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By combining the expertise of experienced food industry players in these foreign markets,
BreadTalk was able to develop local adaptation in its products while lowering its costs through
trading off a lower level of control over processes and activities through franchises. In October
2003, BreadTalk entered a master franchise agreement with Kuwait-based Al-Mejhem Global
Group, which was a family-owned diversified food and beverage company, possessing ‘a network
of contacts, firm financial standing and a sound marketing plan for growing the BreadTalk brand in
the Middle East7’. Together with BreadTalk’s already strong brand name and unique concept bakery
stores, these core competencies were not easily substitutable in foreign markets.
Sharing related activities among business units
Cost savings were derived from BreadTalk’s ability to utilize the same suppliers across their
franchise outlets. In addition, BreadTalk seeks to achieve local adaptation to local taste and
preferences as well. Crustum Products Private Limited, BreadTalk’s franchisee in India, uses the
flour suppliers as its parent outlets in Singapore, while further differentiating the taste and
packaging of its breads. Quoting Managing Director Mr. Reddy, "Our strength is food and their
strength is bread. We import flour from Singapore and Japan. Indian foods are fused with breads to
provide desi flavour to the varieties as well”8. Other relevant upstream activities like the
procurement of other non-perishable raw ingredients for the production of their buns are assumed to
be centrally controlled. This ensures minimum quality assurance of its products as well.
Within its Singapore outlets, Toastbox’s menu spread of bread and other snacks are prepared in its
parent BreadTalk bakery located in the same shop. A central kitchen located at KA Food Link,
Kampung Ampat9 was set up to prepare large volumes of toppings and key ingredients before
delivery to its retail outlets.
Increase in Bargaining Position with its Growth
As mentioned above, bulk purchases of raw ingredients across different business units would
inadvertently increase BreadTalk’s bargaining power with respect to suppliers. This may explain the
low level of vertical integration to secure supplies and overcome cost fluctuations, since they are
7 Asiacase.com, The Asian Business Case Centre, ‘BreadTalk: Managing Expansion Through Franchising’, Foo See Liang & Chung Sang Pok, Dec 20048 Crustum Products plans 40 BreadTalk outlets by 2010, M. Somasekhar , Hyderabad , Jan. 12 http://thehindubusinessline.com/2007/01/13/stories/2007011301610500.htm, Marketing 9 http://articles.wallstraits.net/articles/759, BreadTalk-A fresh and tasty IPO
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expected to obtain raw ingredients at favorable prices. However, it should be noted that BreadTalk
has chosen not to combine their marketing efforts across its different business units to increase
outreach. This is because doing so may result in brand dilution. Moreover, as a franchisee of Din
Tai Fung from Taiwan, cross-marketing may be restricted.
5.1.2 Unrelated Diversification
Corporate parenting/restructuring
BreadTalk has a strong and competent management that provides strong support to its strategic
planning and budgets, financial functions and human resource management.
i) Strategic and budget planning:
With more than 30 years of experience in the F&B industry, Mr. George Quek was instrumental in
establishing the BreadTalk brand name and identifying new business opportunities in restaurants
and Food Atrias. His strong business acumen has historically brought unprecedented commercial
successes. Quoting Mr Quek, ‘When BreadTalk merged with Megabite, 17 outlets in China adopted
the name Food Republic. The experience gained at BreadTalk will be utilized to expand the Food
Republic business10.
ii) Customer perceptions and design layouts:
Across the business units, all retail stores possess layouts that have been thoughtfully
conceptualized to create a unique customer experience. For example, Food Republic aims to
recreate a nostalgic atmosphere with 1900s memorabilia and aged wooden beams. BreadTalk
utilizes a glass architecture and open kitchen concept to appeal to customers while Din Tai Fung
Restaurant’s chic oriental style architecture distinguishes it from its competitors. These retail
concepts have been formulated by the corporate office and can be applied within business units.
iii) Human resource management:
In December 2007, BreadTalk appointed Mr Goh Tong Pak, the deputy director for the Ministry of
Education's (MOE's) school appraisal branch, to be made group chief executive officer (CEO). The
newly created post will require him to oversee BreadTalk's entire operations, including those in
China and Singapore. Quoting a press release from BreadTalk, 'He will also strategize on systems
10 ‘Kneading his way to success’, Money Movers, BreadTalk- George Quek, Smart Investor, June 2007, pg 64
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and talent development within the group’11. Again, it is assumed that top managers could be
transferred to new business units like its foodcourt outlets, allowing BreadTalk to capitalize on their
employees’ expertise.
Portfolio Management
BreadTalk’s strategic expansion of its bakery business and foodcourt business in highlighted in its
choice between franchises and subsidiaries. In its expansion into China, it will only retain a direct
operation pattern in Shanghai and Beijing. BreadTalk set up Shanghai BreadTalk Co. in order to
reap higher profits. This is despite BreadTalk having to incur an approximate RMB2 million12 cost
of opening a shop instead of signing franchises.
5.2 Corporate Level Strategy Evaluation
Based on the above analysis, BreadTalk’s corporate level diversification strategy has adopted an
optimistic yet cautious approach in managing risk and opportunity.
Effective expansion into foreign markets
BreadTalk has successfully managed its bakery business abroad through franchising and direct
operations. They have been able to replicate their core competencies overseas through strategic co-
operation with partners and standardization through franchises. BreadTalk has successfully
implemented a transnational strategy and straddled its pressures of lowering costs and local
adaptation. An example would be how BreadTalk managed to enhance its revenue significantly and
establish itself within China’s market in its embryonic stage. Most bakery stores in China average
between 1,500 and 2,000 customers per day and 400,000 yuan (US$48,780) in sales13. "China's
bakery industry is growing at an annual rate of 10 to 20 percent," said Wu Zhande, president of the
All-China Bakery Association (ACBA). It has harnessed the expertise of credible franchisees in
these foreign markets and worked closely with them to ensure quality standards. This explains
BreadTalk’s geographic revenue growth in China to increase from 7% in 2002 to 38% in 2007
(Refer to Appendix D).
11 BreadTalk hires senior educator to be educator to be group CEO - http://www.asiaone.com/News/Education/Story/A1Story20071226-42505.html, BreadTalk hires senior 12 BreadTalk intends to open 500 stores in China- http://www.chinaretailnews.com/2006/09/14/335-BreadTalk-plans-to-open-500-stores-in-china/, 13 Foreign competitors introduce new concepts to bakery industry, http://www.tmcnet.com/usubmit/2006/04/04/1535852.htm
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The possible benefits of multinational diversification include allowing BreadTalk to engage in
cross-collaborations across businesses so that they can attempt to enter other food and beverage
segments more easily. They can also leverage on their brand name to build up market awareness.
With a centralized HR and marketing system implemented, BreadTalk can reap the advantages of
both economies of scale and scope.
Over-reliance on the bakery business within Singapore
Even though the bakery line was the founding business unit for BreadTalk and still contributes to
51% of its revenue today, BreadTalk faces strong competition and easy imitation of its products by
competitors. In addition, rising flour prices have led to erratic revenues. To overcome these
difficulties, BreadTalk has banked on continual product innovation and revamping of its existing
outlets to draw in customers. Consumer preferences and their corresponding reaction to ‘fad’ items
are difficult to gauge.
In our opinion, there is a limit to BreadTalk’s ability to sustain a high growth rate in its bakery
business. To address this pressing concern, the bakery segment would be analyzed in detail to
further elicit relevant dynamics and trends in the business (Refer to Section 6.0 Business Level
Analysis – Bakery Business).
Short-term run in managing portfolio
BreadTalk has relied on signing franchises for its restaurant line Din Tai Fung, and more recently
J.Co Doughnuts from Indonesia. Din Tai Fung’s profit amounts to 38%, which is considered
substantial for a franchise. BreadTalk would face limitations in trying to expand Din Tai Fung’s
menu and refine its operation as it is a franchise. Also, royalty payments and license fees would
have to be paid to the Din Tai Fung restaurant network.
Similarly, J.Co Doughnuts could be viewed as an addition to complement BreadTalk’s existing
bakery line. Heavy reliance on these franchises to further build BreadTalk’s brand in Singapore may
be restrictive and highly subjected to franchisor’s regulations and standards. Given that BreadTalk’s
core competencies lie in its unique and wide range of products at strategic locations, BreadTalk’s
expansion strategy may be limited by the use of franchises.
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6.0 BUSINESS LEVEL ANALYSIS - BAKERY BUSINESS
The bakery business for BreadTalk achieved unprecedented success in the local bakery sector as the
sleek design and open kitchen concept gained huge popularity. Between 2003 and 2005, the
BreadTalk bakery business segment saw a rise in revenues with the increasing number of outlets set
up regionally. Its performance is highlighted in the following chart:
28
29
30
31
32
33
34
2002 2003 2004
Year
$m
20
21
22
23
24
25N
o. o
f ou
tlets
Total retail sales S$ million Outlets Number of units
FIG 3: BAKERY BUSINESS – NO. OF OUTLETS & SALES
It is therefore important to understand the driving forces behind BreadTalk Bakery’s success by first
identifying its core competencies. This is followed by a SWOT analysis to outline the Bakery’s
external environment in detail.
6.1 Competitive Advantages and Core Competencies
6.1.1 Unique Concepts and Branding
BreadTalk bakeries differentiated themselves from traditional bakeries with sleek and space-age
looking store facades and an open-concept design. Unlike other bakeries, BreadTalk’s novel open-
concept design allowed customers to view the bakers at work and generated a lot of customer
interest in its products. In addition, BreadTalk came up with creative and fun-sounding names for
all their buns. Some buns had a short anecdote to tell a story. New types of buns are introduced
regularly as well to maintain consumer interest. Such unique initiatives by BreadTalk allowed them
to differentiate themselves from other bakeries.
BreadTalk is focused on its branding and has made great efforts to promote the BreadTalk brand.
To ensure this, the modern and contemporary designs of the stores are standardized in all the
BreadTalk outlets. Such is the devotion to a clear brand identity that when BreadTalk recently
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renovated and launched the “Niu” store layout for the CityLink Mall outlet, it also announced plans
to renovate all its other stores around the world to the same layout concept14. Equipment such as
bread tongs, trays and the uniforms that all store employees must don are also standardized in all
bakery outlets. This new concept allows BreadTalk to continue projecting a fresh, clean and lively
look that has become synonymous with their initial bakeries. Consequently, BreadTalk has garnered
awards such as “Singapore Most Distinctive Brand Award 2003-2004” and “Singapore Promising
Brand Award” for from 2002 to 2004.
In 2007, more than 1000 respondents were polled in a market research survey conducted by
Temasek Polytechnic Business School students. The survey findings showed that BreadTalk had
the highest brand recall and is associated with creativity and innovation15.
6.1.2 Wide Product Offerings
Challenging and revolutionizing conventions, BreadTalk bucked the trend by investing in an in-
house Research & Development Team to continuously develop new buns for their bakeries. About
ten new items are introduced every four months. This allows BreadTalk to provide new products to
the unsatisfied tastes of customers. BreadTalk currently offers more than 150 varieties of breads,
buns, pastries and cakes16. Depending on the size of the bakery outlet, each bakery outlet offers 40-
60 different items daily. This creative flair for producing new and innovative products has set
BreadTalk apart from its competitors.
6.1.3 Strategic Locations
BreadTalk has strategically located its bakery outlets at accessible and high human traffic flow
areas. According to the official website, these critical outlets tend to be located near public transport
systems such as bus terminals, the Mass Rapid Transit stations and the Light Rail Transport
stations17. Inevitably, this also translates to significantly higher rental costs.
6.1.4 Strategic Partnerships and Liaisons
14 BreadTalk Gets a ‘Bakeover’, Gabriel Chen, The Straits Times, 29 Jan 200815 Real-Life Client Projects, BreadTalk – The Branded Bread Projecthttp://www-bus.tp.edu.sg/bus_home/bus_showcase/bus_studentprojects/bus_studentprojects_mkt.htm?popup=print&lp=BUS&16 Competitive Strengths, Wide Range of Products http://www.listedcompany.com/ir/BreadTalk/web/show.cgi?content=strengths&17 Competitive Strengths, Strategic Locationhttp://www.listedcompany.com/ir/BreadTalk/web/show.cgi?content=strengths&
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The acquisition of Topwin Investment Holding Pte Ltd brought expertise and know-how of the
workings of the F&B industry in China to BreadTalk. Leveraging on Topwin’s experience,
BreadTalk did not need to depend only on franchise stores but was able to also operate its own
bakeries in Shanghai and Beijing. In addition, with the knowledge from Topwin, BreadTalk was
able to increase its presence in China’s Foodcourt business with the opening of new food courts in
locations such as Chongqing and Shanghai.
6.2 SWOT Analysis of Bakery Segment
To better understand the key issues and trends facing the Bakery segment, a SWOT analysis was
implemented, as exemplified below:
Strengths Market leader and the only public firm
locally in bakery operations Wide product offerings Higher economies of scale Continual and successful innovation Regional ventures Strong Franchise Partnerships
Weaknesses Unpredictable consumer tastes No loyal customer base Business which relies heavily on
volume-based sales Only 2 countries (Singapore & China)
are the revenue drivers Innovative products can be easily
replicated Restaurant division is a franchise
which needs to be renewed No direct control over overseas
operations
Opportunities Growing F&B sectors internationally Emerging markets regionally which
share similar diets
Threats Market saturation in the local bakery
industry Increasing competition in Singapore Existing competitors in new markets
FIG 4: SWOT ANALYSIS OF THE BAKERY SEGMENT
Based on our findings, despite BreadTalk’s attempt in differentiating its bakeries to ensure
continual customer interest, its erratic revenues (Refer to Section 3.2 Profit - Earnings) may stem
from the ‘Weaknesses’ and ‘Threats’ which far outweigh its potential benefits. However, it is
important to differentiate this from BreadTalk’s diversification of the Bakery to overseas markets as
that would be a corporate level decision. Therefore, the focus is on the unpredictable performance
of the Bakery business within Singapore.
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7.0 STRATEGIC ISSUES IDENTIFIED
Our team has identified three key issues that are facing BreadTalk. They have important
implications for its current expansion strategy, impacting its short and long term performance. Also,
these issues involve critical decisions that have to be made at the business and corporate level that
will ultimately influence operations locally and overseas.
In particular, the first two issues relate specifically to the bakery business, while the third focuses on
the corporate level diversification strategy.
Issue 1:
Can BreadTalk ensure consistent growth for its Bakery business within Singapore?
Over the years, the performance of the bakery segment had been erratic and inconsistent. For
example, the revenue increased by more than 100% from 2001 to 2002. This occurred as BreadTalk
was embarking on a rapid expansion of numerous bakery outlets across Singapore. The revenue
growth in 2003 dropped drastically as BreadTalk was greatly affected by SARS that year. However,
they managed a reasonable revenue growth through more outlets in Singapore.
Based on Figure 5, the bakery segment had been lost its edge as the main profit driver for the
Group. For years 2004 and 2005, negative profits were recorded for the first time (Refer to Section
3.2 Profit - Earnings). This is a critical issue to be addressed by BreadTalk if it wants to rely on the
Bakery segment as its key revenue and profit generator. This issue also raises questions of whether
BreadTalk is able to continue its innovation to ensure growth.
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If they are unable to do so, this may be a signal for BreadTalk to re-evaluate its diversification
strategy to focus on other engines of growth.
Issue 2:
With its bakery products easily replicable, how can BreadTalk attempt to differentiate
themselves from their competitors?
BreadTalk continues to face a high intensity of rivalry in the bakery operations, both locally and
internationally. Local bakeries have been quick to mimic its latest innovations as buns can be
considered relatively ‘easy to reverse-engineer’. Internationally, concept stores have also tried to
imitate BreadTalk’s success. This may seriously undermine BreadTalk’s foray into international
markets via franchising its bakery.
The illustrations below exemplify the extent to which the concept of BreadTalk has been emulated
by its rivals.
FIG 6: BREADTALK & ITS COPYCATS
Our team agrees that the issue of imitation poses a significant obstacle of the Bakery’s sustainability
in the long run. This is especially pertinent in markets like China and India, where intellectual
property rights protection is generally weak.
Issue 3:
At the corporate level, is BreadTalk’s expansion strategy short-term in nature?
As previously mentioned (Refer to Section 5.2 Corporate Level Strategy Evaluation), BreadTalk’s
diversification into new product lines have been primarily achieved through purchases of franchises
like Din Tai Fung and J.Co Doughnuts. Even though these constitute low-risk ventures as they do
not require R&D, further developing these product lines may prove challenging as they are
restricted by clauses of the franchise agreements. Moreover, if Din Tai Fung proves to be a
successful and viable business model, they are not allowed to replicate or expand into foreign
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markets unless given permission by the franchisers. Yet, the latter constitutes complex negotiations
and is subject to the franchiser’s discretion. As such, in the long run, BreadTalk may face severe
limitations in its diversification strategy.
8.0 RECOMMENDATIONS
The following recommendations represent broad strategic proposals which BreadTalk can consider
to address the issues highlighted above. It should be noted that each recommendation may address
more than one issue, depending on the context in which it is raised.
8.1 Refine existing Bakeries & Focus on the Restaurant & Food Atria Businesses within
Singapore
Given that the local bakery industry is saturated with competitors that can imitate original
innovations of BreadTalk quickly, it is unlikely that they are able to continue sustaining its growth
in the long run through the expansion of new outlets. However, BreadTalk Bakery should instead
continue to ‘refine’ its current outlets. A case in point would be creating ‘BreadTalk Silver’ to cater
to the high-end discerning crowds that throng Paragon. As there would be a limit to the number of
outlets that BreadTalk Bakery can open, it should focus on developing and expanding its key
drivers of profits, such as Din Tai Fung and Food Republic.
8.2 Leverage on Branding and Strategic Locations to create loyal customer base worldwide
To counteract against the possible high imitation by its foreign competitors like bakeries in China,
we suggest that BreadTalk rely on its international brand presence to charge its products at a
premium. This would support BreadTalk’s key core competency in locating its retail outlets at
strategic, high-traffic areas, which inevitably require high rentals. Yet, these strategic locations in
office towers were played a critical role in allowing it to attract affluent and highly discerning
customers who pay attention to the brands associated with their purchases. This would also enable
BreadTalk to create a loyal customer base that will not be easily eroded away by competitors.
As BreadTalk begins to build further scale in its operations in China, a similar strategy of using
central kitchens and fixing key suppliers can be introduced to further lower costs.
8.4 Remain highly selective in choosing Franchisees
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We propose that BreadTalk continue to be optimistic but cautious in its expansion of the Bakery, as
the success of the franchise model is highly dependent on the quality of the franchisees, their ability
to maintain the BreadTalk brand, product appeal and quality. Franchising works well for businesses
with good track records of profitability, a unique or unusual concept, with broad geographic appeal
and are relatively easy to operate18. Failing to do so would seriously undermine BreadTalk’s
overseas expansion plan and its brand image, impacting its diversification strategy.
Finding credible Chinese partners constitute a significant challenge to ensure BreadTalk’s long-term
existence in China. Additionally, to support its rapid expansion, BreadTalk has to retain and train
loyal employees to uphold product quality.
8.3 Use Franchises as test-bed for Future Self-Development
Even though signing franchises with Din Tai Fung and J.Co Doughnuts may restrict the
BreadTalk’s flexibility in further developing the business lines, they can be considered lower-risk
ventures whereby BreadTalk can terminate these lines without incurring substantial costs
(termination charges notwithstanding). These decisions can be viewed as a medium-term gauge of
whether the franchise is a sustainable business model.
As such, we suggest that BreadTalk continue this strategy in the short-term, bringing in successful
business models that are potentially lucrative to ride on the current fads. A case in point would be
how J.Co Doughnuts was only brought in after BreadTalk had ‘assembled an able team using J.Co’s
well-oiled system of operations’19. If J.Co Doughnuts prove to be a sustainable business model in
the medium term, BreadTalk can then consider developing its own similar outlet in Singapore,
without the restrictions of franchise agreements. This would benefit BreadTalk given that it has
already built up relevant expertise in operations in this area.
However, these additions to the existing business lines must be carefully considered as to whether
they enhance BreadTalk’s existing core competencies and the sustainable level of value creation
that can be extracted from them.
18 Howard, T. (1996). Howard Johnson: Initiator of franchised restaurants. Nation’s Restaurant News, 30(2), pages 85-8619 ‘Much a-dough about nut-thing’, Feb 10 2008, http://forums.hardwarezone.com.sg/showthread.php?t=1858520,
Appendix A: BreadTalk Group Revenue Growth (2001-2007)
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Appendix B: Year-on-Year Group Revenue Growth (2002-2007)
Appendix C: Group Net Profit (2002-2007)
Appendix D: Comparison of Geographic Expansion of BreadTalk (2003 & 2007)
0.00%2.00%4.00%6.00%8.00%
10.00%12.00%14.00%16.00%
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($'000)
3400
1000
-30
1040
3500
7300
-1000
0
1000
2000
3000
4000
5000
6000
7000
8000
2002 2003 2004 2005 2006 2007
($'000)
2003
Singapore
China
7%
93%
Appendix E: Key Competitors in the Bakery Industry Peer Business AnalysisBengawan Solo
This cake and ‘kueh’ (traditional pastry) retail chain targets the premium market segment based on nearly everything from the sophisticated décor of its shops to the pricing of its products.
It is generally perceived as having an authentic and traditional recipe. The quality of Bengawan Solo’s cakes and pastries are generally regarded as high and very consistent despite its long presence in the industry. It could threaten BreadTalk’s premium-priced products although Bengawan Solo generally has lesser varieties while BreadTalk keeps innovating new products.
Cyrstal Jade Kitchen
This bakery is unique because it actually takes up a small section of its other business which is the Crystal Jade Kitchen restaurant.
It uses a complementary strategy of attracting customers who are already dining in the restaurant to savour treats from the bakery as a form of appetizer or dessert. Its products are generally quite similar in variety and price as BreadTalk, based on common Chinese delicacies hence making it a close competitor. Both companies also have restaurants as corporate strategies.
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2007
Singapore
China
Rest of the World
11%
38%51%
Four Leaves
A very close competitor of BreadTalk because it constantly innovates with new products and customers has a large variety to choose from.
It sells popular local delicacies such as floss buns, it also has a comprehensive range of other products such as cakes, Swiss pastries and French bread. Its retail strategy is very similar to BreadTalk, having stores at high volume areas with attractive décor.
Prima Deli It offers products very similar to traditional bakeries in the heartlands. Like BreadTalk, its products are priced at a premium. Most, if not all of its retail activities are concentrated in upscale places
such as shopping centres. Its cakes and pastries could pose both as a close competitor and as a
mainstay substitute to BreadTalk’s products which are primarily innovative concoctions.
Q-Bread Like Four Leaves and BreadTalk, Q-Bread’s strategy is to locate in strategic upscale areas with a high volume of traffic. Retail space is generally small and many varieties of buns and pastries litter its shelves.
Bread is a close competitor with BreadTalk because of similar prices and introduction of similar products which are reincarnations of previous ones.
Sweet Secrets
Sweet Secrets is synonymous with innovation and creative products. That is why it is probably BreadTalk’s greatest threat.
Without resorting to hype-generating media coverage, Sweet Secrets competes from a different perspective. It incorporates technological processes such as its latest invention “Photocakes” where food colourings are used to replicate prints on cake surfaces. It also has licenses with Disney to use images of characters such as Winnie the Pooh in its products.