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
produced products (-)

Local products in several categories in Rio
Grande do Sul have higher market shares
than highly promoted national and some
international brands (-)
 Highly inappropriate in the Brazilian
culture to put down a competing product
or service while promoting your own (-)
 Italian culture is widely represented in
the southern states of São Paulo, Paraná,
Santa Catarina, and Rio Grande do Sul.
Inhabitants of these states had long ago
established and appreciated Italian –style
pizza (-)
 Success of pizza sales at a particular
location could be unrelated to advertising
and image building efforts. Primary
success factors were the taste of pizza,
location convenience, price, and/or the
locale’s atmosphere (+) (-)
 Pizza is considered an inexpensive food
item in Brazil (-)
 Breakfast is usually the lightest and
quickest meal. Most common breakfast
was coffee with milk, and bread with
butter and jelly, or bread with cheese.
Some people also included some of the
many Brazilian fruits such as papaya,
mangoes, pineapples and melons (+)
 Meat, fish, eggs and cereals were not as
common at breakfast as in other cultures
(+)
 Sandwiches and pizza were used a
substitutes for lunch or dinner usually
because the person lacked time, hunger,
company with whom to share a meal, or
money (+) (-)
 Most Brazilians didn’t perceive fast food
as a complete meal, but rather as a
heavy snack(-)
 Most popular pizza toppings were cheese and
calabresa (a thinly sliced pork sausage).
Pepperoni was an acceptable substitute for
calabresa, but was not sold in stores in Brazil.
(+)
 When pizza is consumed in restaurants a drink
is normally served with it, often this is a draft
beer (+)
 An outing to a pizzeria was usually more
economical to than going to a traditional
restaurant (-)
 Pizza was served through a popular system
called rodizio which is equivalent to “all you
can eat” (+)
 None of the pizza chains in Porto Alegre offered
quality packaging (+)
 Economical Factors
 São Paulo is the most economically
developed state and is also the most
densely inhabited, with population
equal to 34 million (+)
 Rio Grande do Sul is a state with little
over 9 million inhabitants (+)
 Porto Alegre is the capital of Rio
Grande do Sul and is a cultural center
for the southern portion of Brazil with
a metropolitan area population of
nearly 3.1 million (+)
 Cost of Brazilian mozzarella is higher
than the cost of mozzarella in other
markets (-)
 Retail establishments were subject to
very high taxes in Brazil and tax
evasion was common (-)
 Brazil is the largest country in Latin
America and was the 8th largest
economy in the world (+)
 The Porto Alegre market consisted of
43 pizza restaurants. 3 are chains
while the rest are small family-owned
businesses (-)
 The success of the Real Plan caused
the market to stop tolerating price
increases and consumers to begin to
compare prices (-)
 Newly stabilized economy created
franchising boom in Brazil, mainly in
food sector (-)
 Average monthly inflation below one
percent meant consumers would no
longer accept price increases (-)
 2 of the largest construction firms active in the
state of Rio Grande do Sul, a national firm and a
local firm had just declared bankruptcy (+)
 The franchisee for Rio de Janeiro suddenly and
unexpectedly decided to close all of its stores
and to stop all operations due to heavy financial
losses. It also began litigation against IPH (-)
 Other fast food franchises that had begun
operations in Brazil, such as KFC and Subway,
were also not meeting profit expectations (-)
 The Pizza Company held local market leadership
(-)
 There was rumor that a huge competitor, the
market leader in pizza delivery in the USA, was
about to enter the market by making the local
Coca Cola distributor its franchisee (-)
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
in the world and is the leader in the
pizza segment
• It’s located in 63 countries and
operations in these countries grossed
close to US $1 billion per year
• Established franchises in places
where they knew there was a lot of
foot traffic and their product would
be received well.
• IPH had a good reputation, and a
successful business.
• Had their novelty thick crusted pan
pizza that they were famous for. This
initially represented 95% of sales
• The 7 stores Maxxi Foods had open in
May of 1995 were within the sphere of
influence (living, working, driving) of
individuals possessing 70% of Porto
Alegre’s income
• Fernando and Marcos Stern traveled to
the USA for 2 months of training at
three IPH centers for new franchisees
and operators. This training included
modules on topics such as store
planning, infrastructure development,
product preparation, and business
operations and administration. They
also attended lectures on topics such as
human resources, implementation of
operational and financial controls, etc.
• IPH realized that they were setting a
new standard for packaging and
charged more because of this fact
• In the beginning, sales increased and the chain’s
market share and popularity grew. The target
market was individuals and families classified as
social classes A and B (the 2 groups with the
highest levels of income and education in the
entire population). Many of these people were
already familiar with IPH in other markets.
• Introduced many new promotions in 1995.
International Collection which introduced several
new pizzas and succeeded in gaining attention
and increasing sales. Another promotion
increased lunch sales by 35% and another was
successful in reaching its objective to increase
sales on slow days.
• A thin crust pizza similar to the Italian style pizza
found in pizzerias preferred by Brazilians was
launched in 1998 and was sold at 10% less than
other IPH pizzas. This pizza initially accounted for
about 35% of sales in stores that launched it and
sales of this type of pizza stabilized at about 25%
of pizza sales
 Weaknesses
Their way of advertising in Brazil. It put
down the traditional Brazilian food and
that was offensive to the Brazilians.
Initial launch strategy was an indirect
knock on local ethnic cuisine.
Their products were more expensive than
other product sold in the local pizzerias.
Their prices were between 20-30% higher
than their competition.
The ingredients they purchased were
more expensive than the ones their
competitors purchased.
Because pizza was considered as an
inexpensive item in Brazil, their high
prices didn’t help their business.
Their advertising was not consistent.
Mr. Marcos Stern left the company
They were subject to high taxes and
because they are a big corporation they
were not able to escape them in any way.
Initial cost to purchase franchise was high.
Stern Group’s initial fees were US $10,000
for each of the 20 stores it was authorized
to open in the Rio Grande do Sul territory
and a fee of US $25,000 for each store that
actually opened. The agreement also
required Stern Group to pay 6% of gross
sales, less direct tax
In 1995 Maxxi Foods only had 7 stores in
operation which was well below the 20
stores expected to be open by this time
As novelty of pan pizza wore off,
customers returned to their regular pizza
restaurants
IPH’s management and cost control
systems also revealed operational problems
High operating costs often made profit
margins lower than those of local
competitors
American franchises received cheese
already shredded, but Brazilian franchises
received the product in blocks and had to
pay employees to shred cheese
Other IPH standardized items, such as
packaging, were also more expensive for
Brazilian franchisee than for franchisees in
other markets
Some of the pizza preparation processes,
which were automated in the US, were
performed manually in Brazil
IPH realized that they were setting a new
standard for packaging and charged more
because of this fact
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:
• Increases customer base
• Increases profits
• Increases their competitive edge,
most other pizzerias probably don’t
have breakfast
• Brazilians would appreciate the
company more for trying to
incorporate their culture rather than
trying to force US culture on them
Negatives:
• Might not work, could be too
big of a change. Risky.
• Franchise agreement might not
allow this
• Competitors might copy this
and be able to do it cheaper
 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.