Thu, May 10, 2001 page24

• New challenge for Thai `Pizza King'

  FAST FOOD FORERUNNER Convincing Thais away from the familiarity of Pizza Hut should be no problem for William Heinecke. He introduced the brand 20 years ago

  • BLOOMBERG
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  William Heinecke resembled a vacationing Santa Claus as he plonked down the equivalent of US$3 for a burger, a Coke and french fries at a downtown Burger King.

  For the bearded fast-food mogul, sporting jeans and a blue- and-white striped shirt over a sizeable belly, it was simply business as usual. As he does at least once a week, Heinecke was sampling the wares at one of the hundreds of burger and pizza outlets he owns throughout Thailand.

  That kind of street-level sleuthing -- the US-born Thai citizen, 51, flies his light plane to visit restaurants in the southern beach resort of Hua Hin and the mountain city of northern Chiang Mai -- helps explain his confidence as Thailand's self- styled "Pizza King."

  He'll need all that experience to take on Tricon Global Restaurants Inc, the fast-food giant that owns and franchises 30,000 restaurants worldwide, after ending a two-decade partnership last year.

  "We know Thai consumers and fast food much better than anybody else because of the success of our various brands," he said. "Only a few people in Thailand had heard about Pizza Hut when we opened its first store here more than 20 years ago."

  Investors aren't so sure. Shares of Minor Food Pcl, the restaurant unit of the company he founded before he was old enough to vote, fell 33 percent this year as the key SET Index rose 12 percent.

  The problem: Under Tricon, Heinecke was the exclusive Thai franchisee for Pizza Hut, one of the world's most recognizable brand names. Though ending that relationship saved 400 million baht in royalties and fees, it also means Heinecke must build a new brand from scratch.

  "The pizza market has become highly competitive after being dominated by one player for years," said Kitti Nathisuwan, an analyst at ABN Amro Securities Pcl, who recommends his clients sell Minor shares. "Intensifying competition will put pressure on Minor's profit margins as promotion costs rise."

  Stakes are high on both sides. Pizza, which Minor now sells under the Pizza Company brand, accounts for two-fifths of Minor's total sales. Tricon, which owns the Kentucky Fried Chicken and Taco Bell brands, isn't eager to surrender a market where its Pizza Hut brand has been dominant since opening Thailand's first restaurant in 1981.

  Heinecke isn't a newcomer to Thailand. He moved to the nation with his parents in 1963, when his father took a job at what was then called the US Information Agency. He formed Pizza Pcl four years later, renaming it Minor last December to reflect the fact that he was just 17 at its founding.

  Though sales surged at He-inecke's 116 Pizza Company outlets since they reopened in mid-March, with pictures of the Leaning Tower of Pisa and pasta on the menu for a more Italian feel, Minor's net income fell by half last year.

  The company earned just 107 million baht (US$2.4 million) last year as it opened more chicken and burger restaurants, giving it a total of 345. The three analysts who follow the company all expect it to post a large drop in first-quarter earnings when it reports them on May 15.

  Tricon has deeper pockets: It earned US$88 million in the first quarter alone. Tricon also has a strong replacement partner for Minor in the form of Central Group, which operates one of Thailand's biggest department store chains and has operated half of Tricon's 270 KFC outlets for more than a decade.

  Tricon opened 70 Pizza Hut outlets in the past year. Tricon and Central Group aims to add 40 more by the end of December to match Minor's 116 delivery and full dine-in pizza restaurants.

  "We already have the world's largest and most recognized pizza brand," Peter Hearl, an executive vice president at Tricon, said in an interview. "What we need is just a wider network to deliver our products." Heinecke must also wean loyal Pizza Hut customers to his new brand, which doesn't offer toppings like spicy chicken aimed at the local market.

  "I still prefer some of the old pizza menu and tastes under the Pizza Hut brand," said Rayka Pong-aksorn, a 19-year old Chulalongkorn University student who says she eats pizza about once a week. "If I can get Pizza Hut's outlets around this area, I will definitely shift to dine there. I still like its taste more than The Pizza Company." Still, Pizza Company sales surged 60 percent in March and 20 percent in the first week of April after being closed for 45 days for their revamp through March 17. And Minor does have its fans.

  Thai Farmers Bank Pcl and three other banks agreed in March to lend 1.25 billion baht to Minor just a week after it reopened under its new brand. The company plans to use the money for working capital and to repay debt due next year.

  "We believe in Minor Food and in Mr. Heinecke and his success in the Thai fast-food market," said Boontuck Wungchaoren, executive vice president at Thai Farmers.

  Heinecke says he's got good reason for optimism.

  Tricon will have to invest several hundreds million baht to duplicate Minor's outlets, including staff, real estate and good will, he said. And Minor won't have to pay Tricon royalty fees as high as 6 percent.

  He's aiming for 70 percent share of Thailand's 2 billion baht pizza market, and says Minor food sales will rise 17 percent this year to 3.5 billion baht, even after absorbing the cost of the 45- day shutdown of its pizza outlets.

  Heinecke has taken risks before. He revived Dairy Queen Inc's ice cream brand in Thailand three years ago after it failed in 1993. Dairy Queen, owned by billionaire Warren Buffett's Berkshire Hathaway Inc, now has more than 100 outlets, the largest number of stores in any country outside the US and Canada.

  Even Heinecke's main competitor isn't writing him off.

  "Heinecke is a good entrepreneur," said Tricon's Hearl, who first met Heinecke in 1997 and was on Tricon's negotiating team during the contract dispute with Minor that led to the end of their partnership.
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