ruthfinaln

Ruth Chris: The High Steaks of International Expansion

1. Give a small introduction and present a situational analysis and overview of

the case.

Introduction

Ruth Fertel, the founder of Ruth Chris, was born in New Orleans in 1927. She took her

graduation degree from Louisiana State University. Then Fertel taught for two semesters in

McNeese State University. Ruth Fertel also had the trainer’s license and was the first female

horse trainer. In 1965, Ruth Fertel mortgaged her home for US $ 22,000 to purchase Chris Steak

House, which was a 60 seat restaurant. But in September 1965, when the city of New Orleans

was devastated by the hurricane, Ruth cooked whatever was present in her restaurant and

brought to her brother, to help in the relief campaign.

In 1976, the thriving restaurant was destroyed by the kitchen fire. After that Fertel brought a

property on the Broad Street and opened the restaurant with the name of “Ruth Chris Steak

House”. In 1976, a first ever franchise of Ruth Chris was opened by Tom Morgan on Airline

Highway in Baton Rouge. After that Ruth continued to awarding more and more franchisees

and the business continued to expand.

Dan Hannah was the vice president for the business development since 2004. Hannah was also

concerned with the strategy development by focusing the growth of franchise and company

operated restaurants.

Overview

Ruth Chris Steak House became the largest fine dining steak house in the US. Their commitment

was to provide customer satisfaction which became one of their success factors. Their steaks

were also USDA Prime graded. And their menu contained steak and sea food combinations and

vegetable platter also. The company occasionally introduced new items as specials that allowed

the restaurant to offer its guests additional choices.

Initial Public Offering

In 2005, Ruth Chris went public by offering its initial public offering and raised more than US

$154 million in equity capital. The sales grew from 82 locations in the United States and 10

international locations including Canada, Hong Kong, Mexico, and Taiwan. As of December

2005, 41 of the restaurants were company owned and 51 were franchisee owned.

Franchise agreement

The franchisee agreement that Ruth Chris used to give was for 10 years, with three 10 year

renewal options. The agreement also provided territorial protection and there were terminal

clauses included as well which could be used in the event of non performance.

Ansoff’s Product/Market Matrix

As a part of the international market selection process, Hannah considered for models,

Restaurant Brands

Existing New

Existing Penetration

(more restaurants)

Same Market

Same Product

Product Development

(new brands)

Same Market

New Product

Market

New Market Development

(new markets)

New Market

Same Product

Diversification

(new brands for new market)

New Product

New Market

The product development model was never seriously considered by Ruth Chris, because they

didn’t find value in diversifying the new kind of restaurants.

The diversification model was also not seriously considered by Ruth because they knew that

their restaurants work only without the risk of brand dilution or brand confusion, which might

occur in case of pursuing the diversification model.

The penetration model was used by the Ruth Chris in the small way, but there was a limiting

factor in that model as well, that the establishments would not become as ubiquitous as the

quick service restaurants.

The market development model was the most common model used by the Ruth Chris for

generating revenue. Franchisees in Canada, Hong Kong, Mexico and Taiwan were successful by

using this model.

Situational Analysis

Currently the biggest challenge for Hannah was to decide which location to choose for the

international expansion to proceed further. Ruth Chris used to receive inquires by the would be

franchisees from all over the world, but because of the strict criteria, many potential countries

got excluded from the list. The criteria included – liquid net worth of at least US $ 1 million,

experience within the hospitality industry, ability to develop multiple locations, cost of a

franchise US $ 100,000 per restaurant franchise fee, five % of gross sales royalty fee and two %

of gross sales fee as a contribution to the national advertising campaign. Because of all these

strict criteria, many potential countries were eliminated from the list of would be franchisees.

Now that Ruth Chris wanted to grow its international business, the most important question

ahead of it was to decide what countries would be best suited for the fine dining that made

Ruth Chris famous. The Ruth Chris was deciding to select the market, for that they created a

certain criteria. They defined certain success factors:

Beef Eaters – As Ruth Chris was the steak House, and most of its items were beef and

meat related, they conducted an analysis in 17 countries to find out the annual beef

consumption.

Legal to import US beef – As the Ruth Chris used only USDA Prime beef, thus they had to

analyze whether the target country is able to import the USDA Prime beef or not.

Population/High Urbanization – The target market also need to be in highly urbanized

and densely populated areas.

High disposable income – The target market should have the people who have high

disposable income.

Do people go out to eat? The target market should have the customers who would be

willing to go out to eat.

Affinity for US brands – As the name Ruth Chris was uniquely American so there could

be certain countries which are anti US. So the target market should be in such a country

which is not anti US.

What should be done next?

The most important issues were to decide about the market entry. Ruth Chris was also

considering whether to continue franchising, or they might look for other opportunities in joint

venture or company owned stores. They also wanted to find the opportunity to find a global

partner/brand.

2. What did Hannah do to make the first cut in the list of potential countries?

How did he get from 200 to less the 35 potential markets? Which variables

seamed more important in his decision making? Which unused variables might

have been useful?

When deciding about where to go next in international expansion, Hannah made a certain strict

criteria which the potential country should meet, if they want to have a franchise agreement.

That criterion was quite strict, and it caused many potential countries to be dropped out from

the list, and the list got from 200 to less than 35 potential markets. The following variables were

considered in the criteria:

Liquid net worth of at least 1 million $ - A net worth of this huge amount was

necessary for the potential country to have, in order to get the franchise agreement.

This excluded many potential countries of the third world that could not have this

amount of capital to start up.

Experience within the hospitality industry – Hospitality industry is related to the

restaurants, cafes and hotels etc. So the potential country must have some experience

in this industry. Now this variable excluded those countries who do not have experience

in the hospitality industry but would be willing to start the franchising and may possess

the other required capabilities.

Ability and Desire to make multiple locations – This was another variable which

eliminated many of the potential countries, because if a country may want to restrict

the business to specified location, it cannot get the franchise agreement from Ruth

Chris, because they want that the country is able to develop and expand the franchises

to multiple locations.

Cost of the franchise – The cost of the franchise was 100,000 $ per restaurant

franchise fee. This cost cannot be afforded by certain third world countries, which

cannot pay this amount for the fee. So, many potential third world countries got

excluded from the list.

Royalty fee – Royalty fee was five percent of the gross sales which has to be paid

monthly, is needed to be paid to Ruth Chris. This was also one of the strict criteria that

excluded many potential countries.

Contribution for the national advertising campaign – It was also compulsory

for the host country to contribute two percent of the gross sales fee for the national

advertising campaign. This advertising fee was also paid monthly. So, the countries that

would not be willing to contribute this amount for the advertising campaign were

eliminated from the list of prospects.

Variables that are important in the decision making

All the variables that Hannah considered were although important, but most important

variables in the criteria were

Initial Capital, because the host country must possess the required capital in order to

make their franchising successful. They must have access to adequate capital to develop

the entire development schedule.

Experience, this is also important variable for Ruth Chris to be considered. The potential

country must have proven hospitality experience (food service, including casual dining

or hotel preferred)

Ability and Desire to make multiple locations, this is also important variable that the

host country must have the ability to make multiple restaurants; they should have made

a development plan for the multiple locations.

Unused Variables for Ruth Chris that might have been useful

Although Hannah considered many important variables that were useful while making a

potential list for the countries to whom the franchise agreement could be given, but there are

other unused variables which could also prove out to be useful in determining the criteria,

these variables are as follows:

The franchisee should comply with the standards – The host country which is

going to take the franchise agreement, must comply with the standards of the operation

which Ruth Chris will define.

Territory – Ruth Chris might also define the specific territories for the host countries,

where they can operate. Because the success of restaurant also depends on such factors

like urbanization, high disposable income etc. This variable can help Ruth Chris increase

its probability of success by defining to work in the urban areas.

Operations Manual – The franchisee must be legally obliged to follow the rules and

regulations of the operations of the business, because if they don’t follow, it could bring

a bad image to the brand of Ruth Chris.

Competency in the Technical Area – Ruth Chris could also verify if the potential

countries are competent enough in the technical area. If they are not, they could also

provide training in the start.

Flexibility – The host company which is going to take the franchise agreement should

be flexible enough to face any change. In case the parent company is sold, they could

have the ability to look for alternatives.

http://franchises.about.com/od/franchiselegalissues/a/franchiseagree.htm

http://www.ruthschris.com/Franchising

3. What would be your choice for top five opportunities? And for the top 10

opportunities? What variables/equation did you use to reach this conclusion and

why?

Top Five Opportunities for Ruth Chris

Opportunity is anything that a company can do to capitalize on some variables that exist in the

environment. While planning to go global, there are certain opportunities for Ruth Chris to

consider, the top five opportunities in their order of priority are as follows:

1. High Disposable Income

A high-income economy is defined by the World Bank as a country with a Gross National

Income per capita of $12,196. This includes countries, for example Australia, Bahrain,

Switzerland, Germany, Kuwait, Saudi Arabia, UAE, Qatar and many more. Ruth Chris has the

opportunity to open franchises in these high income countries where the disposable income of

people is high. As the average cost of the meal is over $70 at Ruth Chris at United States, the

high disposable income of the people in other countries can create an appropriate pool of

potential customers.

2. High Urbanization Rate

The variable is high urbanization rate, then the opportunity for Ruth Chris is to open franchises

in Singapore, Kuwait, Belgium because they have high urbanization rate of 100%, 96% and 97%

respectively. As the urban areas of the country are the major target market for fine dining

restaurants, it will be a great opportunity for Ruth Chris to open up franchises in countries

having high urbanization rate. Singapore is the best opportunity in this case because it has the

urbanization rate of 100%.

3. Population

The countries having the high population can provide a target market because those countries

will have certain pools of target customers at which Ruth Chris can focus. The more the

population of a country, the more will be the chance for the target customers in such countries.

For example, China has the population of 1,313,973,000; it can provide pool of target

customers where franchises would be opened. Similarly, they could open franchises in Brazil

having the population of 188,078,000, Japan having the population of 127,463,000 and Russia

having the population of 142,893,000.

4. Meat and Beef Consumption

Although beef consumption is not much important variable, but even then it can be considered.

Because the countries having the higher beef consumption per capita can provide greater

opportunities for the fine dining restaurants like Ruth Chris. Apart from US, Ruth Chris can focus

on other countries having a high beef consumption per capita, for example Bahamas having a

per capita beef consumption of 123.6 kg, and France, Hungary, Ireland and Spain having beef

consumption of 101.1, 100.7, 106.3 and 118.6 respectively. Ruth Chris has the opportunity to

open franchises in such countries.

5. Per Capita GDP

Per capita GDP can sometime give the distorted image of the economy, but even then it is a

variable to measure the growth rate of the country. If the GDP of the country is high, there will

be greater chance for the success of the Ruth Chris Steak House. For example, the per capita

GDP measured as PPP in US$ for UAE is $43,000 and for Ireland it is $41,000. So, Ruth Chris can

open franchises in Ireland ad UAE because they have higher per capita GDP, which shows that

people have high income and are living well so the Ruth Chris can become a success there.

Other Five Opportunities

Apart from the opportunities mentioned in the case, there are other opportunities as well,

which Ruth Chris can look forward to, in other countries. These opportunities are as follows:

1. Development and Growth rates

As GDP can sometime give the distorted image of the country’s progress, so apart from

GDP, the development rate and growth patterns can be observed in the other countries.

Ruth Chris can find greater opportunities in those countries where there is high living

standard and the growth rate is high. Because the average price of the meal of Ruth Chris is

about $18 to $38. So the countries where there is high living standard and the economies

which are highly developed, can be a opportunity for the Ruth Chris to look forward to.

2. Food consumption patterns

As the food consumption pattern determine the intake of different food components by the

consumers, Hannah can find out the countries where there is high consumption of meat

and beef. For example according to the data of 2002, in North America the meat

consumption per capita in kilograms is 123.2, similarly the meat consumption per capita in

high income countries is 93.5 kilograms. So Hannah can open franchises in such locations

where the consumption pattern is more inclined towards meat and beef.

3. Convenience need in customers

As customers prefer that the products and services become available to them with

minimum effort and with great convenience, so Hannah can decide about the locations of

the franchises by keeping this convenience need in mind. Because if the franchise will be

closer to the target customers, the sales will increase.

4. Demand

Hannah can look forward to those countries where the demand for fine dining restaurants is

not being met currently by the restaurants. By establishing franchises in such countries

where there is demand for steak house like Ruth Chris, it can be a success because the

demand of the target customers will be met.

5. Urbanization and High Income

There is an opportunity for Hannah to consider those high income countries, where

urbanization is also high. As the urban areas of the country contain the major target market

for such restaurants, so by considering the urban areas of the high income countries,

Hannah can exploit the opportunity.

6.

4) Hannah was focused on franchising mode of entry. Do the critical variables

change if a different mode of entry was employed? Can you give at least 2

variables for each entry mode that you think would be different as compared to

franchising?

Although franchising was a good option that Hannah was looking forward to, but if they employ

some different mode of entry for international expansion, the critical variables change which

they have to look in the potential countries then.

Joint Venture

If they try to take joint venture as the entry mode then the critical variables that are different

from the franchising are as follows:

1. Looking for the partner

If they want to come up with the joint venture, then they have to find the global partner

with which they would partner. Moreover, they would have to evaluate the potential

countries that could become their global partner in opening up a joint venture for their

restaurant.

2. Capital Contribution and Profit/Loss

The joint venture agreement that would be made with other countries will have to include

the contribution of cash, property and capital that they will give towards the venture.

Moreover, the percentage of profit and loss will be allocated to the parent company and

the host company also. And this allocation will be written in the agreement.

3. Dissolution

The terms and conditions will be defined in the joint venture agreement that needs to be

fulfilled. Moreover, the events that will lead to the dissolution of the venture will have to be

included in the agreement.

Company Owned Stores

Ruth Chris has already been opening up company owned stores. When it started in 1965, there

was only one store of Ruth Chris Steak House and that was company owned. By the time, the

number of company owned stores continued to increase and in 2005, there were up to 42

company owned stores of Ruth Chris. The variables that are different when company owned

stores are taken as an entry strategy for international expansion are as follows:

1. Greater Knowledge about the potential country

As there is a greater investment required for company owned stores as compared to the

franchising, so a greater knowledge about the potential country is also needed. Ruth Chris

will also need to know about the culture, political and economic environment of the host

country because there could be certain challenges that they have to face when opening up

the company owned stores.

2. Greater investment

As the parent company will be handling the whole restaurant and its operations, there will

be greater investment that has to be made by Hannah. Moreover, the costs and risks will

increase also because the parent company will be the owner of the whole restaurants.

Acquisition

Ruth Chris can also acquire restaurants to expand its business. It will enable the company to

concentrate its resources in best geographical areas by acquiring the restaurants. It will lead to

increased profitability and expansion of the international business. For acquisition, the

following variables will become important for Ruth Chris to consider:

1. Market Value of the Target Company

While acquiring the company, Ruth Chris will have to see the market value of the target

company. They will analyze the financial performance of the target company that how it has

been performing in the past. Not only the past market value, but the future market value is also

analyzed that whether it will be worthy to acquire the company or not.

2. Transfer of the Assets and the Business Contracts

It will be decided in the acquisition agreement that the assets of the target company will be

transferred to the parent company. All the business contracts will be transferred to the parent

company as well, and these variables will be written in the acquisition agreement.

5) What are some of the external and internal challenges Hannah will face in

moving from the list to actually opening restaurants?

There are always certain challenges associated with the international business. Although Ruth

Chris has been doing a successful business so far, but there are certain challenges they could

face internally and externally when opening up the restaurants internationally. These

challenges are as follows:

Internal Challenges:

The internal challenges that Hannah will face in the international expansion are as follows:

1. Limited Menu

The menu of Ruth Chris Steak House was limited to steaks, sea food and vegetable platters. The

challenge was to attract the target market in the potential countries with this limited menu.

Even Mc Donald changes its menu to cater the target market in different countries, Ruth Chris

could also try expanding its menu according to the local tastes of the host countries.

2. Sustaining the customer satisfaction

Their commitment was the customer satisfaction, and while going global it was a challenge for

them to maintain and sustain the customer satisfaction to remain successful in the

international markets.

3. High start up costs

The startup cost were very high, it was 100,000$ per restaurant. And because of this there was

a limited market due to this high cost. The challenge was to either decrease the startup cost or

to increase the market with the same high initial costs.

4. Consistent Cooking method

The cooking method that was employed was that the steaks were cut into smaller portions at

each restaurant, and cooked by a special process using a broiler heated to about 1,800 degrees

Fahrenheit. This cooking method was consistent throughout the chain where ever the

restaurants were. The challenge for Hannah is to maintain that consistency in the cooking

method in order to keep their brand image.

5. Standards set b y Ruth Chris are followed or not

The franchisees were to be checked whether they were following the standards or not. For

example, the Ruth Chris currently used only USDA Prime beef, and for the potential franchisees,

it was a necessary condition to get this beef imported. There need to be a check on the host

countries that whether they are following the standards or not.

6. Brand Image

The challenge is now to maintain that brand image which Ruth Chris created in her life. If any

customer gets a bad experience in any franchise around the world, he/she will perceive the

whole brand as bad. So, it’s a challenge for Hannah to maintain and foster the brand image

which has been created in years.

7. Revenue generation for the new franchisees

As Ruth Chris has gone global, they had to meet the Wall Street’s expectations for revenue

growth. The current stores were seeing incremental consistent revenue growth, but the new

restaurants were critical and there should be revenue generation by them also.

External Challenges:

Apart from these internal challenges, following are the external challenges that Hannah will

face in the international expansion:

1. Affinity towards the US brands

As the name Ruth Chris was uniquely American, so was the Ruth Fertel story. The countries that

were anti United States could also be eliminated from the list of potential franchisees. But if

Hannah decides to open franchise in such country, it was a challenge to decrease that affinity

for the US brand in order to survive in such a country.

2. Political instability

If Hannah decides to establish franchises in countries where there is political instability, for

example in the third world countries, then it is a challenge to prosper the brand in such a

country because the political instabilities can affect the business operations of the

organizations.

3. Cultural barriers

There could be certain cultural barriers to operate at the international level. And these cultural

barriers can be reduced by knowing more and more about the culture of the host country. For

example, if Hannah decides to open franchise in Islamic country, then there could be an issue

regarding the halal and haram as it relates to the importation of beef from US, but the host

country might not be willing to import from US. Hannah has to tackle this challenge also.

4. Location

The biggest challenge so far that Hannah is facing is related to the selection of the optimal

location. As they were looking for new markets, they had to decide which markets to enter first.

As, location can play a significant role in the success of a franchise, it was a critical challenge for

Hannah to decide about the best locations around the world.

5. Trade barriers

As, it was necessary for the franchisees to import the beef from US which needs to be USDA

Prime labeled, it could be a challenge for the countries where there would be trade barriers to

import beef from US. Hannah need to find out first that whether the import of beef is allowed

in the potential countries or not.

6. Competition

Ruth Chris has to face competition from other brands in US and in other countries. If other

brands of steak house will offer their products at lower prices with the same quality, the

customers will switch their brand from Ruth Chris to other brands.

6) Propose Hannah an implementation plan for the International expansion

strategy of its restaurants?

Franchising represents an attractive means for many manufacturers, retailers and service

providers to expand their businesses. Franchise is one of the forms to expand the business.

Hannah first needs to consider the advantages and disadvantages of franchising that wherever

they are going to open its franchise would it be successful or not. These may include sources of

capital, program development, maintenance and management costs, franchisee relations and

franchise legal requirements etc. Hannah should also look over the critical factors to the

development of franchise program that includes geographic strategy, ability to protect its

trademark and trade name, training requirements to transfer operational knowledge, sources

of franchisor revenue, financial projections and analysis, availability of capital and Industry

segment.

Hannah should identify the goals of the company, and includes a balance sheet and cash flow

analysis. As opening a franchise-based business requires a significant financial investment to

buy the franchise and establishing the business so Hannah should consider whether the host

company is able to invest. The host company should make a detailed business plan as soon as

they decide to get into the franchise business and before they sign any franchise agreement.

They should work closely with an accountant for the financial portion of the plan. This franchise

business plan will provide some guidance in running the business.

Hannah should consider the following points for implementation of its international expansion:

1) Capital Plan: This includes the sources of funds, uses of funds and repayments of funds

which states that how much money will they need, how will they use the money such as

building purchase, build-out, equipment, franchise fees, working capital reserves, etc.

2) Company Information: This includes History of the Business of the franchisee, Industry

Overview, Objectives, Implementation Timeline and Future Opportunities. Moreover the

franchisee will provide a proof of their previous experience in the hospitality industry.

The franchisee will also provide a description of their company including information

about its origins, the number of franchise units they want to open, total projected sales

by the franchise units. What will be the size, growth, and overall trends of the industry.

What will be the major tasks and milestones to be reached as they will move forward.

For each, they will provide an estimate of how long it will take to accomplish.

3) The Franchisor-Franchisee Relationship: This includes support provided by the

franchisor and responsibilities of the franchisee. Hannah will provide guidance to the

franchisees on these particular areas: market-proven products and operating format,

volume purchase discounts, marketing support, management counseling, and training

etc. And also discuss the payment and performance requirements that they will be

expected to meet, including franchise fees, royalties, advertising fees and minimum

sales goals.

4) Products and Services: Hannah will briefly provide a basic overview of the products and

services the host company will provide. For each major product/service category, the

nature of the products/services in the category, pricing and pricing policies, direct costs

involved will be described.

5) Management, Staffing, Strategic Partners, and Professional Support: Profile will be

provided for each owner who will participate in operations as well as each major

manager. Discussion will be made on major job responsibilities as well as specific skills

and experiences of each manager that qualifies them to handle the job at hand. A list

will be made of the professionals that will be used and description of how they will use

them.

6) Hours and Days of Operation, Location & Facilities, Licensing, Permitting & Other

Regulatory Issues and Other Operational Issues. It will then be decided that how many

hours and days of operation be configured to meet the needs of the customers. The

location of the business will be decided, the location that will be selected must

contribute to the success of the business operation. It will be near the target customers.

Facilities will describe the actual location, including total square footage, allocation of

space, parking (if appropriate). Office & computer equipment, as well as other

equipment and vehicles required will be finalized. If the location will be on rent, leasing

will be described. The charges of the facilities will be evaluated as the business grows.

The regulatory requirements for doing business, including any certifications, licenses,

permits, registrations will be made.

7) Marketing Targets, Distribution, Competitive Environment and Positioning and

Marketing Tactics. The target customers will be evaluated and identified. The

distribution process of the products/services will be finalized as to how the final product

will get to the customers. The competitive analysis will be done about other fine dining

restaurant in the same location. Strengths and weaknesses of the competitors will also

be analyzed. Promotion techniques will be made which might include advertising,

internet promotions, direct mail, trade shows, etc.

8) Financial Summary After a certain time period, financial statements will be made that

will show whether the franchisee is meeting the goals or not. The financial statement

includes balance sheet, income statement, cash flow statement and break-even analysis

etc.