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Chattha’s – The Case Study

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FAT ANGELO’S: ENTREPRENEURIAL GROWTH

Introduction
Since the first meal was served in June 1998, Fat Angelo’s had been a great sensation in Hong
Kong’s culinary scene. The management team of Fat Angelo’s introduced a brand new
dining concept to Hong Kong – Italian-American home-styled cooking served in large
portions at a reasonable price. Sixteen months after the first restaurant opened its doors in
Wanchai, Hong Kong Island, the management was ready to open a second branch, this time
on Kowloon side. The new location was in Ashley Road, Tsim Sha Tsui. Although it was a
backstreet location, it was only three blocks away from Nathan Road, one of the busiest roads
in Hong Kong, perpetually packed with locals and tourists alike. The other shops on Ashley
Road were mainly restaurants offering different styles of cuisine and varying levels of
sophistication– from black-tie steak house to little mom-and-pop wonton noodle shops. The
variety of restaurant choices drew a considerable number of hungry stomachs. The 23 rd of
September 1999 marked the debut of the second Fat Angelo’s. Like the first one that had
opened on the other side of the harbour, it became an instant hit. Two months later, a third
branch was added on Elgin Street, Central. The neighbourhood was nicknamed “SOHO”
(south of Hollywood Road) and was dotted with exotic boutique restaurants.

Behind the bustling scenes, there was an issue occupying the minds of the managing partners.
Next to the Ashley Road branch there was an additional room of approximately 2,500 square
feet, adjacent to the main restaurant area. The room had its own separate street-front
entrance, but due to fire department requirements the two separate rooms were treated as one
unit and were included in the same lease agreement. Buying time to work out a long-term
plan for the extra space, Andy Chworowsky, Dale Willet and Chris Gallaga, the founders and
managing partners of Fat Angelo’s, decided to use the space as a temporary store-room and
office.

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This temporary arrangement lasted for almost a year. In 2001, with the three shops fully up
and running, the entrepreneurs thought it was time to take the business further by expanding
into a new restaurant concept. After several rounds of meetings, they came down to three
proposals to make use of the extra room for a new business: a pizza takeaway shop, a coffee
shop or a seafood restaurant. Each option seemed to have its own pros and cons, so which
one should they pick? Were there any other choices and possibilities?

Company Background

“We were committed to contriving an un-contrived concept.”


- Fat Angelo’s Business Plan

Fat Angelo’s was the brainchild of three entrepreneurs who were ex-colleagues in a
successful chain of American-style restaurants in Hong Kong. The idea was actually an
offshoot of Chworowsky’s research efforts as Business Development Manager at an
American restaurant. When he put together his proposal for the board, he was absolutely
positive about the idea of opening an Italian-American restaurant – but the board was not
convinced.

Chworowsky moved with his missionary parents to Hong Kong in 1973, at the age of ten.
Among other things, he had been an actor, a bartender and a ranch hand, and had dubbed
kung fu movies into English. 1 Chworowsky received his high-school education in Hong
Kong and was also a graduate of Cornell’s School of Hotel Management. He went on to
work for Dan Ryan’s Chicago Grill; in fact, he was the American steak house’s first
employee in Hong Kong.

Confident that the Italian-American restaurant would be a winning business, Chworowsky


decided to leave the company to start his own restaurant chain with two ex-colleagues in
1997. Drawing on the talents of each partner, the roles and responsibilities were defined
immediately. Dale Willetts, a Canadian Chartered Accountant with more than 10 years of
restaurant experience, would be in charge of finance and general administration. Christopher
Gallaga, an Italian and an experienced executive chef with over 16 years in the business,
would be in charge of food and kitchen operations. 2

The Asian financial crisis was a nightmare for many, and the restaurant trade was one of the
hardest-hit industries. During 1997, one in every five restaurants in Hong Kong folded after
excessive cash bleeding caused by rising rents and escalating labour costs, followed by the
outbreaks of bird flu and cholera. However, Chworowsky and his partners seized the
opportunity to turn the economic adversity to their advantage. The bursting of the economic
bubble pushed the real estate market downward, and many desirable sites suddenly became
available at affordable prices. The entrepreneurs also targeted value-conscious customers,
both local Chinese and expatriates, in Hong Kong, with the formula that fitted perfectly with
the prevalent economic climate. As Chworowsky recalled:

Ours is a “red-ink” business – you always make money selling red ink during
a bad economy because people need it. During the 1997 crisis, there were
many restaurants, the majority were very expensive. A mid-scale restaurant
would easily costs more than HK$300 per head. We aimed at serving

1
Sharp, J., (2003), “Andy Chworowsky: FCC Member, Restaurateur and…Elf”, The Correspondent, Dec 2002-Jan 2003 Issue.

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03/184C Fat Angelo’s: Entrepreneurial Growth
2
Gallaga later left the company in 2001.

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03/184C Fat Angelo’s: Entrepreneurial Growth

inexpensive but decent food in a cheerful setting, targeting an average of


HK$150 per person. Hong Kong people were famous for being very value-
conscious and they were drawn by the high value we offered. We first opened
our doors in early July 1997 and immediately we drew an awful lot of press.
We became the talk of the town and were really full every night.

The three managing partners did not plan to do any marketing for the first two months, but
tables were filled up by the second week. The successful launch continued to build into a
steady operation that yielded a 10 per cent net profit margin and a turnover of more than
HK$1 million per month per shop.

Financing the Restaurant

“Under-capitalisation is the most common reason for restaurant failure. We


did pessimistic, realistic and optimistic columns in our business plan and
make sure we have enough capital under all circumstances.”
- Dale Willetts, Managing Partner

When the Asian economic crisis was at its worst, the entrepreneurs were about half-way
through raising capital. Despite the economic turmoil, they decided to continue lobbying for
their business. They had the full support of those investors who had already committed
money. Finding additional investors proved to be easier than expected. The “red-ink”
business seemed to appeal to the investors’ appetites.

The managing partners incorporated the business under the name Gotham City Concepts
Limited, and sought to raise HK$3.6 million through the placement of 1.2 million ordinary
shares and HK$2.4 million in shareholder loans (debentures), as shown in Table 1 below:

Table 1: Initial Capital Structure


Share Value HK$ Debentures Value HK$ Total Value
HK$
Managing 1,400,000 $1,400,000 0 0 $1,400,000
Partners
Investment 1,200,000 $1,200,000 2,400,000 $2,400,000 $3,600,000
Partners
Total 2,600,000 $2,600,000 2,400,000 $2,400,000 $5,000,000

The managing partners’ capital contribution consisted entirely of share capital, while other
shareholders contributed HK$2 of shareholder loan for each HK$1 of share capital. The share
structure was designed to provide an incentive for the managing partners to maximise the
long-term value of the Company. It was also agreed that profits would be used first to pay
interest and principal on the shareholder loan. No dividends on shares would be paid until the
shareholder loans had been fully repaid.

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The Dining Concept

“My partners and I see ourselves very much in the entertainment business
rather than just a restaurant. We recreated the communal dining, cozy
atmosphere. The philosophy is one of no-nonsense food, served abundantly,
in an atmosphere that echoes a raucous countryside cantina.”
- Fat Angelo’s Business Plan

Fat Angelo’s cleverly blended the Chinese tradition of sharing dishes and the Western flair
for a fun and entertaining dinning experience. The resemblance of Chinese noodles to
spaghetti had gained Italian food a great deal of acceptance by the local palate (spaghetti was
dubbed “Italian Noodles” in Chinese). At the same time, most expatriates identified closely
with the family-run atmosphere. Instead of spending money on “gimmicks” or creating a
high-brow dining environment, Fat Angelo’s concentrated on maintaining a low cost base to
keep prices at a reasonable level. To reinforce the notion of great value, in addition to the
large portions that were served, salad and fresh-baked bread came free of charge with any
main dish order.

The Competition
Italian restaurants in Hong Kong fell into two distinct categories. In the high-end segment,
the competition for Fat Angelo’s included restaurants that placed an emphasis on being “cool”,
up-to-date, sophisticated and sedate. In these “fine-dining” restaurants (e.g., Grissini and Va
Bene), value was perceived in expensive cutlery, fancy china and elegant preparation of
dishes. Fat Angelo’s most direct competitors were in fact the lower to mid-scale Italian
restaurants, most of them fast-food-styled franchised stores (e.g., Pizza Hut and Spaghetti
House). Chworowsky and his partners believed that nobody in the Hong Kong restaurant
trade understood the tradition of family-styled Italian food.

The Menu
The menu at Fat Angelo’s was based on the southern Italian food concept, which had a lot of
similarities with Cantonese food – substantial, simple but nutritious. The style of food that
Fat Angelo’s served was also dubbed “immigrant Italian” food, which was typically found in
Little Italy in New York City. As Chworowsky explained:

The early immigrants to the USA from southern Italy had mostly led a rough
and tough life back home, the only happy time they looked forward to was
meal time when they gathered with their family, sharing the hearty dishes
grandmothers prepared. In the New World, these immigrants discovered
rare and expensive foods in Palermo and Naples were relatively cheap. That,
added to the bounty of new varieties and new ambitions, meant a credo of
abbondanza, which remains to this day.

All branches featured the same menu – a simple selection of home-made styled dishes [see
Exhibit 1 for a sample menu]. The food was not exotic, gourmet, fusion or some other trendy
new taste. It was designed for family-styled dining, and each menu item came in a “big” and
“not-so-big” size. A “weekly special” featuring non-regular items kept the menu fresh to
attract repeat patrons.
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The Service

“We plan to break rules. This is not a restaurant to impress snobbish


critics!”
- Fat Angelo’s Business Plan

Compared with the usual dining experience in a Western restaurant, Fat Angelo’s service was
fast, unfussy and unpretentious. Frontline staff members were given more flexibility in
delivering service in order to create a genuine homely and welcoming atmosphere –
something Chworowsky referred to as “planned chaos”. The philosophy at Fat Angelo’s was
one of no-nonsense food, served in an atmosphere that echoed a raucous countryside cantina
in Italy, rather than a boutique or disco in Manhattan.

The Décor
The décor was also standardised across all Fat Angelo’s restaurants. In order to create the
ambience of a migration-era city restaurant, Fat Angelo’s restaurants featured high ceilings
and old-fashioned functional incandescent factory lights. Plain terracotta was used for the
floor. Vintage Italian posters and black-and-white Italian family photos adorned the walls.
Dark wood tables were large, rugged and covered with coarse green-and-white-checked linen.
Chunky crockery, mismatched flatware and plain glass tumblers were used. The Wanchai
restaurant was big enough to accommodate about 160 guests (roughly 3,500 square feet). The
Tsim Sha Tsui and the Central restaurants had seat capacities of about 200 and 130
respectively. The tables were deliberately put quite close together to enhance the bustling
family-run atmosphere and create the intimacy of a Little Italy-styled shop-front restaurant
[see Exhibit 2].

The Price

“Fat Angelo’s will be a place where no one will be afraid of picking up the
cheque for a party of eight.”
- Fat Angelo’s Business Plan

Great value for the money was one of the factors that differentiated Fat Angelo’s from its
competitors. Prices were set at a level that the management believed customers would find
attractive. The targeted average cheque per person was around HK$150-HK$200. In 1999,
this price level was approximately 60 per cent above that of the lower-end competitors and 50
per cent cheaper than that of the high-end competitors.3 Raw materials were purchased from
local suppliers. Despite the initial difficulties in obtaining credit terms, which was normal for
a new business, Fat Angelo’s gradually built up a good rapport with its suppliers and was
continuously striving to minimise costs. The gross profit margin was maintained at an
impressive 75 per cent.

The Location
The first Fat Angelo’s restaurant was situated on a side street in the area between Wanchai
and Causeway Bay. It was easily accessible but not right in the middle of high-rent districts.

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3
Tilton, S., “Fat Angelo’s Thrives By Filling a Void”, The Asian Wall Street Journal, 12 October, 1998.

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The locations of the second and third branches were carefully chosen in “shoulder” areas
amidst A-list locations. This strategy was in line with the management philosophy of
maintaining a low cost base. Even though the restaurants were in B-list locations, rental
expenses represented up to 30 per cent of Fat Angelo’s operating costs.

The Tsim Sha Tsui store was a ground-floor site on Ashley Road, between Canton Road and
Nathan Road – two of the busiest streets in Hong Kong [see Exhibit 3 for map]. The floor
area of the main restaurant was approximately 4,000 square feet and the adjacent extra room
was approximately 2,500 square feet. The main store was an ideal size for Fat Angelo’s to
accommodate around 200 customers. Using both stores for Fat Angelo’s was not feasible as
the total area would be too big to create the cosy and homely atmosphere the owners wanted.
Moreover, including a separate area in the restaurant would jeopardise the family feel of the
restaurant.

The Options
Having achieved great success in the first three restaurants, the managing partners were keen
to grow the business with a new restaurant in the adjacent room. However, competition was
intense. Within the 540-feet (180-metre) stretch on Ashley Road, there were 38 restaurants
and takeaway stores [see Exhibit 4 for details of the other eateries on Ashley Road].
Nevertheless, the entrepreneurs were undeterred because they were encouraged by the
overwhelming success of the other Fat Angelo’s branches. The business was at a level 10 per
cent better than the most optimistic projection in the original business plan. Moreover, the
Company was cash-rich and had the luxury and flexibility to explore various options. After
late-night coffees, the partners came up with a shortlist of three possible alternatives.

The Pizza Takeaway


Pizza had gained popularity among young locals as an alternative to Chinese fast food.
Tourists staying in nearby hotels or shopping in the area would also be potential customers.
Although there were already a few takeaway stores within the same block, none of them
specialised in pizzas. Moreover, pizza had always been a menu item at Fat Angelo’s, so it
would be easy to produce more for the takeaway operation.

The Coffee Shop


The so-called “coffee culture” had been gaining attention and followers, especially among
young locals. There were a few local Chinese-styled cafés and snack shops, but no Western-
style coffee shop, on Ashley Road. A new coffee shop would fill the void. For people in the
area, particularly shoppers, a coffee shop would also provide a place to take a moment to
pause for refreshment.

Seafood Restaurant
Seafood had always been a basic element in the diet of Hong Kong people. The most popular
way to cook seafood was the local Chinese style of steaming or pan-frying. Nonetheless,
people also liked Japanese raw fish (sashimi) and other styles of preparing seafood such as
baked lobster with cheese. The managing partners were thinking of transferring the winning
concept of a fun, unpretentious atmosphere and the value proposition of Fat Angelo’s into a
new restaurant serving seafood cooked in Western styles.
Each alternative had its own pros and cons. Many blueprints were drafted to help visualise
the different options. Thinking of the lines of people waiting to get into Fat Angelo’s every
night, the managing partners believed that the new restaurant would be able to survive simply

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by capturing the overflow. As they studied one of the many draft floor plans [see Exhibit 5],
some questions remained:
Could they apply the Fat Angelo’s concept to a seafood restaurant? How about the other two
options? Were there any other choices? Which one was the best?

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EXHIBIT 1
SAMPLE MENU

Starters & Sides


Caesar Salad
Garlic Bread
Fried Calamari
Minestrone (cup/bowl)
Antipasti Platter
Mozzarella and Tomatoes

Pan Pizzas
3-Cheese
Meat Deluxe
Vegetarian

Pasta
Spaghetti Marinara (optional: Meat Balls)
Rigatoni Bolognese
Vodka Penne
Fettuccine with Salmon
Linguine Pesto
Lasagne
Farfalle with Sausage and Greens
Lobster & Scallop Fra Diavolo
Fettuccine Alfredo
Fusille Primavera

Main Dishes
Chicken Parmesan
Rosemary Roasted Chicken
Clams in Red Sauce
Mussels in Wine Sauce
Grilled Salmon with Pesto
Steak Florentine
Lamb Osso Buco
Seafood Risotto
Meat Balls
Ribs alla Roma
Eggplant Parmesan

Desserts
Tiramisu
Apple Crumble
Tortoni
Cheese Cake
Vanilla Ice Cream

Source: Fat Angelo’s Italian Restaurant

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EXHIBIT 2
FAT ANGELO’S ITALIAN RESTAURANT

Wanchai Branch - Interior

Elgin Street – Exterior

Source: Fat Angelo’s Italian Restaurant

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EXHIBIT 3
MAP OF ASHLEY ROAD

- Fat Angelo’s and the extra room.

Source: Adapted from www.centamap.com, September 2003.

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EXHIBIT 4
EATERIES IN THE VINCINTY OF FAT ANGELO’S

Source: Adapted from www.centamap.com, September 2003.

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EXHIBIT 5
FLOOR PLAN OF THE ROOM ADJACENT TO FAT ANGELO’S

Source: Gotham City Concepts Limted, September 2003.

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