Group s main business, the construction company. Maxxi Foods had eight owners, whose shares of ownership varied, but all of whom participated in weekly management meetings. The controlling stake in Maxxi Foods belonged to Mr. Max Stern, who held 60% of the shares. Other shareholders included Mr. Stern s four sons, each with 5% ownership and two other Stern Group executives who also held 5% each of the company. The remaining 10% belonged to Mr. Fernando Silva, a Stern Group executive since 1987 who had previously managed a real estate investment company owned by Max Stern and who also had been an independent consultant to the Stern Group s construction business. Maxxi Foods began with a capital investment of US$ 2 million. The total estimated cost of opening the 20 stores planned for the first five years was US$ 6 million. They expected the remaining US$ 4 million to be generated by the franchise, which had a forecasted return of 26% annually. A five-year franchise contract between Maxxi Foods and IPH was signed in June of 1992. The contract was renewable for another five years with the right to use the International Pizza House trademark for ten years. According to IPH s economic and financial viability study, the Rio Grande do Sul franchise could accommodate the opening of 40 stores over ten years. Their projection included freestanding restaurants, express stores in malls, delivery only stores, and combinations of these three kinds of stores. In the opinion of the new franchisee, the estimates were too optimistic. Two months after signing the franchise contract, Fernando, the IPH franchise general manager, and Mr. Marcos Stern, son of the majority shareholder and now the IPH franchise marketing manager, traveled to the USA for two months of training at three IPH centers for new franchisees and operators. The training included modules on topics such as store planning, infrastructure development, product preparation, and business operations and administration. Fernando and Marcos attended lectures on additional topics such as: human resources, the implementation of operational and financial controls, etc. 2 A12-01-0005
On the return trip to Brazil, Fernando and Marcos began planning the first freestanding International Pizza House in Porto Alegre. The franchise agreement stipulated that IPH would have approval of the location and layout of the store. The franchisees did not see this as a problem. In October of 1992 the first store site was chosen on Avenida Nilo Peçanha, one of the most traveled and well-known streets in the city. One of the largest and best construction firms in the state, the Stern Group s own construction company, began immediate construction. The store cost US$ 300 thousand and took 120 days to finish. Only one month after the construction began, the first six management trainees were recruited with the understanding that they would be the first IPH managers in the new franchise. The management trainees went to Rio de Janeiro for training and to participate in new store openings. They also worked in São Paulo stores to learn IPH s operations hands-on. Finally, in January of 1993, Maxxi Foods inaugurated the franchise s first store in Rio Grande do Sul. That same year IPH opened stores in the developed and mid-sized cities of Campinas, Riberão Preto and São José dos Campos, all in the state of São Paulo. In addition to the opening in Porto Alegre, stores were also opened in Curitiba, Belo Horizonte, and Salvador, all capitals of major Brazilian states. The IPH chain was quickly becoming a major player in the Brazilian food service industry as well as becoming a familiar name to many Brazilians. In September of 1993, Maxxi Foods inaugurated its first express store in the downtown area. Shortly after opening the new restaurant, Fernando Silva realized that the customer base was insufficient to support the large size of the store. Barely a month later, in October of 1993, a third site, a delivery store, opened in an important and heavily trafficked section of the city. The chain s expansion continued through 1994. In March of 1994 another delivery site was opened. The following month two new stores were added: an express store in the Iguatemi Mall, the most upscale mall in the city, and a delivery store. A month later in May of 1994, another delivery store opened, again on a well-trafficked site in the city. By this time the franchise had seven stores: four delivery stores, two express stores, and one freestanding restaurant. A year passed before another store opened. In May of 1995, Maxxi Foods opened another freestanding restaurant in front of a beautiful park in an affluent neighborhood. The delivery only site lost business to the freestanding restaurant and later closed because of the cannibalization. Maxxi Foods then had only seven stores in operation, well below the 20 stores estimated to be open within the first five years. Despite this, it was estimated that the seven stores were within the sphere of influence (living, working, driving) of individuals possessing 70% of Porto Alegre s income. Marketing Strategy In the beginning, franchise operators were excited about International Pizza House s operations in Porto Alegre. Sales increased and the chain s market share and popularity grew. The chain s target market consisted of individuals and families classified as being in social classes A and B. According to the classification system used by most marketers in Brazil, these segments represented the two groups with the highest levels of income and education in the entire population. Many members of these groups traveled frequently and were already familiar with International Pizza House in other markets, both within and outside of Brazil. It appeared that the arrival of the IPH restaurant chain to the Brazilian market, and in particular to Porto Alegre, was well received. Based on its international experience and prior success, International Pizza House entered Brazil committed to position its pizza as a premium product. The strategy employed in Brazil presented IPH s pizza as superior to other pizzas currently on the market. The strategy basically said, I am the best in the world, come eat me. This promotion was somewhat offensive to many locals and led to some negative reactions among some potential customers. While Brazilians value imported products, they are also very proud of locally produced products. This is especially true in Rio Grande do Sul where local products in A12-01-0005 3
several categories have higher market shares than highly promoted national and even international brands. It is also highly inappropriate in the Brazilian culture to put down a competing product or service while promoting your own. Comparative advertising in Brazil runs the risk of having the opposite of the desired effect. Consumers often take the side of the product intended to be the loser. The initial launch strategy was also an indirect knock on local ethnic cuisine. Italian culture, including its culinary aspects, is widely represented in the southern states of São Paulo, Paraná, Santa Catarina and Rio Grande do Sul. Inhabitants of these southern states established and appreciated Italian-style pizza long before the arrival of International Pizza House. International Pizza House concentrated on selling its pan pizza, believing it to be superior to local pizzas. This thick-crusted pizza was a novelty in the local market and initially represented 95% of sales. The remaining 5% of sales came from the thin crust pizza that was more expensive than the similar product sold in local pizzarias. The interest in the novelty pan pizza gave the impression that Brazilians approved of the new product. The pan pizza was different from the traditional Brazilian pizza, which had thinner crust, less oil and much less tomato sauce. However, as the novelty wore off, customers returned to their regular pizza restaurants that featured the traditional Italian-style pizza. Even though customers did not return to IPH, the company continued to heavily promote its standard pan pizza product, served successfully in thousands of restaurants throughout the world. The prices charged by International Pizza House were between 20% and 30% higher than the competition. Despite its higher prices, high operating costs often made IPH s profit margins lower than those of local competitors. IPH stipulated that all franchises purchase mozzarella, a key item in a pizza s cost, from the only supplier approved by the chain. The price paid for the cheese was much higher than that paid by the competition. The cost of the Brazilian mozzarella was also higher than the cost of mozzarella in other markets. Maxxi Foods paid $4.80 for the same quantity of mozzarella than would cost an American franchise $2.50. In addition, the American franchises received the cheese already shredded, whereas the Brazilian franchises received the product in blocks and had to pay employees to shred the cheese. Other IPH standardized items, such as packaging, were also more expensive for Brazilian franchisees than for franchisees in other markets. Some of the pizza preparation processes, which were automated in the US, were performed manually in Brazil, resulting in higher operating costs than in other IPH markets. All of these factors contributed to a higher operating cost than in other markets where IPH was present. Taxes also had a strong negative influence on returns. Retail establishments were subject to very high taxes in Brazil and tax evasion was common, especially in small, family-operated businesses such as restaurants. However, such practices would have been difficult for a company with automated stock, accounting and sales records, such as IPH. International Pizza House followed the law and paid all the taxes. The increased operational costs and taxation made IPH s profit margins lower than those of the local competition. These increased costs and the resulting higher prices were especially important in light of the fact that pizza was considered an inexpensive food item in Brazil. However, IPH s meals cost the consumer the equivalent of what a restaurant with more formal service would charge for meat or fish entrees. Due to budget constraints, marketing communication efforts were occasional and did not follow a specific plan. Advertising strategy primarily used the mass media of television and radio, most of the time, to support sales promotions. There was no continuity in the use of advertising. Campaigns were aired for a period of time, followed by periods of no communication effort at all. Advertising in newspaper was sporadically utilized to promote store openings or to distribute discount coupons. When 4 A12-01-0005
adopted, advertising seemed to be successful in generating store traffic and sales, although its effectiveness was not formally evaluated. Consumer Behavior: Food Service, Fast Food, and Pizza Consumption in Brazil Brazil is the largest country in Latin America and was the 8 th largest economy in the world. It had a population of 166 million and the official language is Portuguese. The Brazilian population is composed of a mixture of ethnic groups: Europeans, Africans, Indigenous Peoples, and Asians. Some of the most important migrations into Brazil in the 20 th century were from Germany, Italy and Japan. The influence of these cultures was most notable in the southern states of São Paulo, Paraná, Santa Catarina and Rio Grande do Sul. Eating habits varied from region to region. In the state of Rio Grande do Sul, there was strong influence from the heavy migrations from northern Italy and Germany. Most Brazilians consumed three meals a day. Breakfast tended to be the lightest and the quickest meal. Despite regional differences, the most common breakfast was composed of coffee with milk, and bread with butter and jelly, or bread with cheese. Some people also included some of the many Brazilian fruits such as papaya, mangoes, pineapples, and melons. Many people simply had a cup of very strong black coffee. The preference was for French bread, which neighborhood bakeries produced several times a day. Meat, fish, eggs and cereals were not as common at breakfast as in other cultures. More complete breakfasts sometimes occurred on the weekends or when houseguests were present. Both lunch and dinner tended to be heavier and longer to consume. These meals almost always included a meat (steak, chicken, or fish), a starch or grain (beans, rice, potato), a vegetable (carrots, tomatoes, etc.), and a dessert (fruit or cake). Many inhabitants of Rio Grande do Sul were accustomed to an additional meal around four or five o clock. This meal usually consisted of coffee or tea with breads and cakes. Generally speaking, Brazilians preferred not to eat alone. Meals were shared with family, friends, or work colleagues. Most Brazilians did not perceive fast food as a complete meal, but rather as a heavy snack. It was common to hear someone say, I did not have time to eat today I only had a sandwich (or a slice of pizza). When sandwiches and pizza were used as substitutes for lunch or dinner, it was usually because the person lacked time, hunger, company with whom to share a meal, or money. Nevertheless, these motives gave rise to a booming fast food industry in Brazil. Pizza was very popular in southern Brazil. The success of pizza sales at a particular location could be unrelated to advertising and image building efforts. The primary success factors were the taste of the pizza, location convenience, price, and/or the locale s atmosphere. Pizza was found on the menu of Italian restaurants as well as restaurants specializing in pizza (pizzarias), and was increasingly found on the menu of neighborhood general restaurants. Snack bars and bakeries sold pizza by the slice. For those desiring to make pizza at home, pizza crusts could be purchased precooked or frozen in supermarkets, bakeries, and convenience stores. Delivery stores had also appeared in recent years (both independent and chain-owned). Brazilians consumed pizza in four main ways: 1. By the slice as a fast and cheap snack food (fast food). 2. In restaurants when one was not very hungry or pressed for time, as a substitute for a full meal. 3. In specialized pizza restaurants with friends and family, mainly in the evenings and on weekends. 4. At home almost always on the weekend as an alternative for cooking a traditional meal or dining out. A12-01-0005 5
The taste of Brazilian pizza was different from the pizza consumed in the US. In Brazil, the crust tended to be thinner and the pizza less greasy. Brazilians often complained that American pizza had too much tomato sauce. The most popular toppings were cheese and calabresa, a thinly sliced pork sausage. While pepperoni was an acceptable substitute for calabresa, pepperoni was not sold in stores in Brazil and, therefore, held no special significance to consumers. In snack bars and restaurants, pizza was often positioned as a cheap product and was not of high quality. Many snack bars sold a slice of pizza for less than US$.50. In the major cities of Brazil, including Porto Alegre, there were more sophisticated pizza restaurants, which offered a variety of toppings such as shrimp and catupiry, a special Brazilian cheese. These restaurants offered good service and became gathering places. The busiest times for pizza restaurants were the evenings and weekends. Brazilians typically went to pizza restaurants accompanied by family or friends, reflecting a strong social motivation for dining out. The heavy consumer segment of the market ate pizza twice a week. When consumed in restaurants, drinks, principally draft beer, normally accompanied pizza. Friends and families often spent hours in such places conversing and leisurely dining. The pizzas were often cut into small pieces and served as appetizers accompanying the drinks. An outing to a pizzaria was usually more economical than going to a traditional restaurant. In some places the pizza was served through a popular system called rodizio. At a rodizio restaurant, the customer paid a fixed amount and enjoyed unlimited servings. The rodizio serving method began in restaurants specializing in grilled meats, called churrascarias. Patrons liked the idea of being able to pay a fixed price and repeating their choice of meats. This serving innovation was quickly adopted by some of the pizzarias and several very popular pizzarias in Porto Alegre served rodizio-style. Waiters went from table to table serving the various types of pizzas offered. In Porto Alegre, several rodizio pizzarias were located on Avenida Cristovão Colombo. These pizzarias became popular on the weekends when they attracted a large number of customers from lower-middle class income families who found the rodizio style and the relatively low prices attractive. These locations had a target market different from the more sophisticated pizza restaurants, which offered better service and a more upscale atmosphere. Market and Competition Overview The pizza market in Porto Alegre was estimated at US$4 million per month in 1992. International Pizza House s main competition when they entered the Porto Alegre market consisted of 43 pizza restaurants. Most were small, family-owned businesses spread throughout the city. In addition, there were three competing chains in the Porto Alegre market: The Pizza Company, Super Pizza (delivery only), and Telepizza (delivery and restaurant). None of these chains offered quality packaging. International Pizza House realized that they were setting a new standard for packaging and charged more because of this fact. The 1994-1998 Period: Increasing Challenges and the Crisis Maxxi Foods began its operations in 1993. At that time Brazil was nearing the end of the worst financial crisis in its history. Beginning in the early 1980s, the Brazilian economy slowed significantly from the rapid growth of the late 1960s and 1970s. Inflation exploded and unemployment soared. Monthly inflation in the double digits was common and yearly inflation rates reached astronomical levels, approaching 5000% one year. Consumers became used to frequent price increases as some stores readjusted their prices daily. Companies operating in Brazil passed on to consumers real and forecasted cost increases, including those associated with inefficient operations. IPH also followed this practice, sustainable only when there is a lack of real competition and when consumers have the fatalistic view that such price increases are to be expected. 6 A12-01-0005
In 1994 there was a significant change in the Brazilian economy. After many years of hyperinflation the economic crisis came under control and the currency stabilized. The newly elected government of Henrique Cardoso created a new currency, the Real, which began circulation on July 1, 1994. With the success of the Real Plan, the market stopped tolerating price increases and consumers began to compare prices. Without the ability to pass cost increases along to consumers, the operational inefficiencies of many companies became more obvious. International Pizza House s management and cost control systems also revealed operational problems. The newly stabilized economy created a franchising boom. By 1995 over 750 franchising firms operated in Brazil, many in the food sector. Foreign and local food service franchisers saw Brazil as a land of opportunity. The market was vast, the economy was stable, Brazilian laws were favorable to franchising, and well-developed media infrastructure made reaching targeted consumers relatively easy. McDonalds was well established in Brazil, since the 1970s. Other well-known franchises such as KFC, Dunkin Donuts, and Subway had either entered the Brazilian market or were making plans to do so by 1995. Local food franchisers such as BOB s (a McDonald s clone) and Habib s (Arabic food) gained acceptance and soon expanded in some of the major Brazilian metropolitan markets. Consumers began to have more choice with respect to quality fast food. Some of the improvements and innovations introduced by International Pizza House would soon be copied by the competition. Many restaurants adopted the concept of having a host/hostess seat patrons. Competitors became more aware of choosing the best locations and also improved their service, thus reducing the perceived difference between IPH and the local competition. In light of IPH s high prices, the competition also raised prices, still below IPH s, thereby improving profit margins. The more serious problems began in 1996. With average monthly inflation below one percent, consumers would no longer accept price increases. In 1996 IPH s sales stabilized and the financial condition of the firm began to deteriorate. Maintenance, security, utility and computer costs continued to increase as service providers raised prices to improve their margins even after the Real Plan. The IPH franchise in Porto Alegre was not large enough to bargain effectively with suppliers. Profit margins began to fall. Margins of net sales for delivery fell from 30% to 20 %. Similarly, margins for restaurants fell from 25% to 15%, and for the express segment from 24% to 14%. In an attempt to combat the falling sales, International Pizza House developed new promotions. One, introduced in 1995, was called the International Collection and introduced several new pizzas, which were really just a different combination of toppings. Each new pizza in this series was identified with a particular country such as Mexico, the USA, Switzerland, Brazil, etc. Patrons received a small flag each time they ordered a pizza from a particular country. This promotion succeeded in gaining attention and in increasing sales. Another promotion increased lunch sales by 35%. Yet another promotion was successful in reaching its objective to increase sales on slow days, but it had a detrimental effect on overall sales. Based on a franchisee s suggestion to increase sales on the slow days of Monday, Tuesday and Wednesday, IPH discounted a different pizza by 50% on each of those days. At first the campaign was very successful; however, with time, the discounted sales price became the pricing reference point in the minds of many consumers. They stopped eating pizza that was not on sale and stopped eating at IPH s restaurants on weekends. This did not increase overall sales and did not stop the loss of profitability. With no increase in sales, rising costs and diminishing profit margins, Mr. Max Stern began to consider selling the business. In addition to these factors, another significant event occurred in 1995. Mr. Stern s son, Marcos, the director of marketing at Maxxi Foods, told his father that he had decided to A12-01-0005 7
leave his position in order to pursue an MBA degree in the USA. The father was disappointed as he was counting on Marcos to represent him and to advance this new family business venture. In addition to the disappointment of not having his son involved in the business, dissatisfaction with the franchiser developed. The Stern group won the franchise although their expertise and success had been in construction, not the fast food business. The franchisee expected to receive a lot more assistance from International Pizza House than was forthcoming. The lack of support and assistance became even worse after International Pizza House Brazil purchased the stores from its São Paulo franchisee and began operating them as company-owned stores. The acquisition seemed to consume what little time IPH- Brazil had to offer assistance to its franchisees. Another factor in the decision to sell the franchise would be determined by the strategic orientation and focus of the firm. The Stern Group purchased the franchise with an eye toward diversification. Now some executives in the firm openly raised questions about future investments in Maxxi Foods considering the profitability of alternative investments. External events played a large role in this reconsideration. Two of the largest construction firms active in the state of Rio Grande do Sul, a national firm and a local firm had just declared bankruptcy. The closing of these two firms and the concern over the construction sector in general did not extend to the Stern Group. In fact, just the opposite occurred. New opportunities opened to the group, as it was perceived as a trusted, traditional, solid local construction firm. With the disappearance of the two large competitors, the Stern Group shared leadership with a local firm in the profitable high-rise apartment segment of the market. Stern s projects were accepted well by the high-end market, which valued the firm s reputation for excellence in workmanship and quality. The construction market held many opportunities, and bankers began to pressure the group to divest itself of the less successful fast food industry to focus exclusively on the construction business. The combination of these factors led Mr. Max Stern to look for a buyer for his International Pizza House franchise. At the end of 1996, the franchise holder for International Pizza House in Portugal, the Lusoplan Group, became interested in buying the stores and operations of Maxxi Foods. The Stern Group arranged for an investment bank to have 180 days to negotiate the price and payment terms. The negotiations continued into the beginning of 1997. When the negotiations were well advanced, International Pizza House approached the Lusoplan Group with an offer difficult to refuse. IPH would give the Lusoplan Group its existing company owned stores in Portugal, if the Lusoplan Group would take operational control over IPH s troubled stores in Spain. This offer was considered too good to turn down, so the Lusoplan Group withdrew from the negotiations to purchase the IPH franchise in Rio Grande do Sul. This withdrawal had a negative impact on Maxxi Foods image. Although Maxxi Foods explained the situation, financial analysts had considered the purchase as a done deal. Other potential buyers became less interested in purchasing Maxxi Foods from the Stern Group. Problems with other Brazilian franchises also made the sale more difficult. The franchisee for Rio de Janeiro suddenly and unexpectedly decided to close all of its stores and to stop all operations due to heavy financial losses. In addition, it began litigation against IPH, the franchiser. The franchise in São Paulo was sold and, during that sale, it became known that many of the São Paulo stores were operating at a loss. And things got worse. Other fast food franchises that had begun operations in Brazil, such as KFC and Subway, were also not meeting profit expectations. By this time Mr. Stern was well aware of the difficulty in selling his franchise even though he strongly desired to return to the construction business exclusively. He began to operate Maxxi Foods in a maintenance mode, that is, to continue operations but to withhold further expansion investments. Few things changed after the beginning of 1997. The only major change came later in 1997 when a nation-wide committee was formed by the franchisees with the goal of finding ways to increase prof- 8 A12-01-0005
itability. It had been four years since most of the franchises opened their stores. During that time they had received no major promotional or product assistance from International Pizza House. One of the franchisees launched a traditional pizza in 1998. It was a thin crust pizza and was similar to the Italian style pizza found in pizzarias preferred by Brazilians. The product was sold at 10% less than other IPH pizzas and was an attempt to attract the traditionalist segment of the market that rejected the pan pizza concept. This traditional pizza was the first non-usa based product ever launched by International Pizza House. An analysis of sales revealed that this traditional pizza initially accounted for about 35% of pizza sales in stores that launched this product. Sales of this type of pizza stabilized at about 25% of pizza sales. The Proposal In 1999, after reviewing all that had occurred, Mr. Silva decided that he would have to determine how to restore the image and profitability of the Rio Grande do Sul franchise of International Pizza House. A competitor, the Pizza Company, then held local market leadership. There was a rumor that a huge competitor, the market leader in pizza delivery in the USA, was about to enter the market by making the local Coca Cola distributor its franchisee. International Pizza House s image as an expensive pizza discouraged consumers. Mr. Silva also felt he did not have the most appropriate products for his market, yet he knew that he would have to stay within the guidelines of his IPH franchise agreement. He decided that he would analyze the situation some more and then send his recommended changes to IPH-Brazil. A12-01-0005 9
Exhibit 1 IPH Sales Territories and Map of Brazil Rio Grande do Sul Santa Catarina Paraná São Paulo Capital São Paulo Interior (A) São Paulo Interior (B) São Paulo Interior (C) Rio de Janeiro Minas Gerais Ceará Pernanbuco Bahia Goiânia/Brasília 10 A12-01-0005