Thailand's Big Cheese

Mention Thailand, and images of coconut curries and spicy shrimp soup percolate in the mind. The country would seem an unlikely setting for a pizza war. But one of the bitterest battles in the global fast-food industry is shaping up in Thailand, and its outcome could determine not merely who dominates the pizza market in this country of 61 million but also the future of franchising agreements around Asia and beyond. "This isn't really about pizza," says William Heinecke, 51, the American-born multimillionaire franchise king and hotelier who is at the center of the conflict. "It's about competition."

Against the advice of more experienced colleagues who said Asians wouldn't eat bread or cheese, Heinecke opened the first Pizza Hut in Asia in 1980 in the beach resort of Pattaya, southeast of Bangkok. "It was a daring move," says Kitti Naktisuwan, an analyst with ABN AMRO Asia Securities. It was also the right move at the right time. Thais flocked to sample such customized wares as tom yum (spicy soup) pizza, and Heinecke, who became a Thai citizen in 1991, now has 116 stores taking about 95% of the country's $50 million-a-year pizza market. But after a 20-year relationship, Heinecke and U.S.-based Tricon Global Restaurants, owner of the Pizza Hut, Kentucky Fried Chicken and Taco Bell franchises, are headed for a divorce. And it's not amicable.

Heinecke has filed suit against Tricon in a New York court, seeking compensatory and punitive damages for breach of contract and unfair competition, among other charges. The trial is scheduled to begin Oct. 10. Among the issues is a new global noncompetition clause in Tricon's international franchise agreement, which stipulates that franchisees need Tricon's permission to operate any other food business, even ones that don't compete with pizza, chicken or Mexican cuisine, anywhere in the world. Heinecke's previous contracts with the firm barred him only from opening rival pizza outlets. "How can the U.S., which advocates free trade and competition, support that kind of restrictive practice?" Heinecke asks. Says Peter Hearl, executive vice president of Tricon Restaurants International: "We want our franchisees to focus on our business."

Heinecke says he can't agree to the clause because pizza isn't his only business. It wasn't even his first. Four years after moving to Thailand in 1963, Heinecke borrowed $1,200 from a loan shark to open an office-cleaning service and a public relations company. He made his first million before age 21. While pizza franchises were popping up all across America during the late '70s, he came to believe that if Thais were exposed to pizza, they would like it. "I operate on the belief that, fundamentally, we're all more similar than dissimilar," he says. He built on his success with Pizza Hut by landing franchises for Mister Donut, Swensen's, Sizzler, Dairy Queen and Burger King. Then he added seven hotels to his empire, including Bangkok's Marriott Royal Garden Riverside. He also distributes Esprit clothing and Red Earth cosmetics and other consumer products. When the Thai economy collapsed in 1998, Heinecke's conglomerate also swooned but clawed its way back fast. Last year it had revenues in excess of $200 million and profits of $13 million.

So how did the fight with Tricon get so bad? Tricon's Hearl says his company tried to compromise. "We had grandfathered a number of his concepts into the contract, but he's got more concepts than Tricon," he says. What Tricon objects to is Heinecke's new franchise venture in Thailand, Chicken Treat. "As part of the Tricon family, Heinecke has access to information about KFC, and that presents some issues for us," Hearl says. "We welcome competition but not unfair competition." KFC controls more than 65% of the $110 million fast-food chicken market in Thailand. Heinecke counters that Tricon's franchisees in the U.S. and the European Union are not bound by the same clause, and are free to compete with him in Thailand if they so choose.

With 30,000 outlets around the world, Tricon dwarfs Heinecke's Minor Group. Heinecke has never been afraid, however, to rumble with heavyweights. In 1998 he rallied Thai shareholders in the Regent Bangkok hotel to resist a takeover attempt by U.S. investment bank Goldman Sachs. Goldman was only able to increase its stake from 34% to 40%, while the remainder stayed with Heinecke and his Thai allies. He believes he will eventually gain majority control.

That fight was on Heinecke's turf. Because New York State law governs his contract with Tricon, he will have to win his next fight in his opponent's backyard. If Heinecke wins, he will take whatever damages-award money he gets and rebrand his stores into another pizza franchise. Although Tricon is building new Pizza Huts, Heinecke will still be the big cheese in the local pizza market because his stores are already in the best locations.