Carvel In Beijing

Supervised By
Prof. Dr. Ahmed Shalaby
Prepared By
Eman Essa
Naglaa Ali
Amir Nazir
Mohamed Nasr
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Khalid Abdel Salam

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 Part (1)
Diagnosis
Company History
Carvel Corporation had one of the oldest and most endearing histories of all
the ice cream companies in the U.S.

 Thomas Andreas Carvel as was born July 14, 1906, in Athanassos Greece
1910 his family immigrated to Danbury, New York City in 1920. When he
was a child he has always dreamed of owning his own frozen custard
shop. Mr. Carvel used a combination of fresh ice cream and innovative
products and manufacturing techniques to establish himself as the local,
family-oriented ice cream parlor in the New York City area.
 In1934 when he borrowed $ 100 dollars from his future wife Agnes
Stewart, and bought a trailer load of custard ,The first year he grossed
$3,500
 1939 his yearly gross income was $6,000 a year and he became known as
the "Ice Cream King of the East"
 Tom Carvel developed his own freezer model, known as the batch freezer
under the trade name "Custard King" he sold about 71 freezers for $2,900
each
 Carvel makes the “creamiest” ice cream on the market and maintains
itself as the fourth largest ice cream chain in the United States.
 in 1947, Mr. Carvel used a combination of fresh ice cream and innovative
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products and manufacturing techniques to establish himself as the local,

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family-oriented ice cream parlor in the New York City area. Mr. Carvel
franchised his first store and proceeded to become one of the pioneers in
fast food franchising. In fact, it was only after Tom Carvel refused his
partnership offer that Ray Kroc used Mr. Carvel’s store design as the
model for his McDonald’s chain.
 1960s and 70s, Mr. Carvel used his folksy and savvy style to dominate the
greater New York area. By standardizing procedures and providing
franchisees with exclusive product designs and marketing
 1980s, there were over 800 Carvel stores in operation along the East
Coast and in some Midwestern states such as Ohio and Wisconsin.
Included in the company chain were over 40 stores in California.
 Phil Fang (yang Dengsheng), the Taiwanese general manager of the
Beijing operation, faced similar pressure. Slow sales reduced the
company’s opportunity to break from the myriad of small brands and
establish itself as the first truly national brand in China. Moreover, with
Baskin-Robbins, First, as a Taiwanese manager of a three-part joint
venture, Fang was pulled by each partner’s differing business
perspectives. Most important, though, Fang questioned the American
management’s decision to price and market the product as strictly an
American ice cream. At times, Fang felt that the Americans did not
appreciate the complexities and subtleties of doing business in China.
Now, as the company faced its first summer sales period, Fang would
have to make some long-lasting business decisions. Each manager quietly
felt he understood the problem. Demadis believed that the product was by
far the best quality ice cream in Beijing; the company simply needed to
improve the marketing and retailing of the product. He wanted Carvel
Beijing to increase the products price and, in turn,

Performance indicators
1980s, the recession and the strain on Tom Carvel to manage his business
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began to take its effect on the franchise. Sales and quality control began to
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decline, and events forced Mr. Carvel to consider changes.In 1989, at age 88,
faced with diminishing sales and increasing store closures, Tom Carvel
reluctantly sold his company to Investcorp, a Bahrainian-based investment
banking group. The Investcorp strategy centered on acquiring previously
gainful companies whose profitability had diminished in recent years due to
recession. Following that strategy, between 1988 and 1992 Investcorp had
purchased Macy’s, Sax Fifth Avenue, Tilecorp,
 . Exhibit 1 shows Carvel’s organizational arrangements in Asia.

Market Share & Growth

1994, in the face of industry-wide declines, It was Steve Fellingham who
decided to bring Carvel to China. After an initial backing by Investcorp of $4
million, Fellingham negotiated a joint venture in which Carvel Corporation
established two new enterprises. These two new enterprises were Carvel
Asia, headed by Tony Wang (Wang Da Dong), and Carvel Beijing, headed by
Phil Fang, Financially, Phil Fang did not anticipate reaching break-even sales
until 1996, and the company’s slow start in 1995 jeopardized even that
prediction.His biggest problem continued to be slow sales growth and slow
customer attachment to the high margin cakes. As the Income Statement for
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1994 in Carvel Beijing operated at a net loss of nearly (¥1,070,000) in

1994.For 1995, Fang had requested an additional $800,000 from the joint
venture partners and set the following objectives for the year:

 Sales of ¥13 million

 100,000 cakes sold
 68 total sales outlets by year end
As mentioned earlier, the company’s poor cash flow forced Fang to
reconsider his growth strategy. He would not be able to count on large retail
stores like in the U.S. Instead, he planned on operating many smaller outlets
that would demand less initial cash investment. His budgeted breakdown for
projected outlets by the end of 1995 underlined this strategy. By the calendar
and fiscal year end of 1995, Fang aimed to have the following outlet
distribution:

These goals, however, were jeopardized by continual negative cash flow,

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which in February 1995 totaled (¥400,000).

Clearly, as the Projected Budget for 1995 , nearly 60 percent of Fang’s

investment from the joint venture partners would go toward rent and the
purchase of new equipment. In fact, by April Fang had already realized that
the cash crunch he was under was going to force him to revise his budget
plans or to request more capital from the joint venture partners. Fang’s
Projected 1995 Profit & Loss Statement reveals several factors that
contributed to this problem.

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Customer Satisfaction
The most striking fact to emerge was that Chinese consumers were very
intelligent shoppers who valued quality and long life in their purchases. For
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example, only 29 percent of consumers bought on price alone, whereas 63

percent bought on quality. As for consumer tastes in food, rice, tea, and pasta
are the most common foods in the Chinese household. However, 17 percent
of those polled had dairy products in their house, and 13 percent regularly
kept frozen foods at home. Chinese were very well aware of foreign brand
names.
Brand equity
Carvel Asia then provided 50 percent of the equity for Carvel Beijing. Wang
Meng, president and owner of New Continent Dairy, a local dairy and
producer of low end ice cream in Beijing, contributed 30 percent of the capital
financing for Carvel Beijing. By creating both regional partners and joint
venture partners, Carvel U.S. attempted to meet two objectives

Demadis felt it was crucial for the company to take advantage of its first over
status to establish the brand as the premium ice cream cake and novelty
company against which all subsequent competition would be compared.

Accordingly, Demadis had to defend his position to market the product as a

premium ice cream demanding a premium price. Inherent in the corporate
long term marketing strategy was the need to establish the brand as a
premium product to which a Chinese rank and file with increasing disposable
income would aspire.

Performance Gaps
 Bad external environmental factors study (PESTC)
 Bad External Environmental Factors study (PESTC):
 Cross Cultural Barriers: Chinese don’t like the dairy
product (Lowest in the world). Considering cold food as
unhealthy food
 Economical studies (gaps in the pricing)
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 Demographical and social studies. (gaps in

segmentations)
 Technological applications to reduce the costs
 Competition studies
 Consumer reluctant to globalization
 Here are below the explaination:
  Carvel failed to study culture in Beijing that it is known that
Chinese people are the lowest people in the world using the dairy
product and also they are lactose intolerance
 -Economically carvel ignored that a lot of Chinese people has low
income
 -Politically also carvel found that salary of Chinese labour is very
high due to the Chinese government give 17% taxes and
32%medical care and child care to labour
 Also carvel had gab in studying competitions in china so
competitors like
 Walls as a Holland based company and one of the market leaders in
Europe.
 Buds: was a San Francisco based Ice cream company that enjoyed a
wide presence and brand awareness in Beijing
 Baskin Robins was Carvel’s chief rival in US and its products enjoyed
more national brand awareness than Carvel’s.

Bad STP:
 Bad Market segmentations must lead to a bad targeting and off course
bad positioning which means you lost your direction as a marketer.
 Bad studying and Applying of STP

 Bad Segmentations (due to bad economical and demographical

studies)

 Right Targeting
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 Positioning (by the right product Mix (4Ps).

 Bad Sales representatives management

4Ps
 Gap in deciding right Positioning
  Products (big quantity) and attracting for the kids segments

 pricing for the targeted market segmentations

 promoting and communications due to bad segmentations

(confused message). Limited budget

 Placing of the products mixing between the high and low quality
wholesales channels (150 accounts)

 Bad management of the 10 retail stores

Action Taken
 Proper Segmentations
 Right Targeting
 Middle and upper class (Young Chinese Professionals)
 Little emperors (single child for each family)
 Foreign employees at the multinational communities
 Right Positioning
 Product and Pricing
 Smaller and cheaper cakes like the little love to attract new segment.
 Applying Technology to drop the prices by applying over run process
(forcing air during manufacturing of ice cream process to increase the
size and give the creamy texture)
 Attracting kids through delightful designs of the products
 Right Promotion (communication):
 Big Print Media promotion to communicate a uniform
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message to attract the Chinese for the new Ice cream food
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behavior by Who they are and what they are about and the
benefits of their products
 Focusing at Clubs and Schools
 Right Placing (distribution Channels):
 Reject the low quality Wholesales accounts
 Focusing on the foreign people compounds
 Focusing to place close to the Clubs and Schools
  Better cost management:
 Exchanging to Chinese supplier to reduce the cost
 Using guan xi (exchanging favors)

The performance drivers (the factors that lie behind the

performance gaps):
1- Cultural Factors:
 The cultural complexities of being a Taiwanese manager for an
American firm in China further complicated his role.
 The presence of Guan Xi concept (meaning relations and
connections) in China would affect the entrance of Carvel into
Beijing market.
 Chinese enjoyed various types of traditional dried fruits and they
often ended each meal with a platter of fresh fruit and tea, which is
considered cheaper and more widely recognized than Carvel
product line.
 The traditional Chinese shapes such as the bear were inherently
strong sellers, while American-style cakes seemed too foreign.
2- Environmental Factors:
 There are several factors in Beijing environment that exacerbate
quality control efforts, just as:
1. Dust, pollution and coal ash.
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2. The water supply in Beijing is not potable, so it must be boiled

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and filtered.
3. The traditional Chinese cultural aversion to waste. Carvel used
several single-use items in its production process for
sanitation reasons. For their part the Chinese resisted certain
procedures and standards as too costly or wasteful.
3- Political Factors:
 The apparent stability and growth in the Chinese economy offered
good opportunities for business, but political uncertainty clouded
the future.
 The ailing health of the Communist leader Deng had set the stage
for another succession struggle in the party.
 While the Communist government assured of improved business
conditions in China, the recent events reflected a risk in the Chinese
market.
McDonald’s Case: The communist government’s recent summary
decision on McDonald’s lease on its celebrated Chang An Avenue store
reflected this intrinsic risk. Although he government cited legal clauses
in the lease agreement, the move caused shock waves in the business
community trying to establish long-term commitments in China.

4- Financial Factors:
 90% of Carvel Beijing input products were imported from the U.S. at
a relatively high cost.
 Customs taxes and regulations were the largest daily problem for
Carvel Beijing.
 Tariff rates averaged 50% of the net value of the item, and
sometimes it could reach 80% of the original value.
 Although the average Chinese employee earned 800 yen per month,
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there were other hidden costs involved, raising labor expense to

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149% of its actual cost (17% government payroll tax and 32% for
health care).

5- Internal Factors:
  The different point of views in Carvel Beijing strategy between Greg
Demadis (Director of Business Development for Carvel Corporation)
and Phil Fang (the Taiwanese general manager for Carvel Beijing)
 Non using Ultra High Temperature pasteurization process would
deprive Carvel Beijing of producing long shelf life products (90 days).
 Carvel Beijing experienced several power problems in its retail
stores and factory.
 Two small refrigerated trucks transport only 150 cakes. So, as the
company grows it will need greater delivery capacity.
 The lack of accurate and centralized information hampered efforts
to determine the cause of high costs.
Key environment trends & their likely impact on company
performance
1. Power problem:
Description:
 Rollhards, ice cream machines & shock boxes produce large flows &
consumes of electricity.
 Carvel Beijing’s operations had already experienced several power
problems in both its retail stores & factory.
Impact:
 Once the product begins to melt, its creaminess & smoothness are lost.
Also placing a melting cake or novelty back in the shock box caused ice to
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form on the product; the result is a blander, less tasty ice cream.
Solution:
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Consequently a dependable supply of electricity is essential, such as:

 Generator
 Solar Cells
1. Carvel can use a permanent power source (government’s electricity)
with a backup power supply using one of the above two alternatives of
power source; or
 2. Using one of the above two alternatives of power source as an own
power supply.
To control the source of the electricity supply & ensure of the dependable
supply of electricity.
2. Dirty environment problem:
There are several factors in the Beijing environment that resist quality control
efforts:
2.1 Pollution problem:
Description:
 Huge amount of dust, pollution & coal ash (Firewood powder) found in
the city.
Impact:
 This dust contaminates floors & working surface areas.
Solution:
 Carvel must continually monitor cleaning places.
2.2 Water Problem:
Description:
 The water supply in Beijing is not potable. Therefore it must be boiled
and filtered before use it in any product.
Impact:
 Water can’t be uses without boiling & filtering
Solution:
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 Like its electrical needs, Carvel must continually monitor water quality.
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3. Traditional Chinese culture problem:

Description:
  American management had a difficult time adapting to the traditional
Chinese culture hate to waste.
 When working with dairy products, at time it was necessary to dispose
of uncertain products or tools.
 Carvel also used several single-use items in its production process for
health reasons.
Impact:
 The Chinese resisted certain procedures & standards as too costly or
wasteful.
Solution:
 Carvel Beijing established hard quality control standards & continual
internal inspection program.
 Weekly bacteria reports were done on the mix batches, & biweekly coli-
form counts were checked in the retail outlets.
4. Traditional Chinese consumers problem:
Description:
 Fang believed that the conventional Carvel approach
(Carvel U.S) didn’t attract the tradition Chinese consumers for the following:
a. Some cakes didn’t attract Chinese consumer, who expected a more
complicated.
b. Fang got comments from customers that the ice cream was too sweet,
but Chinese traditionally didn’t like very sweet desserts.
c. On the other hand Demadis assert that consumer awareness was the
issue, not consumer taste.
Impact:
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 According to Phil Fang it was an unwilling, unfamiliar consumer, that

was behind the slow sales.
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Solution:
It was existed a different point of view between Fang & Demadis regarding
the solution for this problem to increase the sales as follow:
 Fang; changing the mix formula might increase sales, but
 Demadis; strongly opposed change the traditional success of the
company in any form.
SWOT analysis
Strength
 Carvel’s patented DL and DH ice cream
machine series
 Carvel has the best ice cream cake &
best Quality/ taste of product unique
offerings of ice cream cakes in different
shapes/designs
 Carvel had received +ve reviews from
its customers
 Training & Operations had progressed
well & the company was ready to
increase production higher overrun
translates into lower unit costs
Opportunities
 New offers to imports vending carts
 and freezers much cheaper could help
get around the imports taxes
 Involvement of foreign embassy
community in its sales promotions as a
means of increasing both sales and
potential outside business contracts
 The approaching summer allowed
Carvel to have a seasonal grand
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opening to reintroduce the brand to
first time customers
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Weakness
 Vaguely defined management roles &
objectives hampered definitive marketing
policies
 Disconnected management, and problems
with the joint venture with New Continent
 Lack of brand awareness in Beijing
 Very high operating expenses
 Perception of Carvel as a purely
 “American” brand Inability to source inputs
locally continued to hamper the bottom
line
 Too many potential customers still did not
know of Carvel Beijing
Threats
 Competition from other established
Ice Cream companies, both local and
 American, that are cheaper  
 The cash flow & sales problem
threatened to scuttle the proposed
business plan for 1995
 The competition including Wang
Meng wear quickly realizing the potential
of Ice cream cakes In Beijing & Carvel's
competitive advantages in this area
would be challenged
 The dynamics political and
economics environment in China
presented inherent uncertainty
 Part (2)
Solutions
Increasing sales by investing in wholesales accounts
Alternative:
1- Each account can produce there own products according to the product
line like McDonalds do in its branches
2- many smaller outlets that would demand less initial cash investment
3- Request more capital from the joint venture partners
4- An aggressive push campaign for outside accounts would create brand
awareness and drive sales
 Delivery trouble due to that they decided to produce only from the
factory

Alternative:
1- Return to the concept that each account can produce there own
products according to the product line like McDonalds do in its branches
2- Company need greater and more flexible delivery capacity ( > 150 truck
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capacity )
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 The high competition range due to the number of competitors that

produce the same type of products
Alternative:
1- They can concentrate on cake makings and reduce the ice cream makings
due to the storage and delivery and labor problem and also will reduce the
competition to be only with Baskin and Robbins.
2- Use the way of UHT rather that HTST in making the ice cream to be
differentiated than other competitors

Problems to be resolved
Communication
 A big problem is that the Chinese people are not familiar with the type
of product Carvel offers: ice-cream cakes.
 In general China’s consumption of dairy products is among the lowest in
the world.
 Unfortunately the Chinese are also showing a high incidence of lactose
intolerance.
 Another trouble is the fact that some folks do believe that cold food is
unhealthy.
 That is why Carvel has to start a big communication program. In terms
of the limited budget, manager Wang will use print media to
communicate, who they are, what they are about and the benefits of
their products.

Products and pricing

 The major part of the Chinese population has a quiet low income. This
is why Carvel has to adjust their prices and their product line to the
market.
 Smaller and cheaper cakes like the little love or the piece of cake are
examples how one could reduce the purchase risk and attract new
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customers.
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Wholesale accounts
 Carvel’s wholesale accounts are showing great differences in terms of
quality. This is a result of the mismanagement of the sales
representatives who are compensated by the number of accounts they
develop and not by the quality of the accounts.
  A radical surgery is needed to ensure that the existing accounts are
worth the effort

Technologies to be applied
 One goal of the strategy is cost reduction. This can also be achieved by
a technology, which is called over-run. The over run describes the
proportion of air that is mixed with the ice cream during the
manufacturing process.
 An over-run increase from 30-40 to a 45-50 per cent level could lower
variable costs about 5 per cent. This saving can be passed directly to
the consumer.

Submarkets and customers to be served

There are three important customer segments in Beijing that hold the greatest
promise for increased sales:

 Middle and upper class Chinese professionals

Thanks to the fast growing economy there are more and more people who
made it to a high-income level. The group of these young professionals is
aged 25 to 45 and seeking for novel products and experiences. 70 per cent of
the cake sales come from these yuppies.

 Little emperors
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In the 80’s the Chinese government started a program called one child policy
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in order to counteract the rapidly growing population. The sense of this

program was that every family should only have one chid. As a result of this
policy, there grew up a generation of pretty spoiled children and young
teenagers, who have no brothers or sisters. Parents spent up to 60 per cent
of their disposable income on their children who are getting everything they
want.
  Expatriate residents

The third group of potential customers are the expatriate residents who
consist mainly of foreign business and embassy employees and their families.
They are responsible for 10 per cent of Carvel’s sales. There are around
100.000 people, which are easy to reach, because of their English skills.

Restructure supply chain - specialty ice cream parlor

 Carvel Beijing must be improved its delivery systems

 Finished cakes were placed in Styrofoam boxes that could hold nearly
ten cakes.

 Large refrigerated trucks to transported Styrofoam boxes to the

accounts.

 Increase trucks Capacity.

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