Cooking Up a Powerhouse of Chinese Fast Food

The founders and builders of Panda Express, the largest Chinese restaurant chain in history, today face the challenge that only comes to successful entrepreneurs: What do you do after you succeed?

Andrew and Peggy Cherng built Panda Restaurant Group from a single Pasadena location to a national powerhouse with 423 outlets in 34 states, with 5,000 employees and about $300 million in annual sales. Now the husband-and-wife team wants to build Panda into a much larger company--establishing Chinese food firmly in the center of the American diet.

"I would like to see 10,000 stores," says Andrew Cherng, Panda's chairman, who started the company in 1973 with a Panda Inn restaurant on Foothill Boulevard in Pasadena.

And those ambitious plans haven't changed since the terrorist attacks Sept. 11. Panda group's business at its outlets in shopping malls and at airports has been down sharply in the last three weeks. But the firm still expects sales growth of 5% to 6% this year and is going ahead with eight scheduled store openings in November in Atlanta and elsewhere in Georgia.

In all, Panda Restaurant Group will open 80 new stores this year, but the Cherngs are considering moves, including franchising or selling shares to the public, that would allow Panda to grow much larger. As a possible model, Cherng cites the Starbucks coffee chain, which is opening its 5,000th store after 30 years in business.

But before Panda can approach such a goal, the company must develop systems to ensure consistency and quality on a much larger scale. "We need to refine the systems for human resources, product consistency and customer relations," says Peggy Cherng, Panda's president and chief executive.

Peggy Cherng, who has degrees in electrical engineering and computer science, understands the opportunity. "This is a favorable time for Chinese food," she says. But she knows that realizing her vision of a "high-performance company with a strong culture" will take time.

But competition might force the Cherngs to move more quickly. P.F. Chang's China Bistro chain of restaurants, which has a highly valued publicly traded stock on Nasdaq, is launching a chain of cook-to-order fast-service Chinese restaurants named Pei Wei.

"Wall Street is looking for something new in restaurant concepts. My sense is that authentic Chinese food could be the next success in casual dining," says analyst Greg Schroeder of Fulcrum Global Partners, an investment research firm in New York.

But if Chinese food is to be the next successful concept, the Panda company is the obvious candidate to provide that concept to the American public. Panda already has opened seven Panda Panda cook-to-order fast-service restaurants, similar to Pei Wei, in Southern California.

And those casual dining establishments are secondary to the main force of Panda restaurants, the 402-outlet Panda Express chain of fast-food counters in shopping malls, supermarkets, ballparks, university and hospital cafeterias and stand-alone stores in cities coast to coast.

Panda Express is a real innovation. Where most attempts at Chinese fast food have settled for egg rolls, rice and chow mein, Panda Express offers orange-flavored chicken, tofu with black mushrooms, beef with broccoli and many other dishes conceived by Chinese chefs and prepared on site by trained cooks.

The Express idea began in Glendale in 1983, when the developers of the Galleria shopping mall asked Andrew Cherng whether he could adapt the cuisine of his Panda Inn restaurant to a fast-food setting in the mall.

He did so, adapting recipes originated by his late father, Ming-Tsai Cherng, and Panda Express was an instant success.

The elder Cherng, who died in 1981, had been a chef in Shanghai, Taipei, Taiwan and Yokohama, Japan, before coming to the United States in 1973. Andrew had come in 1966 to attend Baker University, a small Methodist college in Baldwin City, Kan., southwest of Kansas City.

Andrew took degrees in applied mathematics from Baker and from the University of Missouri. It was at Baker also that he met Peggy, who had come to the school from Hong Kong.

In 1972, Andrew Cherng, with his father and mother about to immigrate to the United States, bought a shuttered coffee shop in east Pasadena and turned it into Panda Inn.

"The hardest times are starting the business," Andrew Cherng says. He didn't want to lose any customers, he recalls. When customers would turn away from Panda Inn because the tables were full, he would go after them. "We had a back door to the restaurant and I would go into the parking lot and say, 'Thank you for coming. I'm sorry we're crowded, but if you'll wait, I'll buy you a drink,' " Andrew says. "And they might return to the restaurant, saying, 'Wow, all this for our business?' "

Panda Inn flourished and Cherng opened a second site in Glendale that attracted the principals of Donahue Schriber Real Estate, the developers of Glendale Galleria who suggested the Express outlet for an expansion of their mall.

With the launch of Panda Express, Peggy Cherng, who had been working as a software developer for McDonnell Douglas and Comtal-3M, as well as raising three daughters, came in to help manage the family firm.

The Express chain grew rapidly. "In 1985, we went from five stores to nine. That was a lot harder than opening 80 stores this year," Andrew Cherng says.

Today, Panda Express includes eight outlets in Japan and five in Puerto Rico. Panda Restaurant Group also owns five Panda Inn traditional restaurants and nine Hibachi-San Japanese fast-food outlets.

Remarkably, aside from the Panda Express outlets in Japan, which are franchised, and 62 outlets in the Midwest that are owned in a joint venture with financial backers, all of the other restaurants are owned by the Cherngs. "Some 20% of the shares are set aside for employee ownership," Peggy Cherng says.

That makes Panda one of the largest family-owned restaurant chains in the world.

Expansion is still financed by internal cash flow. It takes $300,000 to open a Panda Express, which means that the company will invest about $24 million to open new stores this year.

Peggy Cherng indicates that the company earns more than 10% pretax on sales, which works out to more than $30 million of the $300 million-plus in revenue this year. Panda is already a large company.

But both Cherngs have visions of making it bigger. And that puts Panda at a crossroads, one that has faced many family-owned firms in Southern California's entrepreneurial landscape--including restaurant chains from McDonald's to Taco Bell that also were born in this region.

To grow much larger, the Panda chain will have to sell franchises to independent operators--as McDonald's and most restaurant chains do--or sell shares to the public--as McDonald's and many chains have done.

"Of the two choices, public ownership would allow the Cherngs to maintain more control over quality than franchising would," observes management consultant Cameron McConnell, whose firm is based in Irvine.

Of course, "they could sell Panda to a big company like PepsiCo and be very comfortable for the rest of their lives," says a financial expert.

But the Cherngs, who are in their early 50s, don't want to sell Panda. They have visions of a bigger company and a broader purpose. "Chinese food is not on Americans' weekly to-do list yet, but it could be," says Andrew Cherng. "We'd like to build a premier company with a good, distinct culture," says Peggy Cherng.

As Panda has grown, so have the Cherngs' visions. It goes with the territory in Southern California.

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James Flanigan can be reached at jim.flanigan@latimes.com.

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