Ruth Chris: The High Steaks of International Expansion

1. Give a small introduction and present a situational

analysis and overview of the case.

Introduction

Ruth Fertel, the founder of Ruth Chris, was born in New Orleans in 1927. She
took her graduation degree from Louisiana State University. Then Fertel
taught for two semesters in McNeese State University. Ruth Fertel also had
the trainer’s license and was the first female horse trainer. In 1965, Ruth
Fertel mortgaged her home for US $ 22,000 to purchase Chris Steak House,
which was a 60 seat restaurant. But in September 1965, when the city of
New Orleans was devastated by the hurricane, Ruth cooked whatever was
present in her restaurant and brought to her brother, to help in the relief
campaign.

In 1976, the thriving restaurant was destroyed by the kitchen fire. After that
Fertel brought a property on the Broad Street and opened the restaurant
with the name of “Ruth Chris Steak House”. In 1976, a first ever franchise of
Ruth Chris was opened by Tom Morgan on Airline Highway in Baton Rouge.
After that Ruth continued to awarding more and more franchisees and the
business continued to expand.

Dan Hannah was the vice president for the business development since
2004. Hannah was also concerned with the strategy development by
focusing the growth of franchise and company operated restaurants.

Overview

Ruth Chris Steak House became the largest fine dining steak house in the US.
Their commitment was to provide customer satisfaction which became one of
their success factors. Their steaks were also USDA Prime graded. And their
menu contained steak and sea food combinations and vegetable platter also.
The company occasionally introduced new items as specials that allowed the
restaurant to offer its guests additional choices.

• Initial Public Offering

In 2005, Ruth Chris went public by offering its initial public offering and
raised more than US $154 million in equity capital. The sales grew from 82
locations in the United States and 10 international locations including
Canada, Hong Kong, Mexico, and Taiwan. As of December 2005, 41 of the
restaurants were company owned and 51 were franchisee owned.

• Franchise agreement

The franchisee agreement that Ruth Chris used to give was for 10 years, with
three 10 year renewal options. The agreement also provided territorial
protection and there were terminal clauses included as well which could be
used in the event of non performance.

• Ansoff’s Product/Market Matrix

As a part of the international market selection process, Hannah considered

for models,

Restaurant Brands
Existing New
Existing Penetration Product
(more restaurants) Development
Market
Same Market (new brands)
Same Product Same Market
New Product
New Market Diversification
Development (new brands for new
 (new markets) market)
New Market New Product
Same Product New Market

The product development model was never seriously considered by Ruth

Chris, because they didn’t find value in diversifying the new kind of
restaurants.

The diversification model was also not seriously considered by Ruth because
they knew that their restaurants work only without the risk of brand dilution
or brand confusion, which might occur in case of pursuing the diversification
model.

The penetration model was used by the Ruth Chris in the small way, but
there was a limiting factor in that model as well, that the establishments
would not become as ubiquitous as the quick service restaurants.

The market development model was the most common model used by the
Ruth Chris for generating revenue. Franchisees in Canada, Hong Kong,
Mexico and Taiwan were successful by using this model.

Situational Analysis

Currently the biggest challenge for Hannah was to decide which location to
choose for the international expansion to proceed further. Ruth Chris used to
receive inquires by the would be franchisees from all over the world, but
because of the strict criteria, many potential countries got excluded from the
list. The criteria included – liquid net worth of at least US $ 1 million,
experience within the hospitality industry, ability to develop multiple
locations, cost of a franchise US $ 100,000 per restaurant franchise fee, five
% of gross sales royalty fee and two % of gross sales fee as a contribution to
the national advertising campaign. Because of all these strict criteria, many
potential countries were eliminated from the list of would be franchisees.
Now that Ruth Chris wanted to grow its international business, the most
important question ahead of it was to decide what countries would be best
suited for the fine dining that made Ruth Chris famous. The Ruth Chris was
deciding to select the market, for that they created a certain criteria. They
defined certain success factors:

• Beef Eaters – As Ruth Chris was the steak House, and most of its items
were beef and meat related, they conducted an analysis in 17
countries to find out the annual beef consumption.

• Legal to import US beef – As the Ruth Chris used only USDA Prime beef,
thus they had to analyze whether the target country is able to import
the USDA Prime beef or not.

• Population/High Urbanization – The target market also need to be in

highly urbanized and densely populated areas.

• High disposable income – The target market should have the people
who have high disposable income.

• Do people go out to eat? The target market should have the customers
who would be willing to go out to eat.

• Affinity for US brands – As the name Ruth Chris was uniquely American
so there could be certain countries which are anti US. So the target
market should be in such a country which is not anti US.

What should be done next?

The most important issues were to decide about the market entry. Ruth Chris
was also considering whether to continue franchising, or they might look for
other opportunities in joint venture or company owned stores. They also
wanted to find the opportunity to find a global partner/brand.
2. What did Hannah do to make the first cut in the list of
potential countries? How did he get from 200 to less the
35 potential markets? Which variables seamed more
important in his decision making? Which unused variables
might have been useful?

When deciding about where to go next in international expansion, Hannah

made a certain strict criteria which the potential country should meet, if they
want to have a franchise agreement. That criterion was quite strict, and it
caused many potential countries to be dropped out from the list, and the list
got from 200 to less than 35 potential markets. The following variables were
considered in the criteria:

• Liquid net worth of at least 1 million $ - A net worth of this

huge amount was necessary for the potential country to have, in order
to get the franchise agreement. This excluded many potential
countries of the third world that could not have this amount of capital
to start up.

• Experience within the hospitality industry – Hospitality

industry is related to the restaurants, cafes and hotels etc. So the
potential country must have some experience in this industry. Now this
variable excluded those countries who do not have experience in the
hospitality industry but would be willing to start the franchising and
may possess the other required capabilities.

• Ability and Desire to make multiple locations – This was

another variable which eliminated many of the potential countries,
because if a country may want to restrict the business to specified
 location, it cannot get the franchise agreement from Ruth Chris,
because they want that the country is able to develop and expand the
franchises to multiple locations.

• Cost of the franchise – The cost of the franchise was 100,000 $

per restaurant franchise fee. This cost cannot be afforded by certain
third world countries, which cannot pay this amount for the fee. So,
many potential third world countries got excluded from the list.

• Royalty fee – Royalty fee was five percent of the gross sales which
has to be paid monthly, is needed to be paid to Ruth Chris. This was
also one of the strict criteria that excluded many potential countries.

• Contribution for the national advertising campaign – It

was also compulsory for the host country to contribute two percent of
the gross sales fee for the national advertising campaign. This
advertising fee was also paid monthly. So, the countries that would not
be willing to contribute this amount for the advertising campaign were
eliminated from the list of prospects.

Variables that are important in the decision making

All the variables that Hannah considered were although important, but most
important variables in the criteria were

• Initial Capital, because the host country must possess the required
capital in order to make their franchising successful. They must have
access to adequate capital to develop the entire development
schedule.

• Experience, this is also important variable for Ruth Chris to be

considered. The potential country must have proven hospitality
experience (food service, including casual dining or hotel preferred)
 • Ability and Desire to make multiple locations, this is also
important variable that the host country must have the ability to make
multiple restaurants; they should have made a development plan for
the multiple locations.

Unused Variables for Ruth Chris that might have been

useful

Although Hannah considered many important variables that were useful

while making a potential list for the countries to whom the franchise
agreement could be given, but there are other unused variables which could
also prove out to be useful in determining the criteria, these variables are as
follows:

• The franchisee should comply with the standards – The

host country which is going to take the franchise agreement, must
comply with the standards of the operation which Ruth Chris will
define.

• Territory – Ruth Chris might also define the specific territories for
the host countries, where they can operate. Because the success of
restaurant also depends on such factors like urbanization, high
disposable income etc. This variable can help Ruth Chris increase its
probability of success by defining to work in the urban areas.

• Operations Manual – The franchisee must be legally obliged to

follow the rules and regulations of the operations of the business,
because if they don’t follow, it could bring a bad image to the brand of
Ruth Chris.

• Competency in the Technical Area – Ruth Chris could also

verify if the potential countries are competent enough in the technical
area. If they are not, they could also provide training in the start.
 • Flexibility – The host company which is going to take the franchise
agreement should be flexible enough to face any change. In case the
parent company is sold, they could have the ability to look for
alternatives.

http://franchises.about.com/od/franchiselegalissues/a/franchiseagree.htm

http://www.ruthschris.com/Franchising

3. What would be your choice for top five opportunities?

And for the top 10 opportunities? What variables/equation
did you use to reach this conclusion and why?

Top Five Opportunities for Ruth Chris

Opportunity is anything that a company can do to capitalize on some

variables that exist in the environment. While planning to go global, there
are certain opportunities for Ruth Chris to consider, the top five opportunities
in their order of priority are as follows:

1. High Disposable Income

A high-income economy is defined by the World Bank as a country with a

Gross National Income per capita of $12,196. This includes countries, for
example Australia, Bahrain, Switzerland, Germany, Kuwait, Saudi Arabia,
UAE, Qatar and many more. Ruth Chris has the opportunity to open
franchises in these high income countries where the disposable income of
people is high. As the average cost of the meal is over $70 at Ruth Chris at
United States, the high disposable income of the people in other countries
can create an appropriate pool of potential customers.

2. High Urbanization Rate

The variable is high urbanization rate, then the opportunity for Ruth Chris is
to open franchises in Singapore, Kuwait, Belgium because they have high
urbanization rate of 100%, 96% and 97% respectively. As the urban areas of
the country are the major target market for fine dining restaurants, it will be
a great opportunity for Ruth Chris to open up franchises in countries having
high urbanization rate. Singapore is the best opportunity in this case
because it has the urbanization rate of 100%.

3. Population

The countries having the high population can provide a target market
because those countries will have certain pools of target customers at which
Ruth Chris can focus. The more the population of a country, the more will be
the chance for the target customers in such countries. For example, China
has the population of 1,313,973,000; it can provide pool of target customers
where franchises would be opened. Similarly, they could open franchises in
Brazil having the population of 188,078,000, Japan having the population of
127,463,000 and Russia having the population of 142,893,000.

4. Meat and Beef Consumption

Although beef consumption is not much important variable, but even then it
can be considered. Because the countries having the higher beef
consumption per capita can provide greater opportunities for the fine dining
restaurants like Ruth Chris. Apart from US, Ruth Chris can focus on other
countries having a high beef consumption per capita, for example Bahamas
having a per capita beef consumption of 123.6 kg, and France, Hungary,
Ireland and Spain having beef consumption of 101.1, 100.7, 106.3 and 118.6
respectively. Ruth Chris has the opportunity to open franchises in such
countries.

5. Per Capita GDP

Per capita GDP can sometime give the distorted image of the economy, but
even then it is a variable to measure the growth rate of the country. If the
GDP of the country is high, there will be greater chance for the success of the
Ruth Chris Steak House. For example, the per capita GDP measured as PPP in
US$ for UAE is $43,000 and for Ireland it is $41,000. So, Ruth Chris can open
franchises in Ireland ad UAE because they have higher per capita GDP, which
shows that people have high income and are living well so the Ruth Chris can
become a success there.

Other Five Opportunities

Apart from the opportunities mentioned in the case, there are other
opportunities as well, which Ruth Chris can look forward to, in other
countries. These opportunities are as follows:

1. Development and Growth rates

As GDP can sometime give the distorted image of the country’s progress,
so apart from GDP, the development rate and growth patterns can be
observed in the other countries. Ruth Chris can find greater opportunities
in those countries where there is high living standard and the growth rate
is high. Because the average price of the meal of Ruth Chris is about $18
to $38. So the countries where there is high living standard and the
economies which are highly developed, can be a opportunity for the Ruth
Chris to look forward to.
2. Food consumption patterns

As the food consumption pattern determine the intake of different food

components by the consumers, Hannah can find out the countries where
there is high consumption of meat and beef. For example according to the
data of 2002, in North America the meat consumption per capita in
kilograms is 123.2, similarly the meat consumption per capita in high
income countries is 93.5 kilograms. So Hannah can open franchises in
such locations where the consumption pattern is more inclined towards
meat and beef.

3. Convenience need in customers

As customers prefer that the products and services become available to

them with minimum effort and with great convenience, so Hannah can
decide about the locations of the franchises by keeping this convenience
need in mind. Because if the franchise will be closer to the target
customers, the sales will increase.

4. Demand

Hannah can look forward to those countries where the demand for fine
dining restaurants is not being met currently by the restaurants. By
establishing franchises in such countries where there is demand for steak
house like Ruth Chris, it can be a success because the demand of the
target customers will be met.

5. Urbanization and High Income

There is an opportunity for Hannah to consider those high income

countries, where urbanization is also high. As the urban areas of the
country contain the major target market for such restaurants, so by
considering the urban areas of the high income countries, Hannah can
exploit the opportunity.
 6.

4) Hannah was focused on franchising mode of entry. Do

the critical variables change if a different mode of entry
was employed? Can you give at least 2 variables for each
entry mode that you think would be different as compared
to franchising?

Although franchising was a good option that Hannah was looking forward to,
but if they employ some different mode of entry for international expansion,
the critical variables change which they have to look in the potential
countries then.

Joint Venture

If they try to take joint venture as the entry mode then the critical variables
that are different from the franchising are as follows:

1. Looking for the partner

If they want to come up with the joint venture, then they have to find the
global partner with which they would partner. Moreover, they would have
to evaluate the potential countries that could become their global partner
in opening up a joint venture for their restaurant.

2. Capital Contribution and Profit/Loss

The joint venture agreement that would be made with other countries will
have to include the contribution of cash, property and capital that they
will give towards the venture. Moreover, the percentage of profit and loss
will be allocated to the parent company and the host company also. And
this allocation will be written in the agreement.
 3. Dissolution

The terms and conditions will be defined in the joint venture agreement
that needs to be fulfilled. Moreover, the events that will lead to the
dissolution of the venture will have to be included in the agreement.

Company Owned Stores

Ruth Chris has already been opening up company owned stores. When it
started in 1965, there was only one store of Ruth Chris Steak House and that
was company owned. By the time, the number of company owned stores
continued to increase and in 2005, there were up to 42 company owned
stores of Ruth Chris. The variables that are different when company owned
stores are taken as an entry strategy for international expansion are as
follows:

1. Greater Knowledge about the potential country

As there is a greater investment required for company owned stores as

compared to the franchising, so a greater knowledge about the potential
country is also needed. Ruth Chris will also need to know about the
culture, political and economic environment of the host country because
there could be certain challenges that they have to face when opening up
the company owned stores.

2. Greater investment

As the parent company will be handling the whole restaurant and its
operations, there will be greater investment that has to be made by
Hannah. Moreover, the costs and risks will increase also because the
parent company will be the owner of the whole restaurants.

Acquisition
Ruth Chris can also acquire restaurants to expand its business. It will enable
the company to concentrate its resources in best geographical areas by
acquiring the restaurants. It will lead to increased profitability and expansion
of the international business. For acquisition, the following variables will
become important for Ruth Chris to consider:

1. Market Value of the Target Company

While acquiring the company, Ruth Chris will have to see the market value of
the target company. They will analyze the financial performance of the target
company that how it has been performing in the past. Not only the past
market value, but the future market value is also analyzed that whether it
will be worthy to acquire the company or not.

2. Transfer of the Assets and the Business Contracts

It will be decided in the acquisition agreement that the assets of the target
company will be transferred to the parent company. All the business
contracts will be transferred to the parent company as well, and these
variables will be written in the acquisition agreement.
5) What are some of the external and internal challenges
Hannah will face in moving from the list to actually
opening restaurants?

There are always certain challenges associated with the international

business. Although Ruth Chris has been doing a successful business so far,
but there are certain challenges they could face internally and externally
when opening up the restaurants internationally. These challenges are as
follows:

Internal Challenges:

The internal challenges that Hannah will face in the international expansion
are as follows:

1. Limited Menu

The menu of Ruth Chris Steak House was limited to steaks, sea food and
vegetable platters. The challenge was to attract the target market in the
potential countries with this limited menu. Even Mc Donald changes its menu
to cater the target market in different countries, Ruth Chris could also try
expanding its menu according to the local tastes of the host countries.

2. Sustaining the customer satisfaction

Their commitment was the customer satisfaction, and while going global it
was a challenge for them to maintain and sustain the customer satisfaction
to remain successful in the international markets.

3. High start up costs

The startup cost were very high, it was 100,000$ per restaurant. And
because of this there was a limited market due to this high cost. The
challenge was to either decrease the startup cost or to increase the market
with the same high initial costs.

4. Consistent Cooking method

The cooking method that was employed was that the steaks were cut into
smaller portions at each restaurant, and cooked by a special process using a
broiler heated to about 1,800 degrees Fahrenheit. This cooking method was
consistent throughout the chain where ever the restaurants were. The
challenge for Hannah is to maintain that consistency in the cooking method
in order to keep their brand image.

5. Standards set by Ruth Chris are followed or not

The franchisees were to be checked whether they were following the

standards or not. For example, the Ruth Chris currently used only USDA
Prime beef, and for the potential franchisees, it was a necessary condition to
get this beef imported. There need to be a check on the host countries that
whether they are following the standards or not.

6. Brand Image

The challenge is now to maintain that brand image which Ruth Chris created
in her life. If any customer gets a bad experience in any franchise around the
world, he/she will perceive the whole brand as bad. So, it’s a challenge for
Hannah to maintain and foster the brand image which has been created in
years.

7. Revenue generation for the new franchisees

As Ruth Chris has gone global, they had to meet the Wall Street’s
expectations for revenue growth. The current stores were seeing incremental
consistent revenue growth, but the new restaurants were critical and there
should be revenue generation by them also.
External Challenges:

Apart from these internal challenges, following are the external challenges
that Hannah will face in the international expansion:

1. Affinity towards the US brands

As the name Ruth Chris was uniquely American, so was the Ruth Fertel story.
The countries that were anti United States could also be eliminated from the
list of potential franchisees. But if Hannah decides to open franchise in such
country, it was a challenge to decrease that affinity for the US brand in order
to survive in such a country.

2. Political instability

If Hannah decides to establish franchises in countries where there is political

instability, for example in the third world countries, then it is a challenge to
prosper the brand in such a country because the political instabilities can
affect the business operations of the organizations.

3. Cultural barriers

There could be certain cultural barriers to operate at the international level.

And these cultural barriers can be reduced by knowing more and more about
the culture of the host country. For example, if Hannah decides to open
franchise in Islamic country, then there could be an issue regarding the halal
and haram as it relates to the importation of beef from US, but the host
country might not be willing to import from US. Hannah has to tackle this
challenge also.

4. Location
The biggest challenge so far that Hannah is facing is related to the selection
of the optimal location. As they were looking for new markets, they had to
decide which markets to enter first. As, location can play a significant role in
the success of a franchise, it was a critical challenge for Hannah to decide
about the best locations around the world.

5. Trade barriers

As, it was necessary for the franchisees to import the beef from US which
needs to be USDA Prime labeled, it could be a challenge for the countries
where there would be trade barriers to import beef from US. Hannah need to
find out first that whether the import of beef is allowed in the potential
countries or not.

6. Competition

Ruth Chris has to face competition from other brands in US and in other
countries. If other brands of steak house will offer their products at lower
prices with the same quality, the customers will switch their brand from Ruth
Chris to other brands.
6) Propose Hannah an implementation plan for the
International expansion strategy of its restaurants?

Franchising represents an attractive means for many manufacturers,

retailers and service providers to expand their businesses. Franchise is one
of the forms to expand the business. Hannah first needs to consider the
advantages and disadvantages of franchising that wherever they are going
to open its franchise would it be successful or not. These may include
sources of capital, program development, maintenance and management
costs, franchisee relations and franchise legal requirements etc. Hannah
should also look over the critical factors to the development of franchise
program that includes geographic strategy, ability to protect its trademark
and trade name, training requirements to transfer operational knowledge,
sources of franchisor revenue, financial projections and analysis, availability
of capital and Industry segment.
Hannah should identify the goals of the company, and includes a balance
sheet and cash flow analysis. As opening a franchise-based business requires
a significant financial investment to buy the franchise and establishing the
business so Hannah should consider whether the host company is able to
invest. The host company should make a detailed business plan as soon as
they decide to get into the franchise business and before they sign any
franchise agreement. They should work closely with an accountant for the
financial portion of the plan. This franchise business plan will provide some
guidance in running the business.

Hannah should consider the following points for implementation of its

international expansion:
1) Capital Plan: This includes the sources of funds, uses of funds and
repayments of funds which states that how much money will they
 need, how will they use the money such as building purchase, build-
out, equipment, franchise fees, working capital reserves, etc.
2) Company Information: This includes History of the Business of the
franchisee, Industry Overview, Objectives, Implementation Timeline
and Future Opportunities. Moreover the franchisee will provide a proof
of their previous experience in the hospitality industry. The franchisee
will also provide a description of their company including information
about its origins, the number of franchise units they want to open, total
projected sales by the franchise units. What will be the size, growth,
and overall trends of the industry. What will be the major tasks and
milestones to be reached as they will move forward. For each, they will
provide an estimate of how long it will take to accomplish.
3) The Franchisor-Franchisee Relationship: This includes support
provided by the franchisor and responsibilities of the franchisee.
Hannah will provide guidance to the franchisees on these particular
areas: market-proven products and operating format, volume purchase
discounts, marketing support, management counseling, and training
etc. And also discuss the payment and performance requirements that
they will be expected to meet, including franchise fees, royalties,
advertising fees and minimum sales goals.

4) Products and Services: Hannah will briefly provide a basic overview

of the products and services the host company will provide. For each
major product/service category, the nature of the products/services in
the category, pricing and pricing policies, direct costs involved will be
described.
Management, Staffing, Strategic Partners, and Professional
Support: Profile will be provided for each owner who will participate in
operations as well as each major manager. Discussion will be made on
major job responsibilities as well as specific skills and experiences of each
manager that qualifies them to handle the job at hand. A list will be made
of the professionals that will be used and description of how they will use
them.
5) Hours and Days of Operation, Location & Facilities, Licensing,
Permitting & Other Regulatory Issues and Other Operational
Issues. It will then be decided that how many hours and days of
operation be configured to meet the needs of the customers. The
location of the business will be decided, the location that will be
selected must contribute to the success of the business operation. It
will be near the target customers.

Facilities will describe the actual location, including total square

footage, allocation of space, parking (if appropriate). Office & computer
equipment, as well as other equipment and vehicles required will be
finalized. If the location will be on rent, leasing will be described. The
charges of the facilities will be evaluated as the business grows. The
regulatory requirements for doing business, including any
certifications, licenses, permits, registrations will be made.

6) Marketing Targets, Distribution, Competitive Environment and

Positioning and Marketing Tactics. The target customers will be
evaluated and identified. The distribution process of the
products/services will be finalized as to how the final product will get to
the customers. The competitive analysis will be done about other fine
dining restaurant in the same location. Strengths and weaknesses of
the competitors will also be analyzed. Promotion techniques will be
made which might include advertising, internet promotions, direct mail,
trade shows, etc.
7) Financial Summary After a certain time period, financial statements
will be made that will show whether the franchisee is meeting the goals
or not. The financial statement includes balance sheet, income
statement, cash flow statement and break-even analysis etc.