Introduction

As every restaurant chain in Boston, Porcini was considering expansion due to a red ocean
situation. The saturation point of restaurants in the Boston area approaching dangerously, not
growing was no viable option on the long term. When big chains were looking for salute overseas,
Porcini’s regional status pushed the company into another direction. Diversification was
considered through highway restaurant, and financing had to be taken into account. The three
options available will be described in the following order: franchising, syndication, and company
operating.

Franchising Commented [1]: This is what i have so far from

someone else's presentation. May be its helpful
Low Investment and fast Growth Commented [2]: Really like Google Doc!
Porcini would only have to invest around $1 million to set up the franchise, which is considerably
less than company owned branches would cost. Additionally, the forecast for the number of
locations is the highest in comparison to the other options. Within 8 years, 28 locations could be
rolled out.

Profit
The expected profit margin of only 2% is very low. Especially the fact that Porcini is not a
household name would restrain royalty rates in the short run. After the first restaurants, Porcini
might be able to increase the rate given a high success for the franchisees.
Nonetheless, Pronto is a cheap and easy way to diversify Porcini’s portfolio and to insure against
the sensibility of revenues to economic situation and competitors. The traveller segment is rather
stable and could stabilise the company in difficult situations.

New responsibilities for Porcini

As a franchisor, Porcini would have several new responsibilities; from marketing and branding, to
location scouting and screening for the franchisees as well as contracting and offering service
and support, Porcini has no real experience for these tasks. So far, Porcini’s has a relatively low
brand recognition, which would have to be increased rapidly. Especially the success and opinion
of the first franchisees will determine whether or not Porcini will be able to select the best
applicants or not.

Control
An important competitive advantage of Porcini’s is its consistent high quality of service and food.
The chain has a long history since its beginning in 1969 and critics have always praised the chain.
Quality control concepts like pathfinder teams, meal surveys and especially the probably very
costly hiring process are hard to enforce on franchisees. Hiring employees with the right attitude
is rather subjective even harder to enforce than the other mechanisms as they rely on senior
restaurant managers. This may cause substantial dilution in the Pronto/Porcini brand. Bounded
rationality will also compromise the contracting, as Porcinis has relatively high demands.[1]

Know How
The Porcini executives regard Pronto as a test lab for various new ideas such as a new paying
technology. However, Porcini might only have limited possibilities to do so, as it might impair the
franchisee. Another issue is the knowledge generated by setting up the sites. Two company
owned locations will generate additional know how, but the HQ will miss out on other important
location factors that might be relevant to the long-term Porcini/Pronto strategy.
Another factor is the experience and reputation of the franchisee in his given location. This can
be an advantage to Porcini, as they would be associated with established and well-regarded
entrepreneurs, with local market know how.

Implications for Porcini

The low employee turnover rate might be derogated as career opportunities would be limited, as
the franchisee would ultimately decide who to hire and promote.
Moreover, there are Principal-Agent issues regarding moral hazard and hold-up, as no perfect
control of franchisees is feasible. This might fundamentally hurt the Porcini brand.
Another question is whether or not franchising aligns with the overall vision and strategy of
Porcini’s, avoiding adverse selection of the franchisees to find “good” entrepreneurs while
avoiding free riders will be a major challenge.
Syndication

Advantages

Syndication switches ownership of the property to investors and enables Porcini to have a full
operational control of the situation. Selling its created real estate portfolio to investors, would help
Porcini recover capital against a percentage of revenues with an incentive fee based on
profitability.
Having incentive on revenues and performance, investors are easier to convince: Porcini reached
USD 94.3m revenues in 2010 after the recession and a profit margin of 4% from 3% the year
before
As Porcini does not owe the property risk is lower for them: in case of failure, the company would
not financially suffer. However this lack of ownership is not synonym of lack of control. In a
syndication, Porcini still has full control of the operations (e.g. training, hiring). It is a guarantee of
keeping the food and service quality reputation that made their success.
Having financial syndication partners also frees some cash flows for the restaurant chain; they
will be able to grow quicker as noticed on every syndicate hotel chain in the USA, but also to
spend more on training and wages.Senior employees will be asked to train/manage the new ones
needed for the opening of other restaurants. This facilitates promotion, making employees more
loyal.
As prime locations (especially around motorway infrastructure) are usually already owned by real
estate companies, they are hard to get. In a syndication model, Porcini is able to reach these
prime sites by changing land-owners into investors when exposing their model to turn land into a
cash generating businesses. Porcini can also use investors’ knowledge in real estate to find the
right spots.
At last, due to its nature, syndication offers the opportunity for Porcini to make profit out of the
very first deal via the sale of its portfolio.

Disadvantages

But syndication also has its weaknesses. Implying external investors forces Porcini to find an
investment bank and some lawyers to close the deal. These intermediaries result in very high
transaction costs even in a private syndication. Calculation showed that these costs can reach
6% of the property’s value (USD 2.5m according to Exhibit 4).
Unlike franchising, syndication guarantees complete control from Porcini’s headquarters,
reducing creativity and innovation.
As a regionally known brand, Porcini may also rush in its growth research, failing to communicate
its image into further development areas. As an outsider, Porcini may also not have sufficient
structure capabilities, skills or bargaining power to suppliers to support the opening of enough
stores to gain significant market share. These limitations may irritate investors, putting the
company in trouble.
Company Operated

According to Alessio, launching Porcini Pronto as a fully company operated concept, would
produce a 6% pre-tax profit margin; specifically, such a growth strategy would have significant
advantages under an operational perspective. Firstly, Porcini could manage and monitor all
operations in order to maintain its high quality standards in food. Total control of operations could
help Porcini in aligned its whole operational system to be consistent with the company’s visions
and goals. From a theoretical point of view, such a structure would decrease the principal/agent
problem since the operation of the stores are monitored and conducted by the company per se.
Nevertheless, a tight monitoring of quality standards and activities would be beneficial for the firm.
Moreover, direct ownership would allow the company to protect its own brand image and therefore
mitigate potential risks of brand devastation through franchised stores.

Having company operated stores would ensure a higher degree of flexibility both in terms of
operations and overall customer experience. A practical example of this is that Porcini could apply
changes or new policies very quickly such as the replacement of a store manager or the closing
of an underperforming store. This means that stores can respond to changes in demand,
customer tastes and suppliers easier due to its structure, whilst a franchise model would have to
go through a variety of steps before addressing the problem (different agents involved before
solving the problem). Customer experience, one of Porcini’s core values, would benefit from such
a structure as the company could be able to select, train and develop all the diversified range of
workers for the Porcini Pronto concept.

Lastly, due to its nature, company operated stores would allow Porcini to expand the new concept
at its own pace, which would help them in focusing on their competitive advantages and avoid
getting trapped into overexpansion (may damage brand equity). Direct ownership of stores would
also entail a higher degree of motivation and effort by the firm towards a successful outcome of
the strategy; this is consistent with the Endowment effect that states that ownership of a specific
asset increases its performance and utility (Thaler, 1980).

On the other hand running a company operated business has its potential drawbacks; from a
financial perspective purchasing a store would entail an investment of $2.1mil (can be regarded
as a sunk cost), against a projected initial revenue of $2.4mil per store. Therefore, such an
investment would allow Porcini to roll out only one or two stores per year, thus decreasing the
amount of customers, market share and brand reputation that the new concept store could gain.
Another possible drawback is that Porcini may need to account for further sunk costs such as
promotion costs which are needed in order to promote the firms new concept. Furthermore, the
process of developing, constructing and running a new store concept requires a high amount of
time, skills and expertise which Porcini may not possess. Lastly, such a structure would make it
difficult for Porcini to access local suppliers networks and negotiate a competitive prices. Such a
low bargaining power could create moral hazards/ adverse selection in the quality of sourced
products.

Bibliography:
Thaler, R. (1980), Towards a positive theory of consumer choice, Journal of economic
behaviour and organizations, 1(1), 39-60.

Analysis

Commented [3]: I am not sure how they come up with

this projection (acutally i have the financial data, but i
think its not necessary in our case).

Anyway, based on the presentation from the McKinsey

Case i have, Company Owned seems to be the most
suitable choice. Any comment?
Commented [4]: Maybe Beebie u can upload the
calculation to FB.
Commented [5]: I talked to Grace ytd. She told me
that her group and other groups she talked to chose
syndication tho.
Commented [6]: i think company operated if they are
risk averse
and if not they choose syndication
Commented [7]: and they have different growth rates,
franchising has 2% profit margin and company owned
6%
Commented [8]: So we also need to do financial
analysis for that?

Conclusion