12 November 2018

Why pizza delivery won’t work in China

Why pizza delivery won't work in China
Fyodor Ovchinnikov

Fyodor Ovchinnikov

Dodo Pizza CEO

Dodo Pizza came to China two years ago. We opened two units—one in Hangzhou and another in Yantai. You can’t call either of them a success. Sales in Hangzhou are around the break-even point. Yantai brings its owners a modest profit. Yet we’ve gotten experience. Most importantly, we realized that the “western” business model for pizza delivery won’t work in China. Why?

If you ask an American or even a European to close their eyes and think about food delivery, 8 out of 10 will imagine a pizza. For example, in Russia, pizza takes up 50% of the delivery market. I believe in the US this number is even bigger. Our business model is based on delivery that makes up anywhere from 60% to 90% of orders. That’s why we often occupy locations that are far from being the best in town. Our production model isn’t suited for serving many dine-in guests within a short time frame, and our business model can’t justify expensive rent.

In China, we followed the same strategy: opted for not-the-best locations while aiming mostly for delivery. But China isn’t Russia or the US. Nobody there thinks about pizza when considering an order for delivery. Besides, within the last few years, China has gone through a digital transformation. Millions of people now have smartphones, and a new digital economy cropped up—Alibaba, WeChat, Didi, and of course, food delivery services.

Unlike the rest of the world, delivery companies are very effective in China due to its high population density. The Chinese now order for delivery almost everything you can eat or drink, even hot coffee.

There is no difference between delivery and restaurants from their point of view. And the choice of food is endless. A few competing delivery giants own the whole market.

So what have we gotten into in China? We ended up in "the red ocean." Our pizza became just one option out of a thousand choices on the delivery market. We were dependent on the delivery platforms and their algorithms. And the army of our competitors was growing every day, since anyone could start making food in the kitchen and sell it through a delivery platform. After two years of struggles, we now realize that we don't have a bright future in the delivery market. One who wants to survive in it should invest enormous money in its brand and building a chain. So we had a choice: to leave the market or to find a new approach.

 

That's how we've come up with a completely new idea. We realized that Dodo Pizza has to give up the intention of being a delivery company in China. We have to be a pizza company—first of all. We've come to the conclusion that the only way for us to succeed would be to occupy the best locations in the midst of high pedestrian traffic. The rent will be high, but we have to figure out how to stay profitable.

If we come up with a model that can survive in such a competitive environment, we'll be able to scale our business all over the country and won't be dependent on the delivery platforms. Step by step, we'll build our brand in China, since people will be seeing our pizza shops working in the best downtown spots.

So, what will this new pizza shop look like exactly? I'll table the cards in the next post—and also give you the latest update on our progress. The China operation is already in full swing.

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