CONTENTS

1.0 Executive Summary ..................................................................................................................1

2.0 History of BreadTalk Group......................................................................................................2
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............................................................................12
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...................................................................................14
6.2 SWOT Analysis of Bakery Segment .......................................................................................15
7.0 Strategic Issues Identified .......................................................................................................16
8.0 Recommendations ...................................................................................................................18
9.0 Appendices ..............................................................................................................................20

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.

1
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.

2.0 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

1
IPO Analysis: BreadTalk Group -- http://www.wallstraits.com/jungle/ipo/fipo_main.asp?id=iposg_BreadTalk

2
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.

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

2
Food Republic Singapore -- http://en.wikipedia.org/wiki/Food_Republic
3
JobStreet.com: Toast Box -- http://siva-sg.jobstreet.com/_profile/previewProfile.asp?advertiser_id=33315
4
BreadTalk Annual Report 2006, downloaded from www.BreadTalk.com

3
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 109.60 15.10 24.60 89.80 29.70
26.70%
Growth % % % % %

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.

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

4
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,
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.

5
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.

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.

6
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
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.

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 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.
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

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

8
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
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.
7
Asiacase.com, The Asian Business Case Centre, ‘BreadTalk: Managing Expansion Through Franchising’,
Foo See Liang & Chung Sang Pok, Dec 2004
8
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
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
and talent development within the group’11. Again, it is assumed that top managers could be

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

10
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 million 12 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 sales 13. "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).
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.

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

11
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.

6.0 BUSINESS LEVEL ANALYSIS - BAKERY BUSINESS

12
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:
34 25

33
24

32

No. of outlets
23
31
$m

22
30

21
29

28 20
2002 2003 2004
Year
Total retail sales S$ million Outlets Num ber 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 renovated and
launched the “Niu” store layout for the CityLink Mall outlet, it also announced plans to renovate all

13
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 2008
15
Real-Life Client Projects, BreadTalk – The Branded Bread Project
http://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 Location
http://www.listedcompany.com/ir/BreadTalk/web/show.cgi?content=strengths&

14
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

15
be a corporate level decision. Therefore, the focus is on the unpredictable performance of the
Bakery business within Singapore.

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 Profit Profit Profit Profit

from from from from from
% % % % %
Ops Ops Ops Ops Ops
$(‘000) $(‘000) $(‘000) $(‘000) $(‘000)
999 79.5% -802 N.M. -116 N.M. 1 829 24.4% 3 873 32.5%
Bakery *
257 20.5% 2 091 100.0% 3 283 67.4% 3 487 46.5% 4 571 38.4%
Restaurant
- - - - 1 586 32.6% 2 185 29.1% 3 457 29.1%
Foodcourt

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

16
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.
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

17
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
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.

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8.4 Remain highly selective in choosing Franchisees
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 85-86
19
‘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)

20
Appendix B: Year-on-Year Group Revenue Growth (2002-2007)
120.00%

100.00% 16.00%
14.00%
12.00%
10.00%
Operating Profit Margin

Operating Prof it
8.00%
6.00% Margin
4.00%
2.00%
0.00%

80.00%
02

03

04

06

07
2 00
20

20

20

20

20

60.00% Year-on-Year
Revenue Growth
40.00%

20.00%

0.00%
2002 2003 2004 2005 2006 2007

Appendix C: Group Net Profit (2002-2007)

($'000)

8000
7000 7300
6000
5000
4000
3400 3500 ($'000)
3000
2000
1000 1000 1040
0 2003
-30
-1000 2002 2003 2004 2005 2006 2007
Appendix D: Comparison of Geographic Expansion of BreadTalk (2003 & 2007)
7%

Singapore
China

93% 21
 2007

11%

Singapore
China
51% Rest of the World
38%

Appendix E: Key Competitors in the Bakery Industry

Peer Business Analysis

Bengawan  This cake and ‘kueh’ (traditional pastry) retail chain targets the premium
Solo 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  This bakery is unique because it actually takes up a small section of its
Jade other business which is the Crystal Jade Kitchen restaurant.
Kitchen  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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Four  A very close competitor of BreadTalk because it constantly innovates with
Leaves 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  Sweet Secrets is synonymous with innovation and creative products. That is
Secrets 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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