The dream of any entrepreneur is rapid growth and international expansion. Many business owners fall by the wayside but Arnold Wu and his brother Edwin have managed over the course of twelve years to turn the Peruvian brand of Pardo’s Chicken into a chain of restaurants with a presence in Peru, Chile and the United States. Their recipe seems simple: Combine the franchising model, which they helped to pioneer in Peru, together with the growing popularity of Peruvian cuisine, a fusion of the flavors of the country’s European, Asian and Inca populations.
In an interview with Universia Knowledge at Wharton, Wu discussed the secrets of succeeding in the Peruvian system of franchising, and explains why the economic crisis has wound up benefiting his business.
An edited version of the transcript appears below
Universia Knowledge at Wharton: From the outset, you’ve been committed to franchising. Why is that the case?
ArnoldWu: In 1998 I and my brother decided to buy the Peruvian brand called Pardo’s Chicken with the idea of making the only chain of grilled chicken locations in Lima into a chain of restaurants. Our goal was to grow rapidly so we set up a system involving both franchises and locally owned restaurants. In 1998, our goal was to become the leaders of the Lima grilled chicken sector within a period of five years, and we achieved that goal in 2002. Over those five years, we opened 10 new locations. This encouraged us to venture into Chile in 2003, and later on into the United States in 2010, but always by using the franchise format. Currently, we have a total of 25 restaurants under the brand of Pardo’s Chicken, of which 12 are franchises.
Universia Knowledge at Wharton: Is there a boom in this sort of business in Peru?
Wu: I wouldn’t say that there is a boom in this sort of food, but I would say that there is a clear trend toward franchising companies based in foreign countries. The franchise system in Peru is relatively new and is rapidly entering such industries as restaurants and television shows. I can say that we have been the first [franchisors] in Peru and the most successful so far. Our example shows that Peruvian franchises do indeed work out. I think the format of the franchise, which was implemented in the United States many years ago, is just beginning to be exploited by entrepreneurs in Peru.
Universia Knowledge at Wharton: What benefits does the franchising model offer to entrepreneurs and what risks do they face?
Wu: In my opinion, the risks are small; they are almost non-existent. What I would ask any entrepreneur who wants to franchise his brand is whether he has the characteristics to become a franchisor. In my view, the franchisor must be able to listen, because he is sharing his brand with other operators and franchisees. In addition, the franchisor must be able to guide his operators towards a common goal and have a great deal of long-term vision. On the other hand, if the franchisor does not worry about giving good instructions to his franchisees, and he is only waiting to collect his royalties, the business will go downhill.
One risk that may exist in the franchising model is if the franchisor and the franchisee can’t manage to reach an agreement at some point. It sometimes happens that the franchisees, since they have invested in your brand, feel that they have the right to make demands or they want to change certain aspects of the business. It’s natural for this to occur, but if the franchisee is capable of respecting the parameters of the brand and there is a climate of mutual respect and dialogue, then the benefits are enormous. There is a chance that growth will occur at much faster rate than if you took control of the business with only your own means. An emblematic example of this approach is McDonald’s, which operates 33,000 locations around the world under the franchising model.
Universia Knowledge at Wharton: When failures occur in this sort of initiative, what are they due to?
Wu: It is [difficult] for someone to fail if the franchisor views the business from a long-term perspective, the franchisee believes that he is a partner, and that if things … go well for him, they will also go well for the franchisor. Everything depends on this concept, which is nothing more than mutual cooperation. If you start with this idea when you set up the franchise, things should not go wrong for you. Those of us who own brands sometimes go wrong, but if our successes are much more numerous than our mistakes, it is a sign that we are on the right path. There will always be differences in a business relationship, but that does not mean that the relationship will end. Ultimately, what matters is the sound understanding between both parties.
Universia Knowledge at Wharton: Who should avoid becoming a franchisee?
Wu: Those entrepreneurs who are unable to follow the parameters established by a brand. This does not mean that they cannot make recommendations and proposals that benefit the final product or service, but that the franchise arrangement works out well because the owner, the brand franchisor, ultimately has the final word. Those natural entrepreneurs who want to innovate and create are going to have … problems sticking to the pattern. That’s why the franchisee must be able to follow the model of the brand. If the franchisee is buying a brand, it is because of the simple fact that he highly values what already exists, and his mission is to implement that approach in the best possible manner, day by day.
Universia Knowledge at Wharton: What was the indicator that prompted you to pursue this same path in Chile and the U.S.?
Wu: The truth is that there were several signs, but the main one was in 2002, when we saw that Peruvian cuisine was becoming more and more popular popular in Chile, which made our concept very exportable. Chile was perhaps the first country that viewed Peruvian cuisine as something exceptional. In addition, Chile is one of Peru's main trading partners, and it was the most economically profitable country in the region. In addition, our process of internationalization was driven by Peru’s healthy economic climate, starting from 2002. That’s when we saw an opportunity to develop our successful brand in Chile through franchising.
I say "successful brand" because, in truth, Pardo’s Chicken is in quite a high-end consumer segment, which is grilled chicken. Many people think that ceviche is the food that Peruvians consume the most, but that is not the case. Ceviche is an expensive product, and Peruvians are more inclined toward grilled chicken because of its price, portion size and flavor. This was revealed in a market research project conducted by Arellano Marketing, a Peruvian consulting firm. The study showed that the most highly consumed items in Peru’s restaurants were grilled chicken, followed by Chinese food [Chinese or Cantonese food] and, in third place, fish and seafood. This being the situation in Peru, we thought that we could export the product to Chile, along with the Peruvian tastes and flavors that the entire world now knows about.
Universia Knowledge at Wharton: What drove you to do the same thing in the United States?
Wu: We learned a lot in Chile, and took away a great deal of that. In some respects, it was a launching path that catapulted us to take similar — or even greater — challenges, such as in the United States.
Universia Knowledge at Wharton: You mention the learning process. Did you have to face big barriers in Chile?
Wu: Yes, but the barriers didn’t involve anything political or economic, but cultural aspects; that is to say, day-to-day understanding, communications and how to plan things. Those were the main obstacles, and they could be solved. But they delayed our efforts to rapidly overcome the challenges to our main business goals in Chile. In Peru, the style of life and personal communication are quite different from in Chile. For example, service in Chile is different, and we needed to adapt ourselves to that. They don’t eat lunch [in Chile] at 2 p.m., but at 3 p.m. or 4 p.m. They don’t eat dinner at 7 p.m., but at 9 p.m., and you have to be very quick with your service. Ultimately, we got to know the Chilean market well; we refined our selection of flavors to reflect what local customers liked the most, and we managed to attract Chilean business people who were interested in following our brand.
In the United States, specifically Miami, we saw an opportunity to replicate the same learning process as in Chile; trying to get to know the [U.S.] market well. Without doubt, the market [in the U.S.] is a lot more varied than the market in Chile because many different cultures come together. In addition, the economic crisis that erupted in the U.S. in 2008 helped us in some respects.
Universia Knowledge at Wharton: How did the economic crisis help?
Wu: During a recession, everyone makes an effort to monitor costs. Without doubt, the decline in the average consumer’s income forces people to look for more economical alternatives when they go out to eat. With just five or six dollars [to spend], a customer can have quite a satisfactory experience in one of our restaurants. In addition, the flavor of our grilled chicken is unmatched because of the basting sauce that we use, which includes 14 different ingredients and high-quality spices. On the other hand, our locations have a distinctive characteristic: Each one of them is -350-800 square meters [in size], and we invest as much as $650.000 in each one. They are comfortable, welcoming spaces with waiters who provide service to your table. Clearly, if a customer goes to another restaurant that has the same infrastructure as ours, he is going to pay at least double the price.
Finally, our team of employees also plays an essential role, since they live the philosophy of “be happy and make people happy.” We like to say that the first thing you need is to be happy so that you can give happiness to others. This translates into smiles, good service and speedy attention.
Universia Knowledge at Wharton: But you had to overcome some obstacles in the United States…
Wu: No doubt. An important barrier in the United States for us was the cost of labor, which is much higher than in Peru and Chile. The minimum salary in the United States is greater than in Latin American countries, so we had to make some small adjustments in our business plans.
Universia Knowledge at Wharton: In Chile and the United States, there is an abundance of fast food chains. Wasn’t this a barrier for positioning yourselves?
Wu: I believe that you ultimately wind up competing on equal terms because if it is the pocketbook that dictates [what people choose] when it is time for them to eat lunch, customers are going to prefer a premium hamburger that costs [only] $2.50. Nevertheless, I believe that each niche has its well-differentiated strengths. Fast food is quick and cheap. We are also moderately priced but since we are in a category called ‘Casual Dining,” we can offer a better atmosphere and personalized attention. We think that both markets are going to co-exist without any problems.
Universia Knowledge at Wharton: Are you paying much attention to developments in the global economic crisis?
Wu: We Peruvians have a very important strength in that we have experienced a crisis for a long time and we are already somewhat accustomed to it. It wasn’t until 2003 that Peru began to show signs of macroeconomic stability and it began to grow at an accelerated pace. But we are used to having highs and lows. The bad thing is that we don’t make long-term business plans; for example, for 20 years. Instead, we tend to make plans that are focused on the short term. But since we are good entrepreneurs, we try to focus on the positive side of things, and we are confident about the good economic and political performance that Peru is enjoying. So we are committed to keep growing at a strong rate in the local market, using the franchising model.
Universia Knowledge at Wharton: What are your next steps in Peru?
Wu: Pardo’s Chicken is one of our best known brands, but we have other brands, too, and we have plans to open another 20 restaurants in Peru over the next three years. Four months ago, we launched a new brand called Planet Chicken, which has been quite successful. It addresses a very different market from Pardo’s Chicken. Planet Chicken also offers a menu of grilled chicken, but we combine it with typical Creole-style Peruvian dishes. It addresses the entertainment market, providing locations that are much more colorful, and offering shows that begin at 10 p.m. In any case, we are looking forward to expanding into other countries through franchising deals.
Universia Knowledge at Wharton: What other countries in the region are you looking into?
Wu: Colombia is a country that consumes a lot of grilled chicken, along with Bolivia and Ecuador. In Ecuador, a very similar phenomenon is occurring as in Chile. They are becoming aware of the extraordinary flavor of Peruvian food, so we see this market as an interesting opportunity.