TABLE OF CONTENT Title Page 1.0 EXECUTIVE SUMMARY 1 2.0 BACKGROUND (INTRODUCTION) 2 3.0 OBJECTIVES 2 4.0 RESULTS (FINDINGS) 3 5.0 CONCLUSION 11 6.0 REFERENCE LIST 12 7.0 APPENDIX 13 8.0 PRESENTATION SLIDES 19 1.0 EXECUTIVE SUMMARY In year 1997, Secret Recipe was founded in Malaysia. It was an independent restaurant with only one outlet. The founder used it as pilot operation to test how Malaysian accepts the restaurant which focuses mainly on cakes with several unusual flavors. The pilot test was successful and the founder started to franchise it among his friend in 2000. After finding the franchise model is workable, in 2001, the franchisor opened the business option to potential franchisees. The business expended to other neighbour countries as well. To date, the business has more than 150 outlets throughout the region. The franchisor has 2 stages in the franchising procedures whereas stage 1 is pre-opening stage and stage 2 is opening stage. The franchisor had standardized the method of operation whereas the design and promotions are standardized among the outlets with certain exclusions applied to selected outlets. The franchisor uses IBM Solutions based Point of Sales (POS) application to track the sales in real time. Besides, Enterprise Resource Planning system is implemented and applied whereas the inventory tracked in real-time and resources allocated more carefully. Training provided to both franchisee and the new employed staffs who will start serving at any new outlet. Secret Recipe entered China market in 2007 with support of Carrefour. Secret Recipe solely owns its 3 outlets in China. China business is not yet open to franchising as it is in several stage of pilot operation test process. The China operation catered their menu to suit the local taste. Currently master franchising opportunity opened for India, Vietnam and West Asia. Secret Recipe follows factory based supplies whereas the cakes manufactured at one single location and distributed throughout its outlets around. The business spends in research and development to research the market demand and cater the menu to suit the trend. The franchisor targets to establish 200 outlets by end of 2009. 1 2.0 BACKGROUND (INTRODUCTION) Food and beverages industry is among one of the fast growing industry in Malaysia. Many foreign franchise businesses had entered Malaysia and specifically into this industry since 1950’s. Malaysian had followed the trend of franchise and several new franchisors was born locally in this food and beverages industry. Among them are MarryBrown Fried Chicken, Kyros Kebab, and Eden Bakery (George Miranda, 2000). This trend continues and the industry keeps seeing new comers. According to Wahaizad in his recent articles listed 10 established Malaysia franchises. The top of the list is Secret Recipe as first fast growing local franchisor and followed by MarryBrown as second. 3.0 OBJECTIVES Objectives of this report are: • Learn Secret Recipe restaurant history • Learn Secret Recipe franchising history • Identify the franchising procedures • Identify the method of operation • Identify trainings provided • Identify the franchisor’s globalization activities • Highlighting success factor of the franchisor • Highlighting the franchise business growth pattern • Critic the existing franchise model 2 4.0 RESULTS (FINDINGS) 4.1 Restaurant Overview Secret Recipe is a Malaysia born franchise business. Their nature of business is bakery. They are categorized in food & beverages industry. Cake is their core product. Although they provide several other foods and drinks, they still never lose their brand awareness and popularity over their cakes. The Secret Recipe’s real corporation name is Secret Recipe Cakes & Café Sdn Bhd. They are locally registered company under Companies Commission of Malaysia. The business was registered in year 1997. According to Hali J. Edison and Carmen M. Reinhart (2000) research paper, 1997 is the year Malaysia fall into serious financial crisis whereas faced recession, inflation and Ringgit value dropped below the margin. This proves to be a reason why the Secret Recipe owner did not franchise the business straight away. Neither franchising idea nor activity was in place when the business was first founded. The brand name that the owner decided to use is “Recret Recipe” and the brand is registered with Intellectual Property Corporation of Malaysia (MyIPO). The headquarters of the operation is in Petaling Jaya, Malaysia. 4.2 Franchise Overview Franchise idea was not in place when the business was first founded. The founder had used his first open restaurant as a pilot operation to find out disadvantages of the business and worked out to implement solutions to overcome several problems in the real business model. In the year 2000, the founder decided to franchise it. But the franchise option was only open to his circle of friends. The franchised the business among his friends and find out the workability and demand exist for that business model and eventually opened the franchising invitation to the public in 2001. Since then, the business had a serious success and continuous development. The business had expended to other countries such as Singapore, Indonesia, Thailand, China and Philippines. Today, they have more than 150 cafes throughout the region and the number is increasing. According to their announcement in their corporate website, they had temporarily closed franchising application for Klang Valley, Penang, Perak, Seremban, Malacca and Johor Bahru. They are aware that demands in those areas are well served with current existing outlet and no requirement for new outlet. If they allow more franchisee, it will just increase supplies 3 above the demand and creates competitions among their franchisees. The Secret Recipe does not encourage competition among franchisee as mentioned by their Chief Executive Officer in recent interview with BizWeek press. 4.3 Franchising Procedures 4.3.1 Stage 1 – Pre-opening There are 2 stages in their franchising procedures. First stage is known as pre-opening – selection of franchise. There are 6 steps in this pre-opening stage. First, the interested franchisee should submit their application form which includes their complete profile such as working history and education qualification. Second, the franchisor team will review and evaluate the potential. This evaluation is done to both franchisee’s location and franchisee’s qualities. The franchisor will evaluate the location that franchisee interested to open the franchise outlet, such as Penang. Market research will be conducted to evaluate the demand. If current existing outlet in Penang already capable of serving the demand, then the location evaluation fail and the application will be rejected. At the same time, franchisor will evaluate the franchisor’s background to ensure he is capable of handling the outlet. Education history represents his knowledge power while working history represents his experience in management. If the evaluations pass, they will proceed to third step which is preliminary discussions. The franchisor will discuss with the franchisee such as conducting formal interview. Then proceed to step four which is final discussion on terms and conditions. The franchisor will make sure the franchisee really understand each of the terms and condition clauses to ensure the franchisee agree and bound to the rules of franchisor. Once franchisee agrees, they will proceed to step 5 which is signing of contract. The initially payment and setup fees must be paid by the franchisee in this step. Finally both of the parties will proceed to on-site visit which is the final step for first stage. 4.3.2 Stage 2 – Opening After completing stage 1, the procedure continues to stage 2 which is known as opening – preparation for grand opening. The first step in stage 2 is franchise orientation. The selected franchisee will go through orientation with the franchisor where he will be 4 educated over the franchise business operation methods and procedures. The franchisor will make the franchisee understand on what are the responsibilities that he has in operating the outlet. When orientation complete, they will proceed to step 2 which is discussion on design and renovation. The franchisor will bring in his expert designer team to plan the interior design of the new outlet. At the same time, selection and recruitment of new staffs will take place. In step 3, the renovations of the new outlet will begin and meanwhile the recruited staffs will be provided off site training by the franchisor HR team. Next stage 4, once the outlet and staffs are ready; the franchisor will setup the equipment and machineries into the outlet. Finally they will advertisement in newspaper or local magazines about the new outlet and conduct the grand opening fiesta. 4.4 Method of Operation 4.4.1 Standardized Design Secret Recipe follows a standardized outlet design for all their outlets. This gives the outlet to feel the same with their theme color of red. The designs will be slightly changed by their interior designer to ensure the outlet location and space is utilized to the right positions. Such as for dining space, they will allocate 40% and kitchen 40% while the rest occupied by payment counter and others. 4.4.2 Controlled Promotions In term of promotion, Secret Recipe standardizes their promotions to apply to all outlets. But they are sometimes not applied to high profile outlets such as KL Sentral where it being attraction of tourist and travelers. This is in place to ensure the potential revenue of those high profile outlets do not decrease. This method enables the franchisor to control the promotions and ensure that particular outlet receives enough revenue to run without any financial problems and stable inventory turn over. On the other hand, Secret Recipe collaborates with other popular brands to provide stronger approach over their promotions. Recently, they collaborated with Nestle and RHB Bank to provide Hari Raya Promotions. Besides, they conducted lucky draw activities with collaboration of Pensonic. They shake hand with other stronger brand when it comes to promotions. 5 4.4.3 Real-time Sales Tracking Each and every single sale in every outlet is transacted in real-time. They have database system to track all the sales and procurement whereas the franchisor and franchisee can monitor and get real-time statistic. This is done through online; the Point of Sale (POS) application is installed at all outlets. This POS application provided and maintained by IBM Solutions. It is also installed in all the order taking handheld gadget. With this application in place, the system tracks the sales in real time and input into single database. All outlets POS system sends input into same database. Therefore the administrator and management team can get the statistic immediately and accurate. This method ensures the correct sales and procurement report received by franchisor. 4.4.4 Real-time Inventory Tracking They use Enterprise Resource Planning (ERP) system to address reporting, inventory and stock shortage issues. With ERP in place, their inventory monitor system is powered by real-time alarm to alert the particular outlet operator when their inventory level goes down. This helps the management to never say “we are out of stock” to their customers whereas the ERP alert them before the inventory completed finish and the management will arrangement for new stock. The team does not need to manually count their inventory every night as other bakery does who are their competitors. 4.4.5 Factory Based Supply Quality control is consent of every franchisor as well as Secret Recipe franchisor. To ensure the quality and taste of their core product cakes, especially special flavored cakes like durian, banana, mango, and blueberry are always up to the standard, the franchisor applies factory based supply method. Factor based refers to one main outlet will do the cakes and then the cakes supplied to out outlets around it. With this, product quality remains consistent for all outlets. Together with ERP in place, the factory will produce in correct required quantity by referring to inventory status. Amount of resources allocated and shared correctly. 6 4.5 Training 4.5.1 Franchisee Training Franchise introduction courses provided to the franchisees with coloration of Malaysia Franchise Association. This course provides basic understanding of how franchising concept works for both franchisee and franchisor. After the basic course, the franchisor will provide detailed training on how Secret Recipe franchise system works. This training provided to the franchisee in franchise orientation step in stage 2 of franchising procedures. The reporting system, the inventory tracking and all required information will be provided to the franchisee. 4.5.2 Staffs Training On the other hand, the staffs will be hired only when new outlet is being open and this is the second step in stage 2 of franchising procedures. This staffs are hired when required only and therefore the training conducted more specifically. They will most often train 10 staffs per batch and it provides closer understanding to the staffs. These staffs will be trained on what they need to do as a daily process in that new outlet. But for training, it will be conducted off-site and the base for training session is their headquarters located at Taman Mayang, Petaling Jaya, Malaysia. 4.6 Globalization 4.6.1 Expended with Master Franchisee Secret Recipe expended their franchise business to Singapore, Indonesia, Thailand, and Philippines. In these countries, they franchised to master franchisees whole helps them to take care of the local business there and more flexibility for the franchisor. 4.6.2 China Operation Secret Recipe had expended to China as well. In this case, they have not franchise the China outlet. They solely owned by Secret Recipe franchisor. They expended to China after receiving invitation from Carrefour to open their outlet inside Carrefour owned shopping premise. This first outlet was open in 2007 at Shanghai. According to Secret Recipe’s CEO in his recent interview, he had admitted that current China operation is not 7 encouraging but yet the revenue is sufficient for the unit. This first outlet was used as pilot operation to test their weakness. Up to date, Secret Recipe has 3 outlets in China and still not franchised. The CEO believes that the sales will be encouraging after opening it to franchisee which will be considered soon. 4.6.3 Cater Local Taste One of Secret Recipe technique in globalization is catering local taste. The CEO of the firm mentioned that they had catered the menu to suit local taste. Remarkable in China whereas the sales slightly boosted after they changed their menu to provide exactly what the locals prefer. 4.6.4 Opportunity Calls Secret Recipe still receiving many calls encourage them to franchise their business to other countries such as Kenya, South Africa, Norway, Sweden, United States of America, India and Middle East due to Secret Recipe’s uniqueness. Secret recipe is still considering most of the calls. Currently they had opened master franchisee opportunity to India, Vietnam, and West Asia as written in their corporate website. 4.7 Success Factor (competitive advantages) 4.7.1 Uniqueness Secret Recipe selected unique product and unique market. Not many players who has cake restaurant which encourage customers to walk-in with family and dine inside the outlet. Bakery was mean only to bake cake while Secret Recipe took it a step further by making bakery as restaurant as well by catering other foods besides cakes. Furthermore, their unique product is cake. They target to represent Secret Recipe as identify for cake. Their selected unique market and product encourages them to move further in food and beverages industry while player with few number of competitors. 4.7.2 Good Product, Service, and Price The main motive of Secret Recipe is to provide good product, good service and reasonable price. The factory based supply method in their franchise system really helps 8 them to keep their product quality consistent and they remarkably providing good product all the time throughout all outlet. They hire and train staff off site before opening the outlet and his helps the team to educate the small number of staffs more specifically on how to handle the customers by keeping them on first priority in each of their service. When staffs trained well, the service they provide is good. Secret Recipe sets a reasonable and affordable price on their products. Customers are not forced to buy the whole cake; they are given flexibility to buy pieces of it as well. And the price is reasonable for every piece. 4.7.3 Continuously Researched Franchised System Secret Recipe’s franchise system is well researched and accepted. They did roll out pilot operation and figure out weakness and work out to improve it. This applies to each of the country that they expend to. They place research as an important factor continuous growth. At the same time, they conduct market research to survey the demand before deciding to open franchise outlet there. This helps them to avoid doing mistakes as no point opening a cake restaurant at where it is not asked or demanded for. Thus, according to the CEO, the business continuously spending on their research and development department which support them to refine their franchise system according to the latest trend and besides they can serve what exactly the customer need. Taking further, their R&D team also researches their menu and recipes to come with new menu idea. 4.7.4 Easy Model and Fair Competition Secret Recipe follows simple business model with simple menu. Therefore replication over their business is easy and this makes them flexible to open many franchise outlets without losing the business model or concept. They keep their outlets consistent and easy to manage with centralized tracking systems. The different of this franchisor with other franchisor is this franchisor does not encourage competition among the franchisees. The franchisor has no intention to open multiple outlets just to earn fees out of it. There are careful in term of opening outlet and seriously will not open new outlet if that particular location already has an outlet which already serve the demand sufficiently. 9 4.8 Growth Secret Recipe marked RM 70 million as revenue in 2005. The figure increased to RM 90 million in 2007. In the recent report released by Secret Recipe management, the business had reached RM 100 million as revenue for 3rd quarter of 2008 and this figure expected to reach RM 110 million at end of the year. At the same time, the business is expecting RM 20 million higher turn over this year due to their international expansion. The franchisor is targeting to establish 200 outlets by end of next year as currently they have around 150 outlets. 4.9 Indirect Disadvantages (criticisms) 4.9.1 Inconsistent Product Quality Several criticisms exist for current Secret Recipe’s activities and it is their indirect disadvantages. Secret Recipe has 2 outlets in Sabah state and 3 outlets in Sarawak state. The customers in East Malaysia critic that the cakes they purchase at East Malaysia do not taste the same as in West Malaysia. This is support by the fact of Secret Recipe’s franchise method whereas they are having factory based supplies. Therefore, Sabah and Sarawak receives the cakes from their Johor Bahru factory which is in West Malaysia. The cakes kept in the freezer for longer time until they are delivered to East Malaysia. This makes the quality to drop slightly and of course the critic will exist if this is the case. 4.9.2 Factory Based Supply’s Limitation Factory based supplies does makes the product to be delivered to all outlet and quality kept consistent. But it is complicated when they have outlets in far places like Sabah and Sarawak which they cannot really rely on Johor Bahru’s factory to supply the cakes as the quality might drop in delivery. To avoid this, the franchisor needs to open more factories at far places to cater the demand and supply more consistent. This is an indirect disadvantage of following factory based supply because the more factory that the firm opens, the more investment required and profit margin will drop. This will tie the franchisor by limiting investment to other crucial department such as research and development. 10 4.9.3 Inconsistent Staff Training Staffs are trained only when opening new outlet. When a staff quit in any of the outlet, the franchisor tends to hire new staff in rush and provide training. The new staff will be lack of experience and no consistency found in the service provided by the staff. Secret Recipe does not have any training institution to provide consistent training. 5.0 CONCLUSION Secret Recipe had established well in their unique market. The operation conducted resulting steady growth and promises profits. The business invests in research and development department as one of their important invest and in return they are catering the menu to suit the latest trend as well as local taste when expending global. Thus market research conducted before opening new outlet. This avoids them from doing any mistake when expending. At the same time, they also do not open multiple outlets if the demand not sufficient in those areas and avoids opening near any existing outlet as they do not encourage competition among their franchisees. They provide enough space and market for the franchisees run the outlet. On the other hand, the business runs pilot operation when entering new country like China. They collect the weakness then find and implement the appropriate solutions as well as being flexible to cater the menu to suit the local taste and demand. The only start franchising out in that particular country after the pilot operation success. Secret Recipe is a well growing franchise business both locally and globally. They franchise business born in Malaysia made its moves carefully until today it had expended globally with more than 150 outlets. 11 6.0 REFERENCE LIST Chow How Ban, 19 July 2008, Secret Recipe for China, BizWeek – The Star Publication Wahaizad Md Akhir, May 10, 2008, 10 Established Malaysia Franchises, Entrepreneur Articles Secret Recipe uses IBM SurePos & iWaiter solutions to empower staff to increase sales and improve tracking of its franchisees' sales, IBM Solutions Articles archive Secret Recipe Improves Responsiveness and Customer Relationships With an IBM POS Solution, ZDNet Articles archive Secret Recipe Corporate website, http://www.secretrecipe.com.my George Miranda, 2001, Guide to a Successful Franchise Business, Leeds Publications Oxford Business Group, 2007, The Report: Malaysia 2007, Page 216, Oxford Business Group Publication 12 APPENDIX I 13 APPENDIX II 14 APPENDIX III 15 APPENDIX IV 16 APPENDIX V 17 APPENDIX VI 18 19 20 21