CONTENTS

1.0 Executive Summary.................................................................................................................2

2.0 History of BreadTalk Group..................................................................................................3

3.0 Financial Overview..................................................................................................................4

3.1 Revenue Generation...............................................................................................................4

3.2 Profit (Earnings)....................................................................................................................4

4.0 Industry Analysis (Food & Beverage): Porter’s Five Forces...............................................5

4.1 Intensity of Rivalry................................................................................................................5

4.2 Threat of New Entrants..........................................................................................................6

4.3 Bargaining Power of Buyers..................................................................................................7

4.4 Bargaining Power of Suppliers..............................................................................................7

4.5 Threat of Substitute Products.................................................................................................7

5.0 Overall Company Analysis – Corporate Level.....................................................................7

5.1 Corporate Level Strategy.......................................................................................................7

5.1.1 Related Diversification: Economies of Scope................................................................8

5.1.2 Unrelated Diversification..............................................................................................10

5.2 Corporate Level Strategy Evaluation...................................................................................11

6.0 Business Level Analysis - Bakery Business.........................................................................13

6.1 Competitive Advantages and Core Competencies..............................................................13

6.1.1 Unique Concepts and Branding....................................................................................13

6.1.2 Wide Product Offerings................................................................................................14

6.1.3 Strategic Locations.......................................................................................................14

6.1.4 Strategic Partnerships and Liaisons..............................................................................15

6.2 SWOT Analysis of Bakery Segment...................................................................................15

7.0 Strategic Issues Identified.....................................................................................................16

8.0 Recommendations..................................................................................................................18

9.0 Appendices..............................................................................................................................21

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1.0 EXECUTIVE SUMMARY

The BreadTalk Group is a young and promising company that is rapidly expanding its businesses

locally and internationally. With its signature open-concept kitchen, the BreadTalk Bakery

presented its products in attractive packaging that soon earned itself the repute of being a lifestyle

brand. It has since franchised 73 bakery outlets overseas and more recently expanded into the

Restaurant and Food Atria Businesses.

The objective of this report is two-fold. Firstly, an in-depth longitudinal analysis of BreadTalk to

better understand BreadTalk in the context of the Food & Beverage Industry in which it operates.

Secondly, strategic issues facing BreadTalk’s continued expansion and growth are highlighted with

our team’s proposed solutions.

To this end, a financial overview is conducted to highlight overall revenue, profit and growth trends

to outline its financial performance across various business segments, which are found to be highly

dependent on overall economic changes. In particular, the Bakery business experiences the most

erratic changes in revenue and decreasing contribution margin to overall profit. This is followed by

an industry analysis to create a landscape of BreadTalk’s external environment in the Bakery, Food

Atria and Restaurant segments.

To achieve our second objective, BreadTalk is then analyzed at the corporate level to construct a

clear picture of its diversification strategy at the management level. Sources of cost savings and

relevant value creation by the corporate office are also analyzed with our corresponding evaluation.

To delve further into the business, the Bakery segment is scrutinized closely to recognize the core

competencies driving BreadTalk’s success.

Based on these findings, our team derived three critical strategic issues facing BreadTalk that may

drastically affect its short and long-term performance, as well as its local and international financial

outlook. These include whether the BreadTalk Bakery business is able to ensure consistent growth,

how it can overcome problems of imitation in local and foreign markets and evaluation of the short-

term approach taken in managing their diversification portfolio. Our proposed recommendations

aim to overcome the possible obstacles and challenges outlined in the abovementioned issues.

2

2.0 HISTORY OF BREADTALK1 GROUP

BreadTalk Group was incorporated in Singapore in April 2000 as BreadTalk Pte Ltd and has since

become a distinctive brand in Singapore that has gained international appeal. It was founded by the

current Managing Director, George Quek and his wife, Executive Director, Katherine Lee. The first

BreadTalk retail outlet opened on 1st July 2000 at Parco Bugis Junction. A second outlet opened

within 5 months, in December 2000, at Novena Square, followed by the first HDB heartlands outlet

in Bishan.

In September 2001, BreadTalk invested $3 million to set up a central kitchen at KA FoodLink,

Kampong Ampat to prepare for growth and franchise operations. Initially, BreadTalk outlets offered

about 50 varieties of breads, buns, cakes and pastries, but this has grown to over 150 varieties today.

In addition, during 2001, another five retail outlets were opened.

As of April 2003, BreadTalk had 22 retail outlets in Singapore with staff strength at 434. In the

same month, it opened its first franchise outlet in Jakarta. In June, BreadTalk underwent an initial

public offering (IPO), constituting of 32 million shares (28.8 million by placement and 3.2 million

by public offer) at an offer price of S$0.24 per share. In September, the Group diversified into the

restaurant business by operating a franchise of the world-renowned Din Tai Fung brand of

restaurants in Singapore.

In 2005, BreadTalk penetrated further into the China market by acquiring Topwin Investment

Holding Pte Ltd which owns and operates 13 food courts under the award-winning brand Megabite

in China. In the same year, the Group entered a joint venture with Ristoranti Group to open 2 Food

Republic food courts in Suntec City and VivoCity in Singapore2, both featuring retrospective style

and décor, as well as one in Hong Kong’s Cityplaza in Tai Koo Shing. In addition, Toast Box, a

traditional kopitiam-styled coffee house serving coffee and toast to customers in an atmosphere of

pop culture in fashion and music reminiscent of the 1950’s-60s colonial era in Singapore3, was

opened as a food stall unit of Food Republic in Wisma Atria Singapore.

1 IPO Analysis: BreadTalk Group -- http://www.wallstraits.com/jungle/ipo/fipo_main.asp?id=iposg_BreadTalk2 Food Republic Singapore -- http://en.wikipedia.org/wiki/Food_Republic3 JobStreet.com: Toast Box -- http://siva-sg.jobstreet.com/_profile/previewProfile.asp?advertiser_id=33315

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As of December 2006, the Group owned and operated 57 bakery outlets in Singapore, Shanghai,

Beijing and Thailand. The BreadTalk brand has also rapidly infiltrated the region with 73 franchised

outlets in Indonesia, the Philippines, United Arab Emirates, Kuwait, Malaysia, Taiwan, Hong Kong,

India and China.4 BreadTalk Group now operates 5 Din Tai Fung restaurants in Singapore located

in shopping centers which enjoy high human traffic. On 17 Dec 2007, BreadTalk Group Limited

entered into a franchise agreement to acquire and manage the J. Co Donuts & Coffee, an Indonesian

brand.

3.0 FINANCIAL OVERVIEW

3.1 Revenue Generation

The revenue generated by BreadTalk Group has been on an upward trend since 2000. Since 2001,

overall revenue has increased from $16.7 million to $156.6 million in a short span of six years.

This increase of 837.7% in revenue in 6 years is remarkable for a local home-grown company.

However, the revenue growth has been fairly inconsistent as illustrated in the table below. Revenue

growth over the years is mainly driven by increase in number of F&B outlets locally and regionally

and through diversifying into new F&B businesses over the years (Refer to Appendix A & B).

2002 2003 2004 2005 2006 2007

Revenue Growth 109.60% 15.10% 24.60% 89.80% 29.70% 26.70%

FIG 1: BREADTALK’S REVENUE GROWTH

3.2 Profit (Earnings)

The overall net profit returns for BreadTalk has been rapidly growing from 2005 to 2007. Prior to

that, we can see that BreadTalk started with a healthy net profit of about $3.4 million in 2002 (Refer

to Appendix C). The SARS outbreak in 2003 caused the Group’s profits to drop to about $1 million

in 2003. In 2004, BreadTalk’s net profits were expected to rebound to above 2003 levels since the

SARS scare was over. In addition, the Din Tai Fung restaurant that had opened in September 2003

was expected to contribute to the overall net profits as well. However, BreadTalk turned in the red

with a net loss of $30,000 instead. This was mainly due to large losses in the bakery business,

which contributes to the bulk of BreadTalk’s revenue, in the first half of the year. This was due to

intensifying competition amongst the numerous players in the local bakery industry.

4 BreadTalk Annual Report 2006, downloaded from www.BreadTalk.com

4

In 2005, BreadTalk turned around to post a $1 million net profit. This was supported by increasing

revenue from Din Tai Fung and profit contribution of the food atria business that was acquired. In

2006, net profits increased more than three-fold to about $3.5 million. This excellent result was

mainly driven by the highly profitable restaurant business and successful international expansion

forays. This good run continued in 2007 when net profit doubled to $7.3 million in 2007. This

double-digit growth was derived from all its business and geographical segments. New innovations

such as the creation of a premium bakery outlet, BreadTalk Silver, at the Paragon Shopping Mall

and the opening of additional ToastBox outlets had also led to increased local interest in

BreadTalk’s offerings. This was evident in the 24.5% increase in bakery sales in Singapore to $39.1

million (Refer to Appendix C)..

Looking at the trend of BreadTalk’s net profit, we see that initially, local bakery operations were

able to generate positive net profits for BreadTalk in 2002. However, in subsequent years, strong

local competition eventually pushed BreadTalk into the red in 2004. Regional expansion efforts and

diversification into restaurant and food atria businesses helped to drive the net profit to positive

levels again in 2005. In addition, innovative offerings such as BreadTalk Silver and ToastBox have

helped to make local bakery operations profitable again and also set BreadTalk on a path of rising

net profits from 2005 to 2007.

4.0 INDUSTRY ANALYSIS (FOOD & BEVERAGE): PORTER’S FIVE FORCES

Porter’s Five Forces was used to analyze the food and beverage industry environment, including all

the relevant businesses in which BreadTalk operates. In particular, emphasis would be given to the

bakery business which forms a significant engine for growth for BreadTalk. Outlining the key

issues in the external environment would allow us to understand and assess BreadTalk’s position

within its respective businesses more accurately.

For the scope of this report, we shall examine its businesses in Singapore, which represents the

largest geographical market of its operations.

4.1 Intensity of Rivalry

The food and beverage industry is characterized by intense competition. In the food court segment,

BreadTalk faces competition from well-established food courts such as Kopitiam, Food Junction

and Koufu, which price their food and drinks relatively cheaper. In addition, they have a wider

reach to consumers as they operate a greater number of outlets in Singapore. Unlike Food Republic,

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all three food court chains have also introduced discount cards to build on customer loyalty. Its

largest competitor, Kopitiam, has even tapped on the Muslim community by opening Banquet, a

full-fledged Halal food court.

In its restaurant business, its closest competitors are the Crystal Jade and Imperial Treasure chain of

restaurants, both of which offer a similar dining concept (i.e. Shanghai and Cantonese cuisine) at

comparable prices. Competition is highly intense due to high exit barriers and slow growth.

BreadTalk’s direct competitors in its bakery business include large and diverse groups of bakery

chains and individual operators. Competitors include Bengawan Solo, Delifrance, Four Leaves,

Prima Deli Bakery, Crystal Jade Bakery as well as bakeries at various shopping malls, hotels and

neighborhoods. Competitors provide similar product offerings at highly competitive prices. It is

observed that neighborhood bakeries sell its pastries at a significantly cheaper price compared to

other types of bakeries. Six bakeries, which are selected to be most similar to BreadTalk in terms of

product offerings, price ranges and locations were documented in detail (Refer to Appendix E).

Across all its business units, BreadTalk faces diverse competitors which rely on innovation and

product variety to attract customers. It is important to highlight that most of these competitors,

especially in the bakery segment, are not publicly listed. Instead, they are mostly family and

established businesses which each have their distinctive and successful commercial formulas.

4.2 Threat of New Entrants

Given the nature of the bakery industry, threat of new entrants is high as there are relatively low

barriers to entry. Firstly, initial capital outlay is relatively low as compared to other industries as

equipment cost is low and there is little research and development cost incurred prior to starting the

business. Secondly, product differentiation is present though it is hardly a deterrent factor as many

businesses sell the same products or imitate quickly. Lastly, the ability to access effective

distribution channels presents a greater threat to new entrants. Strategic locations with high human

traffic often translate to higher lease payments. As such, not all bakeries are able to situate

themselves in prime locations to capitalize on high traffic areas.

6

With regards to the food atria and restaurant businesses, there is a lower threat of new entrants as

the capital outlay is significantly higher. To tap on economies of scale and build its brand name,

these eateries tend to open more than one outlet. Also, relevant expertise in running a restaurant is

required. Most of the abovementioned food atria and restaurants own a relatively large number of

outlets each.

4.3 Bargaining Power of Buyers

In the food and beverage industry, customers enjoy significant buying power as they incur low

switching costs. In general, the demand for food is highly price elastic. Majority of the customers

are sensitive to price increases and would not hesitate to change their tastes and preferences

accordingly. This is especially pertinent during occurrences of high inflation as the general public

switch to cheaper alternatives.

4.4 Bargaining Power of Suppliers

Suppliers have relatively low bargaining power in the food and beverage industry, primarily due to

the large number of existent suppliers. As they are located further upstream, they are not able to

mark-up their products significantly as most of their customers are bakeries and restaurants that

purchase in bulk. These bulk purchases suppress the bargaining power of the former. More over,

ingredients such as flour, eggs and wheat do not vary largely in quality across suppliers, further

lowering their bargaining power.

4.5 Threat of Substitute Products

As mentioned, product substitutes are a strong threat in the bakery industry as their prices can be

comparatively lower and customers face low switching costs. Any light takeaway snacks constitute

possible substitutes which customers can opt for. Substitutes can be as diverse as snack joints such

as Old Chang Kee, Mr. Bean and Jollibean, to traditional coffee outlets such as Ya Kun Kaya Toast

and Wang Jiao.

5.0 OVERALL COMPANY ANALYSIS – CORPORATE LEVEL

5.1 Corporate Level Strategy

BreadTalk’s corporate level strategy is characterized by an increasing level of diversification. In

2003, it diversified into the Restaurant and Food Atria businesses. As such, it currently has three

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separate business units, namely Bakery (and its associated franchised outlets), Restaurants and Food

Atria. For the purpose of analysis, BreadTalk’s extensive franchise network internationally shall be

regarded as a form of geographical diversification. The following diagram outlines the approach to

analyzing BreadTalk’s corporate level strategy.

FIG 2: CORPORATE LEVEL ANALYSIS

5.1.1 Related Diversification: Economies of Scope

Leveraging on its core competencies through franchising

With regards to its Bakery line, BreadTalk was able to expand quickly through franchising. As of

December 2006, BreadTalk had a total of 73 franchises5. BreadTalk’s franchise contribution margin

increased to 7% of total revenue in view of its base fee, store license fee and monthly royalty fees.

This allowed BreadTalk to derive best practices where operating standards and recipes were

supplied to BreadTalk franchisees, directly leveraging its existing core competencies of innovative

products. Under the franchising guidelines, BreadTalk’s management team would provide support

services in site selection, store equipment, design and layouts6.

These core competencies provided a viable basis for synergy among its Bakery line and

international franchises because they enhanced the competitive strengths of these overseas outlets.

5 2005 Annual Report 6 BreadTalk – Franchise with us, http://www.BreadTalk.com/franchise.htm

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By combining the expertise of experienced food industry players in these foreign markets,

BreadTalk was able to develop local adaptation in its products while lowering its costs through

trading off a lower level of control over processes and activities through franchises. In October

2003, BreadTalk entered a master franchise agreement with Kuwait-based Al-Mejhem Global

Group, which was a family-owned diversified food and beverage company, possessing ‘a network

of contacts, firm financial standing and a sound marketing plan for growing the BreadTalk brand in

the Middle East7’. Together with BreadTalk’s already strong brand name and unique concept bakery

stores, these core competencies were not easily substitutable in foreign markets.

Sharing related activities among business units

Cost savings were derived from BreadTalk’s ability to utilize the same suppliers across their

franchise outlets. In addition, BreadTalk seeks to achieve local adaptation to local taste and

preferences as well. Crustum Products Private Limited, BreadTalk’s franchisee in India, uses the

flour suppliers as its parent outlets in Singapore, while further differentiating the taste and

packaging of its breads. Quoting Managing Director Mr. Reddy, "Our strength is food and their

strength is bread. We import flour from Singapore and Japan. Indian foods are fused with breads to

provide desi flavour to the varieties as well”8. Other relevant upstream activities like the

procurement of other non-perishable raw ingredients for the production of their buns are assumed to

be centrally controlled. This ensures minimum quality assurance of its products as well.

Within its Singapore outlets, Toastbox’s menu spread of bread and other snacks are prepared in its

parent BreadTalk bakery located in the same shop. A central kitchen located at KA Food Link,

Kampung Ampat9 was set up to prepare large volumes of toppings and key ingredients before

delivery to its retail outlets.

Increase in Bargaining Position with its Growth

As mentioned above, bulk purchases of raw ingredients across different business units would

inadvertently increase BreadTalk’s bargaining power with respect to suppliers. This may explain the

low level of vertical integration to secure supplies and overcome cost fluctuations, since they are

7 Asiacase.com, The Asian Business Case Centre, ‘BreadTalk: Managing Expansion Through Franchising’, Foo See Liang & Chung Sang Pok, Dec 20048 Crustum Products plans 40 BreadTalk outlets by 2010, M. Somasekhar , Hyderabad , Jan. 12 http://thehindubusinessline.com/2007/01/13/stories/2007011301610500.htm, Marketing 9 http://articles.wallstraits.net/articles/759, BreadTalk-A fresh and tasty IPO

9

expected to obtain raw ingredients at favorable prices. However, it should be noted that BreadTalk

has chosen not to combine their marketing efforts across its different business units to increase

outreach. This is because doing so may result in brand dilution. Moreover, as a franchisee of Din

Tai Fung from Taiwan, cross-marketing may be restricted.

5.1.2 Unrelated Diversification

Corporate parenting/restructuring

BreadTalk has a strong and competent management that provides strong support to its strategic

planning and budgets, financial functions and human resource management.

i) Strategic and budget planning:

With more than 30 years of experience in the F&B industry, Mr. George Quek was instrumental in

establishing the BreadTalk brand name and identifying new business opportunities in restaurants

and Food Atrias. His strong business acumen has historically brought unprecedented commercial

successes. Quoting Mr Quek, ‘When BreadTalk merged with Megabite, 17 outlets in China adopted

the name Food Republic. The experience gained at BreadTalk will be utilized to expand the Food

Republic business10.

ii) Customer perceptions and design layouts:

Across the business units, all retail stores possess layouts that have been thoughtfully

conceptualized to create a unique customer experience. For example, Food Republic aims to

recreate a nostalgic atmosphere with 1900s memorabilia and aged wooden beams. BreadTalk

utilizes a glass architecture and open kitchen concept to appeal to customers while Din Tai Fung

Restaurant’s chic oriental style architecture distinguishes it from its competitors. These retail

concepts have been formulated by the corporate office and can be applied within business units.

iii) Human resource management:

In December 2007, BreadTalk appointed Mr Goh Tong Pak, the deputy director for the Ministry of

Education's (MOE's) school appraisal branch, to be made group chief executive officer (CEO). The

newly created post will require him to oversee BreadTalk's entire operations, including those in

China and Singapore. Quoting a press release from BreadTalk, 'He will also strategize on systems

10 ‘Kneading his way to success’, Money Movers, BreadTalk- George Quek, Smart Investor, June 2007, pg 64

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and talent development within the group’11. Again, it is assumed that top managers could be

transferred to new business units like its foodcourt outlets, allowing BreadTalk to capitalize on their

employees’ expertise.

Portfolio Management

BreadTalk’s strategic expansion of its bakery business and foodcourt business in highlighted in its

choice between franchises and subsidiaries. In its expansion into China, it will only retain a direct

operation pattern in Shanghai and Beijing. BreadTalk set up Shanghai BreadTalk Co. in order to

reap higher profits. This is despite BreadTalk having to incur an approximate RMB2 million12 cost

of opening a shop instead of signing franchises.

5.2 Corporate Level Strategy Evaluation

Based on the above analysis, BreadTalk’s corporate level diversification strategy has adopted an

optimistic yet cautious approach in managing risk and opportunity.

Effective expansion into foreign markets

BreadTalk has successfully managed its bakery business abroad through franchising and direct

operations. They have been able to replicate their core competencies overseas through strategic co-

operation with partners and standardization through franchises. BreadTalk has successfully

implemented a transnational strategy and straddled its pressures of lowering costs and local

adaptation. An example would be how BreadTalk managed to enhance its revenue significantly and

establish itself within China’s market in its embryonic stage. Most bakery stores in China average

between 1,500 and 2,000 customers per day and 400,000 yuan (US$48,780) in sales13. "China's

bakery industry is growing at an annual rate of 10 to 20 percent," said Wu Zhande, president of the

All-China Bakery Association (ACBA). It has harnessed the expertise of credible franchisees in

these foreign markets and worked closely with them to ensure quality standards. This explains

BreadTalk’s geographic revenue growth in China to increase from 7% in 2002 to 38% in 2007

(Refer to Appendix D).

11 BreadTalk hires senior educator to be educator to be group CEO - http://www.asiaone.com/News/Education/Story/A1Story20071226-42505.html, BreadTalk hires senior 12 BreadTalk intends to open 500 stores in China- http://www.chinaretailnews.com/2006/09/14/335-BreadTalk-plans-to-open-500-stores-in-china/, 13 Foreign competitors introduce new concepts to bakery industry, http://www.tmcnet.com/usubmit/2006/04/04/1535852.htm

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The possible benefits of multinational diversification include allowing BreadTalk to engage in

cross-collaborations across businesses so that they can attempt to enter other food and beverage

segments more easily. They can also leverage on their brand name to build up market awareness.

With a centralized HR and marketing system implemented, BreadTalk can reap the advantages of

both economies of scale and scope.

Over-reliance on the bakery business within Singapore

Even though the bakery line was the founding business unit for BreadTalk and still contributes to

51% of its revenue today, BreadTalk faces strong competition and easy imitation of its products by

competitors. In addition, rising flour prices have led to erratic revenues. To overcome these

difficulties, BreadTalk has banked on continual product innovation and revamping of its existing

outlets to draw in customers. Consumer preferences and their corresponding reaction to ‘fad’ items

are difficult to gauge.

In our opinion, there is a limit to BreadTalk’s ability to sustain a high growth rate in its bakery

business. To address this pressing concern, the bakery segment would be analyzed in detail to

further elicit relevant dynamics and trends in the business (Refer to Section 6.0 Business Level

Analysis – Bakery Business).

Short-term run in managing portfolio

BreadTalk has relied on signing franchises for its restaurant line Din Tai Fung, and more recently

J.Co Doughnuts from Indonesia. Din Tai Fung’s profit amounts to 38%, which is considered

substantial for a franchise. BreadTalk would face limitations in trying to expand Din Tai Fung’s

menu and refine its operation as it is a franchise. Also, royalty payments and license fees would

have to be paid to the Din Tai Fung restaurant network.

Similarly, J.Co Doughnuts could be viewed as an addition to complement BreadTalk’s existing

bakery line. Heavy reliance on these franchises to further build BreadTalk’s brand in Singapore may

be restrictive and highly subjected to franchisor’s regulations and standards. Given that BreadTalk’s

core competencies lie in its unique and wide range of products at strategic locations, BreadTalk’s

expansion strategy may be limited by the use of franchises.

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6.0 BUSINESS LEVEL ANALYSIS - BAKERY BUSINESS

The bakery business for BreadTalk achieved unprecedented success in the local bakery sector as the

sleek design and open kitchen concept gained huge popularity. Between 2003 and 2005, the

BreadTalk bakery business segment saw a rise in revenues with the increasing number of outlets set

up regionally. Its performance is highlighted in the following chart:

28

29

30

31

32

33

34

2002 2003 2004

Year

$m

20

21

22

23

24

25N

o. o

f ou

tlets

Total retail sales S$ million Outlets Number of units

FIG 3: BAKERY BUSINESS – NO. OF OUTLETS & SALES

It is therefore important to understand the driving forces behind BreadTalk Bakery’s success by first

identifying its core competencies. This is followed by a SWOT analysis to outline the Bakery’s

external environment in detail.

6.1 Competitive Advantages and Core Competencies

6.1.1 Unique Concepts and Branding

BreadTalk bakeries differentiated themselves from traditional bakeries with sleek and space-age

looking store facades and an open-concept design. Unlike other bakeries, BreadTalk’s novel open-

concept design allowed customers to view the bakers at work and generated a lot of customer

interest in its products. In addition, BreadTalk came up with creative and fun-sounding names for

all their buns. Some buns had a short anecdote to tell a story. New types of buns are introduced

regularly as well to maintain consumer interest. Such unique initiatives by BreadTalk allowed them

to differentiate themselves from other bakeries.

BreadTalk is focused on its branding and has made great efforts to promote the BreadTalk brand.

To ensure this, the modern and contemporary designs of the stores are standardized in all the

BreadTalk outlets. Such is the devotion to a clear brand identity that when BreadTalk recently

13

renovated and launched the “Niu” store layout for the CityLink Mall outlet, it also announced plans

to renovate all its other stores around the world to the same layout concept14. Equipment such as

bread tongs, trays and the uniforms that all store employees must don are also standardized in all

bakery outlets. This new concept allows BreadTalk to continue projecting a fresh, clean and lively

look that has become synonymous with their initial bakeries. Consequently, BreadTalk has garnered

awards such as “Singapore Most Distinctive Brand Award 2003-2004” and “Singapore Promising

Brand Award” for from 2002 to 2004.

In 2007, more than 1000 respondents were polled in a market research survey conducted by

Temasek Polytechnic Business School students. The survey findings showed that BreadTalk had

the highest brand recall and is associated with creativity and innovation15.

6.1.2 Wide Product Offerings

Challenging and revolutionizing conventions, BreadTalk bucked the trend by investing in an in-

house Research & Development Team to continuously develop new buns for their bakeries. About

ten new items are introduced every four months. This allows BreadTalk to provide new products to

the unsatisfied tastes of customers. BreadTalk currently offers more than 150 varieties of breads,

buns, pastries and cakes16. Depending on the size of the bakery outlet, each bakery outlet offers 40-

60 different items daily. This creative flair for producing new and innovative products has set

BreadTalk apart from its competitors.

6.1.3 Strategic Locations

BreadTalk has strategically located its bakery outlets at accessible and high human traffic flow

areas. According to the official website, these critical outlets tend to be located near public transport

systems such as bus terminals, the Mass Rapid Transit stations and the Light Rail Transport

stations17. Inevitably, this also translates to significantly higher rental costs.

6.1.4 Strategic Partnerships and Liaisons

14 BreadTalk Gets a ‘Bakeover’, Gabriel Chen, The Straits Times, 29 Jan 200815 Real-Life Client Projects, BreadTalk – The Branded Bread Projecthttp://www-bus.tp.edu.sg/bus_home/bus_showcase/bus_studentprojects/bus_studentprojects_mkt.htm?popup=print&lp=BUS&16 Competitive Strengths, Wide Range of Products http://www.listedcompany.com/ir/BreadTalk/web/show.cgi?content=strengths&17 Competitive Strengths, Strategic Locationhttp://www.listedcompany.com/ir/BreadTalk/web/show.cgi?content=strengths&

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The acquisition of Topwin Investment Holding Pte Ltd brought expertise and know-how of the

workings of the F&B industry in China to BreadTalk. Leveraging on Topwin’s experience,

BreadTalk did not need to depend only on franchise stores but was able to also operate its own

bakeries in Shanghai and Beijing. In addition, with the knowledge from Topwin, BreadTalk was

able to increase its presence in China’s Foodcourt business with the opening of new food courts in

locations such as Chongqing and Shanghai.

6.2 SWOT Analysis of Bakery Segment

To better understand the key issues and trends facing the Bakery segment, a SWOT analysis was

implemented, as exemplified below:

Strengths Market leader and the only public firm

locally in bakery operations Wide product offerings Higher economies of scale Continual and successful innovation Regional ventures Strong Franchise Partnerships

Weaknesses Unpredictable consumer tastes No loyal customer base Business which relies heavily on

volume-based sales Only 2 countries (Singapore & China)

are the revenue drivers Innovative products can be easily

replicated Restaurant division is a franchise

which needs to be renewed No direct control over overseas

operations

Opportunities Growing F&B sectors internationally Emerging markets regionally which

share similar diets

Threats Market saturation in the local bakery

industry Increasing competition in Singapore Existing competitors in new markets

FIG 4: SWOT ANALYSIS OF THE BAKERY SEGMENT

Based on our findings, despite BreadTalk’s attempt in differentiating its bakeries to ensure

continual customer interest, its erratic revenues (Refer to Section 3.2 Profit - Earnings) may stem

from the ‘Weaknesses’ and ‘Threats’ which far outweigh its potential benefits. However, it is

important to differentiate this from BreadTalk’s diversification of the Bakery to overseas markets as

that would be a corporate level decision. Therefore, the focus is on the unpredictable performance

of the Bakery business within Singapore.

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7.0 STRATEGIC ISSUES IDENTIFIED

Our team has identified three key issues that are facing BreadTalk. They have important

implications for its current expansion strategy, impacting its short and long term performance. Also,

these issues involve critical decisions that have to be made at the business and corporate level that

will ultimately influence operations locally and overseas.

In particular, the first two issues relate specifically to the bakery business, while the third focuses on

the corporate level diversification strategy.

Issue 1:

Can BreadTalk ensure consistent growth for its Bakery business within Singapore?

Over the years, the performance of the bakery segment had been erratic and inconsistent. For

example, the revenue increased by more than 100% from 2001 to 2002. This occurred as BreadTalk

was embarking on a rapid expansion of numerous bakery outlets across Singapore. The revenue

growth in 2003 dropped drastically as BreadTalk was greatly affected by SARS that year. However,

they managed a reasonable revenue growth through more outlets in Singapore.

2003 2004 2005 2006 2007

Profit

from Ops

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%

Profit

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$(‘000)

% Profit

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$(‘000)

%

Profit

from Ops

$(‘000)

%

Profit

from Ops

$(‘000)

%

Bakery * 999 79.5% -802 N.M. -116 N.M. 1 829 24.4% 3 873 32.5%

Restaurant 257 20.5% 2 091 100.0% 3 283 67.4% 3 487 46.5% 4 571 38.4%

Foodcourt - - - - 1 586 32.6% 2 185 29.1% 3 457 29.1%

FIG 5: BREADTALK’S PROFIT SEGMENTS (2003-2007)

Based on Figure 5, the bakery segment had been lost its edge as the main profit driver for the

Group. For years 2004 and 2005, negative profits were recorded for the first time (Refer to Section

3.2 Profit - Earnings). This is a critical issue to be addressed by BreadTalk if it wants to rely on the

Bakery segment as its key revenue and profit generator. This issue also raises questions of whether

BreadTalk is able to continue its innovation to ensure growth.

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If they are unable to do so, this may be a signal for BreadTalk to re-evaluate its diversification

strategy to focus on other engines of growth.

Issue 2:

With its bakery products easily replicable, how can BreadTalk attempt to differentiate

themselves from their competitors?

BreadTalk continues to face a high intensity of rivalry in the bakery operations, both locally and

internationally. Local bakeries have been quick to mimic its latest innovations as buns can be

considered relatively ‘easy to reverse-engineer’. Internationally, concept stores have also tried to

imitate BreadTalk’s success. This may seriously undermine BreadTalk’s foray into international

markets via franchising its bakery.

The illustrations below exemplify the extent to which the concept of BreadTalk has been emulated

by its rivals.

FIG 6: BREADTALK & ITS COPYCATS

Our team agrees that the issue of imitation poses a significant obstacle of the Bakery’s sustainability

in the long run. This is especially pertinent in markets like China and India, where intellectual

property rights protection is generally weak.

Issue 3:

At the corporate level, is BreadTalk’s expansion strategy short-term in nature?

As previously mentioned (Refer to Section 5.2 Corporate Level Strategy Evaluation), BreadTalk’s

diversification into new product lines have been primarily achieved through purchases of franchises

like Din Tai Fung and J.Co Doughnuts. Even though these constitute low-risk ventures as they do

not require R&D, further developing these product lines may prove challenging as they are

restricted by clauses of the franchise agreements. Moreover, if Din Tai Fung proves to be a

successful and viable business model, they are not allowed to replicate or expand into foreign

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markets unless given permission by the franchisers. Yet, the latter constitutes complex negotiations

and is subject to the franchiser’s discretion. As such, in the long run, BreadTalk may face severe

limitations in its diversification strategy.

8.0 RECOMMENDATIONS

The following recommendations represent broad strategic proposals which BreadTalk can consider

to address the issues highlighted above. It should be noted that each recommendation may address

more than one issue, depending on the context in which it is raised.

8.1 Refine existing Bakeries & Focus on the Restaurant & Food Atria Businesses within

Singapore

Given that the local bakery industry is saturated with competitors that can imitate original

innovations of BreadTalk quickly, it is unlikely that they are able to continue sustaining its growth

in the long run through the expansion of new outlets. However, BreadTalk Bakery should instead

continue to ‘refine’ its current outlets. A case in point would be creating ‘BreadTalk Silver’ to cater

to the high-end discerning crowds that throng Paragon. As there would be a limit to the number of

outlets that BreadTalk Bakery can open, it should focus on developing and expanding its key

drivers of profits, such as Din Tai Fung and Food Republic.

8.2 Leverage on Branding and Strategic Locations to create loyal customer base worldwide

To counteract against the possible high imitation by its foreign competitors like bakeries in China,

we suggest that BreadTalk rely on its international brand presence to charge its products at a

premium. This would support BreadTalk’s key core competency in locating its retail outlets at

strategic, high-traffic areas, which inevitably require high rentals. Yet, these strategic locations in

office towers were played a critical role in allowing it to attract affluent and highly discerning

customers who pay attention to the brands associated with their purchases. This would also enable

BreadTalk to create a loyal customer base that will not be easily eroded away by competitors.

As BreadTalk begins to build further scale in its operations in China, a similar strategy of using

central kitchens and fixing key suppliers can be introduced to further lower costs.

8.4 Remain highly selective in choosing Franchisees

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We propose that BreadTalk continue to be optimistic but cautious in its expansion of the Bakery, as

the success of the franchise model is highly dependent on the quality of the franchisees, their ability

to maintain the BreadTalk brand, product appeal and quality. Franchising works well for businesses

with good track records of profitability, a unique or unusual concept, with broad geographic appeal

and are relatively easy to operate18. Failing to do so would seriously undermine BreadTalk’s

overseas expansion plan and its brand image, impacting its diversification strategy.

Finding credible Chinese partners constitute a significant challenge to ensure BreadTalk’s long-term

existence in China. Additionally, to support its rapid expansion, BreadTalk has to retain and train

loyal employees to uphold product quality.

8.3 Use Franchises as test-bed for Future Self-Development

Even though signing franchises with Din Tai Fung and J.Co Doughnuts may restrict the

BreadTalk’s flexibility in further developing the business lines, they can be considered lower-risk

ventures whereby BreadTalk can terminate these lines without incurring substantial costs

(termination charges notwithstanding). These decisions can be viewed as a medium-term gauge of

whether the franchise is a sustainable business model.

As such, we suggest that BreadTalk continue this strategy in the short-term, bringing in successful

business models that are potentially lucrative to ride on the current fads. A case in point would be

how J.Co Doughnuts was only brought in after BreadTalk had ‘assembled an able team using J.Co’s

well-oiled system of operations’19. If J.Co Doughnuts prove to be a sustainable business model in

the medium term, BreadTalk can then consider developing its own similar outlet in Singapore,

without the restrictions of franchise agreements. This would benefit BreadTalk given that it has

already built up relevant expertise in operations in this area.

However, these additions to the existing business lines must be carefully considered as to whether

they enhance BreadTalk’s existing core competencies and the sustainable level of value creation

that can be extracted from them.

18 Howard, T. (1996). Howard Johnson: Initiator of franchised restaurants. Nation’s Restaurant News, 30(2), pages 85-8619 ‘Much a-dough about nut-thing’, Feb 10 2008, http://forums.hardwarezone.com.sg/showthread.php?t=1858520,

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9.0 APPENDICES

Appendix A: BreadTalk Group Revenue Growth (2001-2007)

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Appendix B: Year-on-Year Group Revenue Growth (2002-2007)

Appendix C: Group Net Profit (2002-2007)

Appendix D: Comparison of Geographic Expansion of BreadTalk (2003 & 2007)

0.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%16.00%

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($'000)

3400

1000

-30

1040

3500

7300

-1000

0

1000

2000

3000

4000

5000

6000

7000

8000

2002 2003 2004 2005 2006 2007

($'000)

2003

Singapore

China

7%

93%

Appendix E: Key Competitors in the Bakery Industry Peer Business AnalysisBengawan Solo

This cake and ‘kueh’ (traditional pastry) retail chain targets the premium market segment based on nearly everything from the sophisticated décor of its shops to the pricing of its products.

It is generally perceived as having an authentic and traditional recipe. The quality of Bengawan Solo’s cakes and pastries are generally regarded as high and very consistent despite its long presence in the industry. It could threaten BreadTalk’s premium-priced products although Bengawan Solo generally has lesser varieties while BreadTalk keeps innovating new products.

Cyrstal Jade Kitchen

This bakery is unique because it actually takes up a small section of its other business which is the Crystal Jade Kitchen restaurant.

It uses a complementary strategy of attracting customers who are already dining in the restaurant to savour treats from the bakery as a form of appetizer or dessert. Its products are generally quite similar in variety and price as BreadTalk, based on common Chinese delicacies hence making it a close competitor. Both companies also have restaurants as corporate strategies.

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2007

Singapore

China

Rest of the World

11%

38%51%

Four Leaves

A very close competitor of BreadTalk because it constantly innovates with new products and customers has a large variety to choose from.

It sells popular local delicacies such as floss buns, it also has a comprehensive range of other products such as cakes, Swiss pastries and French bread. Its retail strategy is very similar to BreadTalk, having stores at high volume areas with attractive décor.

Prima Deli It offers products very similar to traditional bakeries in the heartlands. Like BreadTalk, its products are priced at a premium. Most, if not all of its retail activities are concentrated in upscale places

such as shopping centres. Its cakes and pastries could pose both as a close competitor and as a

mainstay substitute to BreadTalk’s products which are primarily innovative concoctions.

Q-Bread Like Four Leaves and BreadTalk, Q-Bread’s strategy is to locate in strategic upscale areas with a high volume of traffic. Retail space is generally small and many varieties of buns and pastries litter its shelves.

Bread is a close competitor with BreadTalk because of similar prices and introduction of similar products which are reincarnations of previous ones.

Sweet Secrets

Sweet Secrets is synonymous with innovation and creative products. That is why it is probably BreadTalk’s greatest threat.

Without resorting to hype-generating media coverage, Sweet Secrets competes from a different perspective. It incorporates technological processes such as its latest invention “Photocakes” where food colourings are used to replicate prints on cake surfaces. It also has licenses with Disney to use images of characters such as Winnie the Pooh in its products.

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