IPH in Brazil Case Study

Audrie Bielskis, Sirah Camara, Mike Butler, Adam Willis

Introduction

International Pizza House (IPH) is one of the largest restaurant chains

in the world and was the leader in the pizza segment. The first IPH in
Brazil was opened in 1989 in a suburb of São Paulo. The Stern Group
was a financially and managerially stable major construction business
looking to expand. In April 1992, the Stern Group bid against 3 other
firms for the International Pizza House franchise for Rio Grande do Sul
and was awarded this franchise in May 1992. The company formed
Maxxi Foods S/A in June of 1992 to operate the IPH franchise in Rio
Grande do Sul. Fernando Silva was responsible for the management of
Maxxi Foods along with Mr. Marcos Stern until Stern left the company
in 1995.
 Sociocultural Factors

 Brazilians are very proud of locally  Pizza is considered an inexpensive food  Most popular pizza toppings were cheese and
produced products (-) item in Brazil (-) calabresa (a thinly sliced pork sausage).

Pepperoni was an acceptable substitute for
Local products in several categories in Rio  Breakfast is usually the lightest and
Grande do Sul have higher market shares
calabresa, but was not sold in stores in Brazil.
quickest meal. Most common breakfast (+)
than highly promoted national and some was coffee with milk, and bread with
international brands (-) butter and jelly, or bread with cheese.  When pizza is consumed in restaurants a drink
 Highly inappropriate in the Brazilian Some people also included some of the is normally served with it, often this is a draft
culture to put down a competing product many Brazilian fruits such as papaya, beer (+)
or service while promoting your own (-) mangoes, pineapples and melons (+)
 An outing to a pizzeria was usually more
 Italian culture is widely represented in  Meat, fish, eggs and cereals were not as economical to than going to a traditional
the southern states of São Paulo, Paraná, common at breakfast as in other cultures restaurant (-)
Santa Catarina, and Rio Grande do Sul. (+)
Inhabitants of these states had long ago  Pizza was served through a popular system
established and appreciated Italian –style  Sandwiches and pizza were used a called rodizio which is equivalent to “all you
pizza (-) substitutes for lunch or dinner usually can eat” (+)
because the person lacked time, hunger,
 Success of pizza sales at a particular company with whom to share a meal, or  None of the pizza chains in Porto Alegre offered
location could be unrelated to advertising money (+) (-) quality packaging (+)
and image building efforts. Primary
success factors were the taste of pizza,  Most Brazilians didn’t perceive fast food
location convenience, price, and/or the as a complete meal, but rather as a
locale’s atmosphere (+) (-) heavy snack(-)
 Economical Factors

 São Paulo is the most economically  Brazil is the largest country in Latin  2 of the largest construction firms active in the
developed state and is also the most America and was the 8th largest state of Rio Grande do Sul, a national firm and a
densely inhabited, with population economy in the world (+) local firm had just declared bankruptcy (+)
equal to 34 million (+)
 The Porto Alegre market consisted of  The franchisee for Rio de Janeiro suddenly and
 Rio Grande do Sul is a state with little 43 pizza restaurants. 3 are chains unexpectedly decided to close all of its stores
over 9 million inhabitants (+) while the rest are small family-owned and to stop all operations due to heavy financial
businesses (-) losses. It also began litigation against IPH (-)
 Porto Alegre is the capital of Rio
Grande do Sul and is a cultural center  The success of the Real Plan caused  Other fast food franchises that had begun
for the southern portion of Brazil with the market to stop tolerating price operations in Brazil, such as KFC and Subway,
a metropolitan area population of increases and consumers to begin to were also not meeting profit expectations (-)
nearly 3.1 million (+) compare prices (-)
 The Pizza Company held local market leadership
 Cost of Brazilian mozzarella is higher  Newly stabilized economy created (-)
than the cost of mozzarella in other franchising boom in Brazil, mainly in
markets (-) food sector (-)  There was rumor that a huge competitor, the
market leader in pizza delivery in the USA, was
 Retail establishments were subject to  Average monthly inflation below one about to enter the market by making the local
very high taxes in Brazil and tax percent meant consumers would no Coca Cola distributor its franchisee (-)
evasion was common (-) longer accept price increases (-)
Political Regulation Factors

 Tax evasion was common especially in small, family-operated

businesses such as restaurants, but such practices are difficult for
a company with automated stock, accounting records, and sales
records.(-)

 Henrique Cardoso created a new currency, the Real, which began

circulation on July 1, 1994 (-)
Ecological and Technological Factors

Ecological
 There are no obvious ecological factors

Technological
 Brazil has a well-developed media infrastructure (+)
 Strengths

• One of the largest chain restaurants • The 7 stores Maxxi Foods had open in • In the beginning, sales increased and the chain’s
in the world and is the leader in the May of 1995 were within the sphere of market share and popularity grew. The target
pizza segment influence (living, working, driving) of market was individuals and families classified as
individuals possessing 70% of Porto social classes A and B (the 2 groups with the
• It’s located in 63 countries and Alegre’s income highest levels of income and education in the
operations in these countries grossed entire population). Many of these people were
close to US $1 billion per year • Fernando and Marcos Stern traveled to already familiar with IPH in other markets.
the USA for 2 months of training at
• Established franchises in places three IPH centers for new franchisees • Introduced many new promotions in 1995.
where they knew there was a lot of and operators. This training included International Collection which introduced several
foot traffic and their product would modules on topics such as store new pizzas and succeeded in gaining attention
be received well. planning, infrastructure development, and increasing sales. Another promotion
increased lunch sales by 35% and another was
• IPH had a good reputation, and a product preparation, and business
successful in reaching its objective to increase
successful business. operations and administration. They
sales on slow days.
also attended lectures on topics such as
• Had their novelty thick crusted pan human resources, implementation of • A thin crust pizza similar to the Italian style pizza
pizza that they were famous for. This operational and financial controls, etc. found in pizzerias preferred by Brazilians was
initially represented 95% of sales launched in 1998 and was sold at 10% less than
• IPH realized that they were setting a other IPH pizzas. This pizza initially accounted for
new standard for packaging and about 35% of sales in stores that launched it and
charged more because of this fact sales of this type of pizza stabilized at about 25%
of pizza sales
 Weaknesses

Their way of advertising in Brazil. It put They were subject to high taxes and High operating costs often made profit
down the traditional Brazilian food and because they are a big corporation they margins lower than those of local
that was offensive to the Brazilians. were not able to escape them in any way. competitors
Initial launch strategy was an indirect
knock on local ethnic cuisine. Initial cost to purchase franchise was high. American franchises received cheese
Stern Group’s initial fees were US $10,000 already shredded, but Brazilian franchises
Their products were more expensive than for each of the 20 stores it was authorized received the product in blocks and had to
other product sold in the local pizzerias. to open in the Rio Grande do Sul territory pay employees to shred cheese
Their prices were between 20-30% higher and a fee of US $25,000 for each store that
than their competition. actually opened. The agreement also Other IPH standardized items, such as
required Stern Group to pay 6% of gross packaging, were also more expensive for
The ingredients they purchased were sales, less direct tax Brazilian franchisee than for franchisees in
more expensive than the ones their other markets
competitors purchased. In 1995 Maxxi Foods only had 7 stores in
operation which was well below the 20 Some of the pizza preparation processes,
Because pizza was considered as an stores expected to be open by this time which were automated in the US, were
inexpensive item in Brazil, their high performed manually in Brazil
prices didn’t help their business. As novelty of pan pizza wore off,
customers returned to their regular pizza IPH realized that they were setting a new
Their advertising was not consistent. restaurants standard for packaging and charged more
because of this fact
Mr. Marcos Stern left the company IPH’s management and cost control
systems also revealed operational problems
Weaknesses Continued

• Discounted prices were initially successful, but soon the sales price became the
pricing reference point in the minds of many consumers
• The franchisee received a lot less assistance from IPH than was forthcoming
• Some executives in the firm openly raised questions about future investments in Maxxi
Foods
• Stern Group was considering going back to only construction and selling the franchise
• There were well advanced negotiations for a franchise holder for IPH in Portugal to
buy the stores and operations of Maxxi Foods, but this fell through at the last minute
• The franchise agreement was restricting for the franchisee and did not allow for the
most appropriate products for a market to be used
• Another IPH franchise suddenly and unexpectedly closed because it was not doing well
• Porto Alegre franchise was not large enough to bargain effectively with suppliers so
profit margins began to fall.
Case Problem Area

The Rio Grande do Sul franchise of International Pizza House needs

to determine how to restore its image and profitability. Marketing

strategies should be improved so as not to offend Brazilians.

Alternative 1
Find a way to overcome the negative image so that the franchise can be sold.
Make a more consistent marketing strategy that doesn’t offend the locals. Once
sold, go back to construction.
Positives: Negatives:
• Would improve the image of this • It might not work and they’ll
franchise territory and possibly the
surrounding ones
just lose more money. It’s
risky.
• There is still possibility of a small
profit for the Stern Group • Marketing is expensive
• A more subtle approach to • Could be missing out on future
marketing with less comparative financial gain if there is a
advertising would make the better way to turn the
franchise more attractive to
Brazilians
franchise around
 Alternative 2
Incorporate more of the culture into the franchise. Begin a breakfast line by incorporating a
French bread pizza/cheesebread. Get French bread from a local bakery through some kind
of agreement. Expand menu to add pastas or some other food item that Brazilians enjoy.
Also, focus on selling the thin crust Italian style pizza, with limited pan pizza selections.

Positives: Negatives:
• Increases customer base • Might not work, could be too
• Increases profits big of a change. Risky.
• Increases their competitive edge, • Franchise agreement might not
most other pizzerias probably don’t
have breakfast allow this
• Brazilians would appreciate the • Competitors might copy this
company more for trying to and be able to do it cheaper
incorporate their culture rather than
trying to force US culture on them
 Alternative 3

Begin serving pizza rodizio style in addition to regular menu. Focus on selling the thin
crust Italian style pizza, with limited pan pizza selections.

Positives: Negatives:
• Caters more to Brazilian • Might not increase anything
customers because there is so much
• Increases customer base competition already doing this
• Increases profitability/profit
margins. Most all you can eats
charge you for more than most
people can eat.
• Increases competitive edge
Recommendation and Implementation

• We would recommend the third alternative. It has the most

potential and is the easiest to implement. There are more
positives and fewer negatives than the other alternatives.
• The target market is still Brazilians in social groups A and B, but is
now expanding to include other social classes as well.
• The positioning of the franchise is good
• The price of rodizio should be reasonable, but still high enough to
make a profit.
• Promotion should be positive and should not involve putting down
competitors.