Food for Thought: Why Auntie Anne's Pretzels Failed in ChinaPublished: March 06, 2013 in Knowledge@Wharton
Growing up in Indiana and Washington, D.C., Taiwanese-born Wen-Szu Lin often felt torn between two cultures. When, as a young entrepreneur, he was presented with the opportunity to buy the Chinese franchise rights to Auntie Anne's, his unique background began to feel like an advantage: Who better than a Chinese-American to sell an American product to Chinese consumers? That advantage didn't carry the English-speaking, American-educated Lin as far as he thought it would. The China Twist: An Entrepreneur's Cautious Tales of Franchising in China is the story of his journey.
At a time when China's global economic importance continues to grow, the book provides interesting insights into the challenges -- the ones you might expect as well as those you don't necessarily see coming -- of launching a business in a dynamic and rapidly evolving consumer landscape.
A year after graduating from Wharton with a degree in entrepreneurial management, Lin was working for a global strategy consulting firm. He enjoyed his job but had recently gotten engaged and was hoping for a position that would afford greater financial stability to his future family. As his academic focus might suggest, he wanted the opportunity to build a business of his own from the ground up. A franchise operation seemed like the perfect place to start, offering the best of both worlds: He would own the territory, but also have the advantage of a proven business model and a built-in support system.
Auntie Anne's offered an enticing opportunity. Explaining the company's background and the reasons for his enthusiasm about his entrepreneurial venture, Lin writes: "'Anne' of Auntie Anne's Pretzels is Anne Beiler. In 1988, she began mixing, twisting and baking pretzels and a variety of snacks at a farmer's market in Downingtown, Pa. One day, Anne and her husband Jonas ran out of raw ingredients to make their typical pretzels, so they used the materials they had left in their kitchen. The change in recipe caused their sales to soar. The pretzels sold so well that they decided to stop selling anything else. The recipe they discovered in 1988 is the same recipe sold today at more than a thousand stores in more than twenty countries....
"In the U.S., the stores became extremely popular in most malls and transportation hubs, so it was proven to make money. Another plus: somehow, the brand had taken on a very nostalgic, comforting feeling. Many consumers could often recall a personal experience with Auntie Anne's. Few brands could claim this kind of emotional bond. More amazing was that Auntie Anne's had never invested in any above-the-line advertising (that is, TV, radio, print media, etc.). Their marketing plan was simple: enthusiastic employees offering samples of piping hot pretzels to anyone walking within a few feet of the stores."
Lin and his partner Joseph Sze believed this approach could potentially make pretzels a huge hit in China. So, with a few investors backing their plans, Lin and Sze acquired franchise rights to introduce Auntie Anne's Pretzels in China and embarked on their venture in 2008. What followed were four harrowing years of red tape, headaches and cultural clashes.
Welcome Home, Stranger
Particularly interesting -- and abundant -- are Lin's anecdotes of trying to navigate a culture he had assumed he would be able to re-assimilate into with ease. He tried, as an adult, to re-discover a culture he had left at the age of seven. But China was not Taiwan and the mainland had changed so much that his background was not much of an advantage.
Lin's Taiwanese ID card proved to be of some use -- "Although I am an U.S. citizen, the fact that I was born in Taiwan allowed me to obtain a Taiwanese ID" -- but this slight edge was canceled out by the red tape that ensnarled almost every interaction, such as his amusingly rendered struggle to converse with a Chinese bank teller: "She had to help me fill out the forms since I could not write well in Chinese. Her face turned sourer each time I asked for help."
Lin's troubles in China, professional and personal, were largely logistical. His business school education served him well, and when he was in his element, he was fine. The problem was that day-to-day issues thrust him into uncharted territory quite often. Food, and the ingredients he needed for his pretzel franchise, are not regulated as strictly in China as in the United States, and became a frequent source of discord. "You son of a bitch!" Lin describes yelling into the phone at one point, apparently at the end of his rope. "What the hell did you sell me?! Did you know that your crappy, poisonous products blinded half my employees?! We have over 20 people right now who cannot see!" The person Lin was speaking with seemed baffled that so much was being made over what was apparently, simply par for the course in China. (The employees, with the aid of China's then-new medical reforms, eventually recovered their sight.)
As Lin takes his readers through the twists and turns of his entrepreneurial experience -- quite appropriately for a pretzel franchise -- he makes the case that for him and his colleagues, the venture often felt like an extended modern version of Chinese water torture. This ancient practice involves dripping water on the victim's body, preferably on the forehead, at irregular intervals with the goal of breaking his resolve. For Lin, a lot of what he endured in China felt like that. He writes, "Drip. Incapacitating our entire staff during training. Drip. Employees threatening physical violence against other employees. Drip. Getting ordered by different government bureaus to make contradictory modifications to the stores. Drip. Getting constantly picked on by the customs bureau. Drip. Employees abusing local labor laws to take advantage of us. Drip. Hiding from our employees in fear of our personal safety. Drip, drip, drip...."
The China Twist offers quite a bit of useful information about the ins and outs of trying to run an American franchise in China. Lin writes about the importance of guanxi (loosely translated as "relationships") in the Chinese business world and describes offering to help Mr. Zeng, a customs official, practice his English in exchange for business help and advice. These are the portions of the book where Lin comes across best -- his prose is natural when he is writing directly about his area of expertise.
We are introduced to Mr. Zeng in the first chapter, when Lin is forced to jump through a ridiculous set of hoops to free some of the necessary pretzel ingredients from quarantine: They have allegedly tested positive for contaminants -- in one case, the issue is supposedly a dairy bacterium in a dry flour mixture that contains no dairy. Our first view of Mr. Zeng -- over Lin's shoulder, as it were -- is of him sitting at his desk, keeping Lin waiting while playing computer games. The desks in the office are littered with candy wrappers and Lin recognizes the brand; he has an acquaintance whose recent shipment of this very candy was seized and "destroyed." After a few weeks, the shipment of pretzel ingredients gets "unstuck" and is cleared for release for reasons that are not entirely clear. Lin is informed that a second sample has been found to be free of contaminants, which is mystifying because Lin had never submitted a second sample. An American embassy official is quoted, ascribing customs hassles as tit for tat in the wake of the melamine-tainted milk disaster that saw many countries -- the U.S. included -- put a temporary hold on some Chinese food and agricultural imports.
All in all, The China Twist is a useful read for anyone considering embarking on a similar business endeavor in China. The afterword to the book, which is essentially a list of business tips, is likely to prove especially useful to aspiring entrepreneurs with an international focus.
When Knowledge@Wharton asked Lin the single biggest lesson from his experience that might help international firms doing business in China, his response was: "For us, the biggest lesson is to come into China with much more funding. Many of the issues that we faced, from trying to localize the concept to dealing with different business and regulatory practices, can all be solved as a function of investment. While we were very conservative in our calculations, we did not anticipate the heavy volume of issues that required funding to overcome. The market is very dynamic, with the customers and regulations changing each year. It is hard to anticipate everything to come; the best protection is to have deep enough pockets to withstand the impact of changes that will inevitably come."
In early 2012, after four years of excruciating effort, Auntie Anne's Chinese operations shut down for good. Lin and his colleagues, after much consideration, decided that the endeavor had been more trouble than it was worth and that they would prefer to spend more time with their families (Lin's first child was born in 2011). But their efforts were not entirely fruitless. The pretzel itself, although until recently there was no Chinese word for it, is made of ingredients similar to those which comprise many Chinese dietary staples. Though the Auntie Anne's brand never quite caught on in China, it is possible that the food itself will. This detail, like The China Twist itself, is an unexpected victory, but a victory nonetheless.