Read the Fat Angelo’s Italian Restaurant case study located in the?Case Study?folder. This is a team exercise. You will compile your answers in a Microsoft Word document following APA writing

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RONALD LAU JOSEPH SANTANA FERNANDEZ

Fat Angelo’s Italian Restaurants: Managing the Customer Waiting Experience

We’re a family-style Italian restaurant known for our value-for-money tasty food, friendly service and lively atmosphere.1

Fat Angelo’s was a well-established and renowned family-style Italian restaurant chain that had never lacked customers, both young and old, since it opened its first restaurant in Hong Kong in 1998. It subsequently expanded to additional locations in Hong Kong and one in Taipei.

Douglas Hsia, director of marketing and development at Gotham City Concepts Limited, the parent company of Fat Angelo’s, was generally pleased with the restaurant’s performance and the reviews from satisfied customers and critics. Its popularity, however, created other challenges for Fat Angelo’s. Douglas was well aware that, in a highly competitive restaurant industry with rising cost pressures, maintaining efficient operations and managing high customer expectations were a perpetual challenge.

One daily example of this were the queues the restaurants encountered during their peak dinner periods. Long waits resulted in dissatisfied, or even lost, customers. On the other hand, during non-peak hours, the restaurants were at less than full capacity, meaning lost revenue opportunities. To help bring in additional customers during off-peak hours, Douglas was

1 Fat Angelo’s Italian Restaurant, http://www.fatangelos.com/, accessed 23 February 2014. Due to the high rent increase, Fat Angelo’s management decided to close all of its operations in Hong Kong in May 2014.

Joseph Santana Fernandez prepared this case under the supervision of Professor Ronald Lau solely as a basis for class discussion. The authors may have disguised certain data to protect confidentiality. Cases are written in the past tense; this is not meant to imply that all practices, organizations, people, places or facts mentioned in the case no longer occur, exist or apply. Cases are not intended to serve as endorsements, sources of primary data, or illustration of effective or ineffective handling of a business situation.

Inquiry on ordering and permission to reproduce the case and its materials, write to [email protected] or visit cbcs.ust.hk.

© 2014 by the Hong Kong University of Science and Technology. This publication may not be digitized, photocopied or otherwise reproduced, posted, or transmitted without the permission of the Hong Kong University of Science and Technology.

Last edited: 29 January 2018

HKUST Business School Thompson Center for Business Case Studies

considering various measures, including a new promotional opportunity with online voucher company Groupon.

Douglas’s most urgent priority, though, was managing the queues of hungry customers at its doors during the weekend dinner hours. Fat Angelo’s considered its customers to be guests and even extended family. Douglas was keen to ensure that all guests who chose to dine at Fat Angelo’s, among many other dining options in Hong Kong, left Fat Angelo’s as contented guests, thinking about when they might be able to return.

Fat Angelo’s: Bringing Little Italy to Hong Kong

History

While working for an American-style restaurant chain in Hong Kong in the mid-1990s, Andrew Chworowsky identified a potential opportunity in the Hong Kong restaurant scene. He noticed that an opening existed for a mid-market Italian eatery that was distinct from the upscale Italian restaurants located in some of the five-star hotels in the city and the budget eateries serving standard pizza and spaghetti to the masses. Unfortunately, the board of that restaurant company did not endorse Andrew’s vision to bring home-style Italian family dining straight out of Little Italy in New York to the people of Hong Kong.

Undeterred and with confidence in the validity of his market research findings, Andrew, together with colleagues Dale Willets and Christopher Gallaga, established the first Fat Angelo’s on Hong Kong Island in June 1998. It was an inauspicious time in Hong Kong, as a major financial crisis gripped economies in Asia; repercussions were evident in Hong Kong, with declining real estate values amid economic uncertainty. From the standpoint of Fat Angelo’s founders, however, the declining rents meant lower operating costs; good-value dining options, such as those Fat Angelo’s offered, would be even more appealing to value-conscious consumers.

The Hong Kong Restaurant Landscape

Restaurant Business in Hong Kong Where Space Is at a Premium

With one restaurant for every 600 residents, Hong Kong had one of the highest concentrations of restaurants in the world.2 One fundamental reason was the dense living conditions and limited space in many people’s homes. Many Hong Kong households, for example, needed to shop for groceries daily due to limited storage space at home. Undertaking such daily tasks was more difficult given the high number of women in the workforce and

CNN Travel, “50 Reasons Hong Kong is the World's Greatest City,” http://travel.cnn.com/hong- kong/none/worlds-greatest-city-hong-kong-576599, accessed 25 February 2014.

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typically long working hours, making dining out a more appealing option.3 In addition, dinner gatherings with extended family and friends were more likely at a restaurant than in someone’s home.4

With space a highly valued commodity, rents in Hong Kong were among the highest in the world; as a consequence, restaurants emphasized space utilization and moving as many customers through the dining establishment as possible.

Given the popularity of dining out, Hong Kong also offered a wide variety of food choices. Over the years, as prosperity increased in the city, so did the choices of cuisines, including, of course, a growing number of Italian dining options.

Fat Angelo’s Market Position

Dubbing itself “New York Style Little Italy in the Heart of Asia,” Fat Angelo’s sought to create a distinctive dining experience for Hong Kong people. All its restaurants had dark wood ceilings and floors; brick walls; vintage Italian images of Italian families on the walls; and a relaxed, comfortable, yet pleasant environment, with tablecloths and wooden tables and chairs. In the background, the music of Frank Sinatra and other notable crooners of Italian heritage added to the dining experience.

Fat Angelo’s menu featured hearty, home-style Italian-American cooking offered in regular and family sizes, making it easy to share with family and friends, as would be the case in Old World Italy, while also being consistent with dining habits in Hong Kong. The food was delivered by friendly and courteous staff, further enhancing the feeling of “home cooking.”

Among the most popular dishes on the menu were BBQ ribs; a variety of “handcrafted” pizzas; salmon with pesto; eggplant parmesan; and surf and turf, a seafood and steak combo [see Exhibit 1]. Its dessert list featured Italian-American favorites such as tiramisu and cheese cake. There was a selection of Italian wines and, to top off the meal, 12-ounce coffees that were promoted as “the biggest in town.”

Fat Angelo’s positioned itself as a mid-market dining destination providing better value than five-star eateries, while offering a more upscale dining experience than other low-budget restaurant chains. Having begun operations in the midst of the Asian financial crisis, Fat Angelo’s senior management was intent on creating the perception of both quality and value for its diners. The average charge per person was a relatively steep, though not excessive, HK$200.

3 Thematic Report Household Income Distribution in Hong Kong, 2011 Population Census Office, Census and Statistics Department, June 2012, http://www.census2011.gov.hk/pdf/household-income.pdf, accessed 30 March 2014.

4 Myfanwy Taylor, Cristina Inclan-Valadez, Paul S. F. Yip, Sophia G. Chak, and Phil Leung, “Living at Density: Voice of Hong Kong Residents,” Cities, Health and Well-Being (London: London School of Economics, 2011).

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However, every table was provided with baskets of homemade bread and bowls of fresh salad free of charge with orders of main courses. Its restaurants were conveniently located, but just off the main thoroughfares where rents were somewhat more reasonable.

Key Elements of Fat Angelo’s Operations—The Tsuen Wan Location

After establishing its presence on Hong Kong Island and Kowloon, Fat Angelo’s made its first foray into the New Territories of Hong Kong with the opening of its Tsuen Wan restaurant on September 23, 2005. The restaurant was located in the Panda Place shopping mall on the ground floor of the popular Panda Hotel, with convenient access to the Tai Wo Hau MTR (subway) station via a pedestrian bridge. Together with the Panda Place shopping mall, the restaurant underwent a renovation in mid-2012. The restaurant could accommodate over 100 diners seated at 26 tables for both small (2–4 persons) and large (5–8 persons) parties [see Exhibit 2]. Except for the two large booths, all tables could be easily rearranged to accommodate parties of different sizes.

The Tsuen Wan location’s operations were typical for Fat Angelo’s. It was open every day from 11:00 a.m. to midnight. Sunday was the busiest day, as many families from nearby residential estates made their way to Fat Angelo’s for a family dinner on, perhaps, the only day of the week they could all gather together. Peak hours were from noon to 1:30 p.m. and from 7:30 p.m. to 9:00 p.m. Each party of diners would spend, on average, about one-and-a-half hours in the restaurant. At lunch time, there was, on average, one cover per lunch period. However, the extended dinner time provided an opportunity to increase covers.

Lunch and dinner customers were quite different. During the lunch hours, a set lunch menu was used to provide quicker service, as most customers needed to finish their meals within an hour. The average spending per customer was about HK$80, and the net profit margin was about 10%. At dinner, most customers took their time to dine and socialize with friends or family. The average spending was about HK$200 per customer, with an average party size of 3.5 persons. A separate dinner menu with higher-priced dishes and wine were served. The net profit margin was still a slim 20%, but based on a higher overall bill. Douglas considered the dinner business the most important aspect of Fat Angelo’s overall business.

Considering both the lunch and dinner periods, average food costs, always considered a variable cost in the restaurant industry, were typically about 25% of the total costs for Fat Angelo’s. Most of the operating expenses for the restaurant were the unyielding fixed costs (75% of total costs), including rent and utilities (30%) and labor (30%); other overhead costs were 15%. With relatively high fixed costs, Fat Angelo’s, like all other restaurants in Hong Kong, had to create new ways to generate additional revenue just to break even.

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Improving Operational Efficiency and Profitability

In assessing Fat Angelo’s operations, Douglas regularly reviewed many statistics, one of the most important being the service cycle time, from when a party was seated to when the table was reset for the next party.5 Other related and relevant statistics were the waiting time, ordering time, and food delivery time.

Essentially, revenue was determined by how many parties could be seated, served, pay their bills, and depart during any given time period. This was especially true during the peak dinner hours. Other factors that had an impact on revenues were the unused seating capacity during off- peak dinner hours and the parties that the restaurant failed to serve during the peak hours. These were the “balking” and “reneging” parties. The balking parties were those that chose not to wait after hearing how long the waiting time was; the reneging parties were those that joined the waiting line but later decided not to wait any longer.6

To address the unused seating capacity problem, Douglas considered two initiatives to increase revenues for the restaurants and help offset their fixed costs. One was to provide incentives to parties to dine earlier during the off-peak dinner hours, and the second was a Groupon campaign. These initiatives not only helped create extra revenue, but also eased some of the congestion during the peak dinner hours and minimized the chances of customers balking or reneging.

Early-Bird Discount Campaign

To encourage more customers to dine during off-peak hours, Douglas also implemented an early-bird discount campaign. Parties that arrived early and departed by 8:00 p.m. received a 15% discount on their bill. This was seen as a good incentive to encourage diners to arrive earlier, increasing the likelihood of being able to serve other customers later on. Douglas hoped that the loss of 15% revenue would be more than offset by the increased number of parties served over the course of an evening, and by decreasing the number of customers that reneged or balked during the peak dinner period.

The Groupon Opportunity and Challenge

Douglas was unsure how many parties would opt to accept the 15% discount and dine earlier in the evening. Therefore, to further ensure an increase in the number of diners during the off- peak dinner hours, he also wanted to implement a Groupon promotion. Through its website, Groupon offered a “deal of the day.” For that day or a fixed number of days, customers could

5 Christopher C. Muller, “A Simple Measure of Restaurant Efficiency,” Cornell Hotel and Restaurant Administration Quarterly 40 (June 1999): 31–37.

6 Lauren Landry, “Jockeying, Faffing and Balking: The Science Behind Waiting In Line from MIT,” http://bostinno.streetwise.co/2012/01/30/jockeying-faffing-balking-the-science-behind-waiting-in-line-from-mit/, accessed 6 March 2014.

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purchase a coupon that offered them a discount on a product or service. There was a fixed commission and administrative fee of HK$250,000 paid to Groupon for setting up the promotion arrangement.

Groupon diners could enjoy a typical HK$200 meal for just HK$120 during off-peak dinner hours. When customers used Groupon, Fat Angelo’s mainly just covered their food costs and made a very small contribution to recovering some of the fixed costs. However, Douglas still valued the benefits of a Groupon campaign, which included diverting diners to the restaurant during off-peak hours, thereby reducing the number of balking and reneging customers during the peak hours, as well as the marketing value of a Groupon campaign, which provided greater exposure for the restaurant chain. Groupon was considered an effective promotional tool in Hong Kong, especially among those who were active in social media. Nevertheless, he wanted to undertake some careful calculations in order to ensure the overall benefits of a Groupon campaign would outweigh its costs.

Managing the Waiting Lines

Douglas was hopeful that diverting diners to the off-peak hours would help make the peak dinner period more manageable. Douglas understood the restaurant business well, however, and knew that some things, such as eating habits (specifically when diners preferred to enjoy their evening meal) were difficult to change. Irrespective of incentives provided, their peak dinner period would remain the same, from 7:30 p.m. to 9:00 p.m. Douglas thought it was important that the restaurant properly managed the inevitable queues of hungry diners, minimize the waiting times, and ensure the shortest cycle time possible.

Douglas felt he needed to have more data about the exact nature of the queues at the peak dinner time before he could take effective action to better manage the situation. As a result, he instructed the manager of the Tsuen Wan restaurant to collect relevant statistics during the peak dinner time and make observations and record the number of diners that arrived every 15 minutes [see Exhibit 3]. From that, he planned to perform some analyses on the number that could be seated immediately and the number kept waiting, as well as the length of time they had to wait [see Exhibit 4]. He hoped that by analyzing the data, he could gain more insight on how to better manage the queues of hungry diners.

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Enhancing the Waiting Experience

While he awaited the analysis, Douglas wondered what measures the restaurant could implement to enhance the experience of its guests waiting in the queue. Restaurant patrons in Hong Kong were accustomed to waiting in queues at popular restaurants, as a FedEx ad aptly summarized: “Waiting is frustrating, demoralizing, agonizing, aggravating, annoying, time consuming and incredibly expensive.”7

The Tsuen Wan location had a mini bar, and some customers could be diverted there. Instead of counting the minutes while waiting in the queue, patrons would be more inclined to focus on enjoying their beverage at the bar while feeling as if they had already been served rather than still waiting for service. Douglas realized this was simply a psychological game, but one can that could have a direct impact on the restaurant’s bottom line. Customer satisfaction could be captured in a simple formula: Satisfaction = Perception – Expectation.8

If customers’ perceived experiences were better than what they were expecting, they would be satisfied. Conversely, if the customers’ expectations were higher than their perception of the experience, they would be dissatisfied. Serving customers drinks at a bar not only distracted them from focusing on each minute in the queue, but it also enhanced their perception of the experience. Of course, the drinks they purchased were also a source of additional revenue. The mini-bar space was limited, however, so Douglas was keen to implement additional measures to improve customers’ experience while they patiently waited for a table.

From his experience of working many years in Fat Angelo’s restaurants, Douglas estimated that 40% of customers would balk if the waiting time was more than 30 minutes. One resource from which Douglas believed he could gain a better understanding of managing the customer waiting experience was the Disney theme parks. While most guests at Disney unknowingly spent most of their time waiting at a Disney park, they seemed to do so “happily” and “patiently.” That was certainly something Douglas wanted to emulate in managing the waiting lines at the Tsuen Wan location.

Going Forward

Fat Angelo’s had a good thing going, as the saying goes. It was a success by almost any indicator. Since the opening of the first Fat Angelo’s restaurant in 1998, its popularity among the people of Hong Kong was undeniable. The appealing dishes on its menu, the generous portions, pleasant atmosphere, and friendly service all contributed to an enjoyable dining experience for many guests. Douglas fully understood, however, that the restaurant landscape was a fickle one.

7 David H. Maiser, “The Psychology of Waiting Lines,” http://www.columbia.edu/~ww2040/4615S13/ Psychology_of_Waiting_Lines.pdf, accessed 23 February 2014.

8 Ibid. ST23 UST023 Fat Angelo’s Italian Restaurants: Managing the Customer Waiting Experience

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This month’s popular menu item could lose its appeal a few months later, and a trendy establishment today could be overtaken by a new trendsetter tomorrow.

While he couldn’t control all aspects of the restaurant landscape in Hong Kong, Douglas knew he could control the operations of each restaurant. Two problematic issues he identified were the long queues during the busy dinner hours and the restaurant being at below capacity during the off-peak dinner periods.

For the waiting problem, Douglas would need to quantify the lost revenue due to customer balking, and identify new ways to keep customers from balking. For the underutilized capacity issue, he would need to evaluate the impacts of an early-bird discount campaign and a Groupon promotion. He was hopeful these measures would improve overall operations and increase revenues. There were costs associated with each initiative, however, and Douglas had to be careful that he could justify the increased expenditures. Moreover, from Douglas’s standpoint, the interaction with a guest began at the time that guest arrived at the door of a Fat Angelo’s restaurant and requested a table. It was important to Douglas that, if guests could not be seated immediately and had to wait for a table, their waiting experience, in addition to their dining experience, be as pleasant as possible.

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EXHIBIT 1: TOP FIVE DISHES

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EXHIBIT 2: NEWLY RENOVATED TSUEN WAN LOCATION

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EXHIBIT 3: NUMBER OF PARTIES ARRIVING AND DEPARTING

# Parties arriving and

dining* # Parties departing

6:30-6:45 1 0 6:45-7:00 1 0 7:00-7:15 3 0 7:15-7:30 4 0 7:30-7:45 5 0 7:45-8:00 6 0 8:00-8:15 10 1 8:15-8:30 12 2 8:30-8:45 11 10 8:45-9:00 6 15 9:00-9:15 3 6 9:15-9:30 2 3 9:30-9:45 1 4 9:45-10:00 0 9 10:00-10:15 0 9 10:15-10:30 0 6 10:30-10:45 0 0 10:45-11:00 0 0

* Does not include balking or reneging parties.

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