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MADE IN CHINA: International Brands Home-Grown in Shanghai
Two Shanghai restaurant chains, Wagas and Element Fresh, show what it takes to develop an international brand in China

From CHINA INTERNATIONAL BUSINESS August 1, 2008 Print & Web Edition

 

By Mina Choi


When John Christiansen failed to find a good cafe in Shanghai, he decided to open one himself. The Danish expatriate, who at the time was working in logistics, opened Wagas in Citic Square on Nanjing Road, one of the city’s main shopping thoroughfares, back in 1999. Nine years on, Wagas has 10 locations nationwide, with three more slated to open this year.

Just after business at Wagas started to gain traction, another similar restaurant appeared on the scene in Shanghai - Element Fresh. Like Christiansen, founder Scott R. Minoie also spotted a gap in the market: salads and smoothies. Minoie, who previously ran a popular juice bar in a Shanghai gym, used his experience gleaned from previous roles at Jamba Juice and Whole Foods Market back in his native USA, and opened the first branch of Element Fresh in 2002, featuring salads, healthy mains, and fresh juices. The brand now boasts five restaurants and three cafes across the city, and last month opened its first Beijing branch.

The success of Wagas and Element Fresh on one level mirrors the huge growth in the restaurant and catering industry in China, which has shown annual double-digit increase in recent years. In Shanghai alone, the industry has grown by 25% annually since the year 2000, with total 2007 revenues estimated at RMB 55.6 billion (USD 8.2 billion).

However, while international brands such as KFC and McDonald’s have prospered in China and home-grown Chinese brands are also slowly gaining traction, both Wagas and Element Fresh are trying to do something very different: build up a Western-style brand, but one which originated, and has grown up in, China.

Both are testament to the enormous opportunities on offer to enterprising foreigners in the Chinese restaurant space. But doubts remain about their long-term profitability, and the potential to grow their brands outside of China’s tier-one cities.

ATTRACTING THE LOCALS

Wagas and Element Fresh initially catered mainly to expatriates looking for food that reminded them of home. But as business expanded, both have started to streamline their pricing and marketing to appeal to local customers, who now make up around 50% of customers. In some locations, like Element Fresh’s branch in the Grand Gateway mall in Xujiahui, 60% of customers are locals.

This reflects not just the change in marketing approach of the two restaurants, but also the increase in the number of local white-collar workers in nearby office buildings, along with growth in the average income in the major cities. “In 1999-2001 the market wasn’t there yet,” recalls Jackie Yun, a former café owner from Sydney who joined Wagas in 2001. “The foreign-to-local customer ratio was 80-20. Back then, Chinese white-collar workers would never consider having a sandwich for lunch. Now, with average incomes rising, even a lot of Shanghai youngsters and university students are coming in.”

According to Shaun Rein, managing director of the China Market Research Group, Element Fresh in particular has struck the right balance. “Element Fresh has done a great job of localizing its offering to appeal to Chinese as well as Westerners,” he said. “It's not seen as a pure Western restaurant, but defined by healthy, great ingredients. Right now, both Chinese and Westerners are not looking at price, but looking for value – the quality of the vegetables or the meat. And Element Fresh offers great quality control.”

PRICE PINCH

Element Fresh’s managing director Frank Rasche acknowledges, however, that attracting more local customers is a delicate task, since much of its brand appeal comes from its “credibility as a foreign or international restaurant.”

In addition, holding prices down and focusing on a higher turnover of customers has become an increasingly difficult task over the past few years given the rising cost of food ingredients and skyrocketing rents in the city.

Although growth has been spectacular for both brands — with revenues at Element Fresh growing at 80% a year (averaged out for the past six years) — doubts therefore remain over profitability. Yun herself admits that Wagas is operating on a very tight profit-margin.

But both Rasche and Yun remain optimistic. Element Fresh now has more than 100,000 customers a month. Although Rasche wouldn’t disclose the chain’s annual revenue, he did mention that the average bill came out to 80 RMB (USD 11.70), which may put estimated annual food and drink revenues at around RMB 96 million (USD 14.1 million). Wagas also wouldn’t disclose revenues; however, Yun did state that it has over 600 customers a day at the busiest locations, and at least 2-300 at its slowest.

GROWTH SPURTS

With developers queuing up to invite Element Fresh and Wagas to open new branches in their complexes, both are unsurprisingly eyeing further growth.

Element Fresh is poised to open five new locations: three in Beijing, one in Suzhou, and another inside the Shanghai World Trade Center, the tallest office tower in the city. And Rasche, a former Coca-Cola employee, is not content to limit his ambitions to China. Element Fresh is now looking at expanding into Singapore, and eventually to Europe and America – it recently registered its name as a trademark in both the EU and the USA. Rasche believes the brand name is now sufficiently strong for it to be a success overseas as well. “Our customers in China are from everywhere, and that means the brand will have immediate recognition internationally,” he says.

International expansion plans are not yet in the works for Wagas, which has taken a more personal approach to brand-building, based closely around the instincts of its partners, Christensen and Yun. But the restaurant chain is nonetheless considering further expansion in Beijing — its first branch in the Chinese capital opened in March — as well as opportunities in other Chinese first- and second-tier cities.

Rein believes the latter may provide the best expansion opportunities for both restaurant chains. “I see huge potential for these restaurants in second- and third-tier cities in China; they have a good brand, good management, and have done a great job positioning themselves.”

However, he is less convinced about the ability of Element Fresh to build up a genuinely competitive international presence, warning that expanding too quickly, without a major overhaul of its management infrastructure, may be a mistake. This is because both brands, despite their success, remain closely controlled by their original founders.

“One founding team can manage two or three restaurants, but it's a different skill set for them to manage six or eight,” he said. “I would [therefore] be concerned about expanding too fast or expanding into the international market.” He added that in order for expansion to be successful, both brands would need to raise significant additional outside capital to enable a “professional” expansion process.

PERFECT TIMING

Doubts may linger about both Element Fresh and Wagas’ long-term growth plans. But both benefited from coming on the scene at just the right time – when demand for Western-style healthy food was growing but there was very little in the way of competition. Rasche admitted that this lack of competition gave Element Fresh founder Minoie time to fine-tune the concept.

Nowadays, competition in the Western food market in Chinese cities is much more intense – even a cursory flick through the restaurant section of one of Beijing or Shanghai’s English-language listings magazines reveals hundreds of restaurants, from cut-price student dives to Michelin-starred establishments, serving up Western fare.

Consequently, Rein believes other enterprising foreigners looking to follow in Christensen or Minoie’s footsteps and build a Western restaurant chain from the ground up in China may well end up disappointed. “It will be difficult for new brand concepts to create a splash and build up like Element Fresh [did],” he said. “There are [now] simply too many choices in major cities like Shanghai and Beijing.”

For a complete list of Business Articles by Mina Choi click HERE