TABLE OF CONTENT

Title Page

1.0 EXECUTIVE SUMMARY 1

2.0 BACKGROUND (INTRODUCTION) 2

3.0 OBJECTIVES 2

4.0 RESULTS (FINDINGS) 3

5.0 CONCLUSION 11

6.0 REFERENCE LIST 12

7.0 APPENDIX 13

8.0 PRESENTATION SLIDES 19

1.0 EXECUTIVE SUMMARY

In year 1997, Secret Recipe was founded in Malaysia. It was an independent restaurant

with only one outlet. The founder used it as pilot operation to test how Malaysian accepts

the restaurant which focuses mainly on cakes with several unusual flavors. The pilot test

was successful and the founder started to franchise it among his friend in 2000. After

finding the franchise model is workable, in 2001, the franchisor opened the business

option to potential franchisees. The business expended to other neighbour countries as

well. To date, the business has more than 150 outlets throughout the region. The

franchisor has 2 stages in the franchising procedures whereas stage 1 is pre-opening stage

and stage 2 is opening stage.

The franchisor had standardized the method of operation whereas the design and

promotions are standardized among the outlets with certain exclusions applied to selected

outlets. The franchisor uses IBM Solutions based Point of Sales (POS) application to

track the sales in real time. Besides, Enterprise Resource Planning system is implemented

and applied whereas the inventory tracked in real-time and resources allocated more

carefully. Training provided to both franchisee and the new employed staffs who will

start serving at any new outlet.

Secret Recipe entered China market in 2007 with support of Carrefour. Secret Recipe

solely owns its 3 outlets in China. China business is not yet open to franchising as it is in

several stage of pilot operation test process. The China operation catered their menu to

suit the local taste. Currently master franchising opportunity opened for India, Vietnam

and West Asia. Secret Recipe follows factory based supplies whereas the cakes

manufactured at one single location and distributed throughout its outlets around. The

business spends in research and development to research the market demand and cater the

menu to suit the trend. The franchisor targets to establish 200 outlets by end of 2009.

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2.0 BACKGROUND (INTRODUCTION)

Food and beverages industry is among one of the fast growing industry in Malaysia.

Many foreign franchise businesses had entered Malaysia and specifically into this

industry since 1950’s. Malaysian had followed the trend of franchise and several new

franchisors was born locally in this food and beverages industry. Among them are

MarryBrown Fried Chicken, Kyros Kebab, and Eden Bakery (George Miranda, 2000).

This trend continues and the industry keeps seeing new comers. According to Wahaizad

in his recent articles listed 10 established Malaysia franchises. The top of the list is Secret

Recipe as first fast growing local franchisor and followed by MarryBrown as second.

3.0 OBJECTIVES

Objectives of this report are:

• Learn Secret Recipe restaurant history

• Learn Secret Recipe franchising history

• Identify the franchising procedures

• Identify the method of operation

• Identify trainings provided

• Identify the franchisor’s globalization activities

• Highlighting success factor of the franchisor

• Highlighting the franchise business growth pattern

• Critic the existing franchise model

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4.0 RESULTS (FINDINGS)

4.1 Restaurant Overview

Secret Recipe is a Malaysia born franchise business. Their nature of business is bakery.

They are categorized in food & beverages industry. Cake is their core product. Although

they provide several other foods and drinks, they still never lose their brand awareness

and popularity over their cakes. The Secret Recipe’s real corporation name is Secret

Recipe Cakes & Café Sdn Bhd. They are locally registered company under Companies

Commission of Malaysia. The business was registered in year 1997. According to Hali J.

Edison and Carmen M. Reinhart (2000) research paper, 1997 is the year Malaysia fall

into serious financial crisis whereas faced recession, inflation and Ringgit value dropped

below the margin. This proves to be a reason why the Secret Recipe owner did not

franchise the business straight away. Neither franchising idea nor activity was in place

when the business was first founded. The brand name that the owner decided to use is

“Recret Recipe” and the brand is registered with Intellectual Property Corporation of

Malaysia (MyIPO). The headquarters of the operation is in Petaling Jaya, Malaysia.

4.2 Franchise Overview

Franchise idea was not in place when the business was first founded. The founder had

used his first open restaurant as a pilot operation to find out disadvantages of the business

and worked out to implement solutions to overcome several problems in the real business

model. In the year 2000, the founder decided to franchise it. But the franchise option was

only open to his circle of friends. The franchised the business among his friends and find

out the workability and demand exist for that business model and eventually opened the

franchising invitation to the public in 2001. Since then, the business had a serious success

and continuous development. The business had expended to other countries such as

Singapore, Indonesia, Thailand, China and Philippines. Today, they have more than 150

cafes throughout the region and the number is increasing. According to their

announcement in their corporate website, they had temporarily closed franchising

application for Klang Valley, Penang, Perak, Seremban, Malacca and Johor Bahru. They

are aware that demands in those areas are well served with current existing outlet and no

requirement for new outlet. If they allow more franchisee, it will just increase supplies

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above the demand and creates competitions among their franchisees. The Secret Recipe

does not encourage competition among franchisee as mentioned by their Chief Executive

Officer in recent interview with BizWeek press.

4.3 Franchising Procedures

4.3.1 Stage 1 – Pre-opening

There are 2 stages in their franchising procedures. First stage is known as pre-opening –

selection of franchise. There are 6 steps in this pre-opening stage. First, the interested

franchisee should submit their application form which includes their complete profile

such as working history and education qualification. Second, the franchisor team will

review and evaluate the potential. This evaluation is done to both franchisee’s location

and franchisee’s qualities. The franchisor will evaluate the location that franchisee

interested to open the franchise outlet, such as Penang. Market research will be conducted

to evaluate the demand. If current existing outlet in Penang already capable of serving the

demand, then the location evaluation fail and the application will be rejected. At the same

time, franchisor will evaluate the franchisor’s background to ensure he is capable of

handling the outlet. Education history represents his knowledge power while working

history represents his experience in management. If the evaluations pass, they will

proceed to third step which is preliminary discussions. The franchisor will discuss with

the franchisee such as conducting formal interview. Then proceed to step four which is

final discussion on terms and conditions. The franchisor will make sure the franchisee

really understand each of the terms and condition clauses to ensure the franchisee agree

and bound to the rules of franchisor. Once franchisee agrees, they will proceed to step 5

which is signing of contract. The initially payment and setup fees must be paid by the

franchisee in this step. Finally both of the parties will proceed to on-site visit which is the

final step for first stage.

4.3.2 Stage 2 – Opening

After completing stage 1, the procedure continues to stage 2 which is known as opening –

preparation for grand opening. The first step in stage 2 is franchise orientation. The

selected franchisee will go through orientation with the franchisor where he will be

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educated over the franchise business operation methods and procedures. The franchisor

will make the franchisee understand on what are the responsibilities that he has in

operating the outlet. When orientation complete, they will proceed to step 2 which is

discussion on design and renovation. The franchisor will bring in his expert designer

team to plan the interior design of the new outlet. At the same time, selection and

recruitment of new staffs will take place. In step 3, the renovations of the new outlet will

begin and meanwhile the recruited staffs will be provided off site training by the

franchisor HR team. Next stage 4, once the outlet and staffs are ready; the franchisor will

setup the equipment and machineries into the outlet. Finally they will advertisement in

newspaper or local magazines about the new outlet and conduct the grand opening fiesta.

4.4 Method of Operation

4.4.1 Standardized Design

Secret Recipe follows a standardized outlet design for all their outlets. This gives the

outlet to feel the same with their theme color of red. The designs will be slightly changed

by their interior designer to ensure the outlet location and space is utilized to the right

positions. Such as for dining space, they will allocate 40% and kitchen 40% while the rest

occupied by payment counter and others.

4.4.2 Controlled Promotions

In term of promotion, Secret Recipe standardizes their promotions to apply to all outlets.

But they are sometimes not applied to high profile outlets such as KL Sentral where it

being attraction of tourist and travelers. This is in place to ensure the potential revenue of

those high profile outlets do not decrease. This method enables the franchisor to control

the promotions and ensure that particular outlet receives enough revenue to run without

any financial problems and stable inventory turn over. On the other hand, Secret Recipe

collaborates with other popular brands to provide stronger approach over their

promotions. Recently, they collaborated with Nestle and RHB Bank to provide Hari Raya

Promotions. Besides, they conducted lucky draw activities with collaboration of

Pensonic. They shake hand with other stronger brand when it comes to promotions.

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4.4.3 Real-time Sales Tracking

Each and every single sale in every outlet is transacted in real-time. They have database

system to track all the sales and procurement whereas the franchisor and franchisee can

monitor and get real-time statistic. This is done through online; the Point of Sale (POS)

application is installed at all outlets. This POS application provided and maintained by

IBM Solutions. It is also installed in all the order taking handheld gadget. With this

application in place, the system tracks the sales in real time and input into single

database. All outlets POS system sends input into same database. Therefore the

administrator and management team can get the statistic immediately and accurate. This

method ensures the correct sales and procurement report received by franchisor.

4.4.4 Real-time Inventory Tracking

They use Enterprise Resource Planning (ERP) system to address reporting, inventory and

stock shortage issues. With ERP in place, their inventory monitor system is powered by

real-time alarm to alert the particular outlet operator when their inventory level goes

down. This helps the management to never say “we are out of stock” to their customers

whereas the ERP alert them before the inventory completed finish and the management

will arrangement for new stock. The team does not need to manually count their

inventory every night as other bakery does who are their competitors.

4.4.5 Factory Based Supply

Quality control is consent of every franchisor as well as Secret Recipe franchisor. To

ensure the quality and taste of their core product cakes, especially special flavored cakes

like durian, banana, mango, and blueberry are always up to the standard, the franchisor

applies factory based supply method. Factor based refers to one main outlet will do the

cakes and then the cakes supplied to out outlets around it. With this, product quality

remains consistent for all outlets. Together with ERP in place, the factory will produce in

correct required quantity by referring to inventory status. Amount of resources allocated

and shared correctly.

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4.5 Training

4.5.1 Franchisee Training

Franchise introduction courses provided to the franchisees with coloration of Malaysia

Franchise Association. This course provides basic understanding of how franchising

concept works for both franchisee and franchisor. After the basic course, the franchisor

will provide detailed training on how Secret Recipe franchise system works. This training

provided to the franchisee in franchise orientation step in stage 2 of franchising

procedures. The reporting system, the inventory tracking and all required information

will be provided to the franchisee.

4.5.2 Staffs Training

On the other hand, the staffs will be hired only when new outlet is being open and this is

the second step in stage 2 of franchising procedures. This staffs are hired when required

only and therefore the training conducted more specifically. They will most often train 10

staffs per batch and it provides closer understanding to the staffs. These staffs will be

trained on what they need to do as a daily process in that new outlet. But for training, it

will be conducted off-site and the base for training session is their headquarters located at

Taman Mayang, Petaling Jaya, Malaysia.

4.6 Globalization

4.6.1 Expended with Master Franchisee

Secret Recipe expended their franchise business to Singapore, Indonesia, Thailand, and

Philippines. In these countries, they franchised to master franchisees whole helps them to

take care of the local business there and more flexibility for the franchisor.

4.6.2 China Operation

Secret Recipe had expended to China as well. In this case, they have not franchise the

China outlet. They solely owned by Secret Recipe franchisor. They expended to China

after receiving invitation from Carrefour to open their outlet inside Carrefour owned

shopping premise. This first outlet was open in 2007 at Shanghai. According to Secret

Recipe’s CEO in his recent interview, he had admitted that current China operation is not

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encouraging but yet the revenue is sufficient for the unit. This first outlet was used as

pilot operation to test their weakness. Up to date, Secret Recipe has 3 outlets in China and

still not franchised. The CEO believes that the sales will be encouraging after opening it

to franchisee which will be considered soon.

4.6.3 Cater Local Taste

One of Secret Recipe technique in globalization is catering local taste. The CEO of the

firm mentioned that they had catered the menu to suit local taste. Remarkable in China

whereas the sales slightly boosted after they changed their menu to provide exactly what

the locals prefer.

4.6.4 Opportunity Calls

Secret Recipe still receiving many calls encourage them to franchise their business to

other countries such as Kenya, South Africa, Norway, Sweden, United States of America,

India and Middle East due to Secret Recipe’s uniqueness. Secret recipe is still

considering most of the calls. Currently they had opened master franchisee opportunity to

India, Vietnam, and West Asia as written in their corporate website.

4.7 Success Factor (competitive advantages)

4.7.1 Uniqueness

Secret Recipe selected unique product and unique market. Not many players who has

cake restaurant which encourage customers to walk-in with family and dine inside the

outlet. Bakery was mean only to bake cake while Secret Recipe took it a step further by

making bakery as restaurant as well by catering other foods besides cakes. Furthermore,

their unique product is cake. They target to represent Secret Recipe as identify for cake.

Their selected unique market and product encourages them to move further in food and

beverages industry while player with few number of competitors.

4.7.2 Good Product, Service, and Price

The main motive of Secret Recipe is to provide good product, good service and

reasonable price. The factory based supply method in their franchise system really helps

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them to keep their product quality consistent and they remarkably providing good product

all the time throughout all outlet. They hire and train staff off site before opening the

outlet and his helps the team to educate the small number of staffs more specifically on

how to handle the customers by keeping them on first priority in each of their service.

When staffs trained well, the service they provide is good. Secret Recipe sets a

reasonable and affordable price on their products. Customers are not forced to buy the

whole cake; they are given flexibility to buy pieces of it as well. And the price is

reasonable for every piece.

4.7.3 Continuously Researched Franchised System

Secret Recipe’s franchise system is well researched and accepted. They did roll out pilot

operation and figure out weakness and work out to improve it. This applies to each of the

country that they expend to. They place research as an important factor continuous

growth. At the same time, they conduct market research to survey the demand before

deciding to open franchise outlet there. This helps them to avoid doing mistakes as no

point opening a cake restaurant at where it is not asked or demanded for. Thus, according

to the CEO, the business continuously spending on their research and development

department which support them to refine their franchise system according to the latest

trend and besides they can serve what exactly the customer need. Taking further, their

R&D team also researches their menu and recipes to come with new menu idea.

4.7.4 Easy Model and Fair Competition

Secret Recipe follows simple business model with simple menu. Therefore replication

over their business is easy and this makes them flexible to open many franchise outlets

without losing the business model or concept. They keep their outlets consistent and easy

to manage with centralized tracking systems. The different of this franchisor with other

franchisor is this franchisor does not encourage competition among the franchisees. The

franchisor has no intention to open multiple outlets just to earn fees out of it. There are

careful in term of opening outlet and seriously will not open new outlet if that particular

location already has an outlet which already serve the demand sufficiently.

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4.8 Growth

Secret Recipe marked RM 70 million as revenue in 2005. The figure increased to RM 90

million in 2007. In the recent report released by Secret Recipe management, the business

had reached RM 100 million as revenue for 3rd quarter of 2008 and this figure expected to

reach RM 110 million at end of the year. At the same time, the business is expecting RM

20 million higher turn over this year due to their international expansion. The franchisor

is targeting to establish 200 outlets by end of next year as currently they have around 150

outlets.

4.9 Indirect Disadvantages (criticisms)

4.9.1 Inconsistent Product Quality

Several criticisms exist for current Secret Recipe’s activities and it is their indirect

disadvantages. Secret Recipe has 2 outlets in Sabah state and 3 outlets in Sarawak state.

The customers in East Malaysia critic that the cakes they purchase at East Malaysia do

not taste the same as in West Malaysia. This is support by the fact of Secret Recipe’s

franchise method whereas they are having factory based supplies. Therefore, Sabah and

Sarawak receives the cakes from their Johor Bahru factory which is in West Malaysia.

The cakes kept in the freezer for longer time until they are delivered to East Malaysia.

This makes the quality to drop slightly and of course the critic will exist if this is the case.

4.9.2 Factory Based Supply’s Limitation

Factory based supplies does makes the product to be delivered to all outlet and quality

kept consistent. But it is complicated when they have outlets in far places like Sabah and

Sarawak which they cannot really rely on Johor Bahru’s factory to supply the cakes as

the quality might drop in delivery. To avoid this, the franchisor needs to open more

factories at far places to cater the demand and supply more consistent. This is an indirect

disadvantage of following factory based supply because the more factory that the firm

opens, the more investment required and profit margin will drop. This will tie the

franchisor by limiting investment to other crucial department such as research and

development.

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4.9.3 Inconsistent Staff Training

Staffs are trained only when opening new outlet. When a staff quit in any of the outlet,

the franchisor tends to hire new staff in rush and provide training. The new staff will be

lack of experience and no consistency found in the service provided by the staff. Secret

Recipe does not have any training institution to provide consistent training.

5.0 CONCLUSION

Secret Recipe had established well in their unique market. The operation conducted

resulting steady growth and promises profits. The business invests in research and

development department as one of their important invest and in return they are catering

the menu to suit the latest trend as well as local taste when expending global. Thus

market research conducted before opening new outlet. This avoids them from doing any

mistake when expending. At the same time, they also do not open multiple outlets if the

demand not sufficient in those areas and avoids opening near any existing outlet as they

do not encourage competition among their franchisees. They provide enough space and

market for the franchisees run the outlet. On the other hand, the business runs pilot

operation when entering new country like China. They collect the weakness then find and

implement the appropriate solutions as well as being flexible to cater the menu to suit the

local taste and demand. The only start franchising out in that particular country after the

pilot operation success. Secret Recipe is a well growing franchise business both locally

and globally. They franchise business born in Malaysia made its moves carefully until

today it had expended globally with more than 150 outlets.

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6.0 REFERENCE LIST

Chow How Ban, 19 July 2008, Secret Recipe for China, BizWeek – The Star Publication

Wahaizad Md Akhir, May 10, 2008, 10 Established Malaysia Franchises, Entrepreneur

Articles

Secret Recipe uses IBM SurePos & iWaiter solutions to empower staff to increase sales

and improve tracking of its franchisees' sales, IBM Solutions Articles archive

Secret Recipe Improves Responsiveness and Customer Relationships With an IBM POS

Solution, ZDNet Articles archive

Secret Recipe Corporate website, http://www.secretrecipe.com.my

George Miranda, 2001, Guide to a Successful Franchise Business, Leeds Publications

Oxford Business Group, 2007, The Report: Malaysia 2007, Page 216, Oxford Business

Group Publication

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APPENDIX I

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APPENDIX II

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APPENDIX III

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APPENDIX IV

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APPENDIX V

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APPENDIX VI

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