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Baguettes in Paris by Paris Baguette

29 Mar 2018
South Korea’s biggest bakery chain officially makes a classic French food item better than the French; the U.S. and parts of Asia already know that. Is the rest of Europe about to find out?
 
It is akin to selling ice to Eskimos or bringing coal to Newcastle, but South Korean bakery chain Paris Baguette did just that in 2014 by opening a boulangerie in the heart of the 1st arrondissement, two blocks from the Louvre. A year later, the company opened its second store in the city, this time in the opera district in the 2nd arrondissement. In two years, the two locations served over 700,000 customers.
 
Paris Baguette’s success in the spiritual home of the baguette is the culmination of an expansion strategy that had sprouted over 3,000 outlets in its home market and hundreds more across the U.S. and Asia in Singapore, Vietnam, and China.
 
With success in France checked off the list, a push into the rest of Europe beckons. But the big question looms: Should the company offer staple bread specific to each European country, which have their own long baking history and preference of confection? Or should it be consistent and use the baguette everywhere else to leverage on its success in France?

Growing too big for Korea

Paris Baguette (PB) is the premium bakery café franchise brand owned by SPC Group, a leading food and confectionery conglomerate in South Korea with sales of US$4.4 billion for the year 2015. Founded by the late Hur Chang-Sung in 1945 as a small confectionary, Sangmidang, the company grew under the founder’s second son and current CEO, Hur Young-In.
 
Although it is the biggest bakery chain in South Korea – it has an 80 percent market share as opposed to its closest rival Tous les Jours’s roughly 20 percent – PB’s growth has been curtailed in recent years. From 2012 to 2014, its store numbers grew only marginally from 3251 to 3324 while sales dipped from US$1.074 billion to US$1.068 billion.
 
The reason for this is as much political as commercial. In 2012, independent bakeries had more than 65 percent of the stores in the industry, but accounted for only about 40 percent of the revenue. The Korean Fair Trade Commission passed a regulation in 2013 designating the bakery industry as an “SME-suited” area and restricted the likes of Paris Baguette from opening new stores within 500 meters of existing store locations. It also limited the increase in franchise numbers to two percent annually. The guidelines also prohibited the replacement of old stores that were closing down.
 
Over the next three years, about 2800 people approached the Korean Bakers’ Association with plans to open their own independent bakeries. By 2014, just two years after the regulation was passed, there was a 16 percent increase in the number of independent bakeries (11,889 in 2014), and a 29 percent increase in total sales from US$2.05 billion in 2012 to US$2.65 billion in 2014.

Expanding overseas

PB had little choice but to expand overseas for growth. Its international operations started 10 years prior in 2004 when it opened its first overseas company-owned store in Shanghai, China. By August 2012, it had opened its 100th outlet abroad and 200th in December 2015, and by 2016 the chain had expanded to more than 240 stores across China (166), Vietnam (nine), USA (57), Singapore (six) and France (three).
 
The brand’s pursuit of localisation strategy had led to its success in the Chinese market, known for its complexity where even the well-known French bakeries Paul and Fauchon had failed. Prior to entering the market in 2004, PB had sent its employees to analyse the appetite and dietary culture of the region to better understand the preferences of Chinese consumers. Knowledge of their love for greasy food and preference for chopped meat in sandwiches led the company to develop customised fare such as the Rousong (肉松) bun, an immensely popular product in the Chinese market.
 
For the U.S., PB took the plunge in 2005 by first targeting the Korean ethnic population and other Asians in the country before reaching out to the wider market. As it was a brand familiar to the Koreans, PB quickly gained acceptance and captured a viable consumer base. Thereafter, it went beyond its Korean roots and opened in prime commercial districts such as Times Square, Midtown and the Upper West Side to penetrate the mainstream Manhattan market. By 2013, it had opened 30 stores in major US cities including San Francisco, New York, New Jersey and Philadelphia, and successfully competed with renowned brands such as Panera Bread and Au Bon Pain.
 
PB’s analysis of the US bakery market had revealed that the existing American bakery chains catered primarily to morning-time consumers. This prompted it to differentiate itself through a variety of fare offered round the clock—with espressos and pastries in the morning, sandwiches and salads for lunch, and breads and cakes in the evening. Like in China, it put emphasis on localising the menu while ensuring that a wide selection with high quality ingredients was on offer.

Baguette, ciabatta, or pumpernickel?

When PB made its first foray into Europe, and no less than in the country widely deemed as the mecca of bakery, its CEO Hur Young-In was quoted in the Korean Herald: "We regard France as the spiritual home of our bakery products. The opening of our Paris store highlights our commitment to continually improving and perfecting the quality of our European-style bread and pastries."
 
Two years after that, a team of PB bakers won the top prize at the Coupe du Monde de Bounlangerie – the World Cup of baking in plain English – with a Taiwanese one in second, and the French team in third.
 
With its credentials as a bona fide producer of a French staple, management is now looking across the European continent for further expansion. But different European countries have different preferences, from the baguette-like pan in Spain to the local variant bocadillo, ciabatta and panettone in Italy, pumpernickel in Germany and myriad others acruoss the continent.
 
What should PB do next? Which should be its next market? And what should be its product strategy?
 

This is an adapted version of the SMU Case Writing Initiative case, “Paris Baguette: Quintessentially French with Love from Korea". To see the full case, please click on the following link: https://cmp.smu.edu.sg/case/3501

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Last updated on 03 Apr 2018 .

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