Peggy Cherng: Engineering a fast-food fortune

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1:17It's 1983. In a shopping mall in Southern California, a new food court is being unveiled to shoppers and the lunchtime rush is about to begin. One outlet stands out, serving Chinese food, but forget table service and sprawling menus. Instead, a neat row of dishes gleams on stainless steel steam trays behind a glass counter. Nearby, a PhD-trained engineer watches numbers flicker on a computerised hill. She's tracking what sells, how fast dishes move and which combos slow the line. This isn't just a restaurant opening. It's an efficiency experiment in action. And the results will change Chinese-American cuisine forever and make that engineer a billionaire.

1:59Welcome to Good, Bad, Billionaire from the BBC World Service. Each episode we pick a billionaire and we find out how they made their money. We take them from zero to their first million, then from a million on to a billion. I'm Simon Jack, I'm the BBC's business editor. And I'm Zing Zing and I'm a journalist, author and podcaster. And the engineer watching that lunch rush was Peggy Chung, who along with her husband co-founded something called Panda Express, America's largest Chinese fast food chain. Now it doesn't exist in the UK but if you've been to America you will almost certainly have come across one of them.

2:31Am I right in thinking it's kind of like the McDonald's of Chinese food in the US? Exactly. They're in airports, shopping malls, drive-thrus and the couple are currently worth$7.4 billion which makes them some of the richest restaurant owners in US history. But she started her career working on battlefield simulators and computer systems for aerospace firms. Yum. Peggy applied engineering logic, though, to fast food with early computer systems and performance metrics long before data-driven, which is common these days, became a corporate buzzword. And Panda Express changed how millions of Americans experienced Chinese flavours.

3:07Dishes like orange chicken are now a cultural staple. Orange chicken? Never had it? I mean, I've actually not had it, but I can imagine it's not that dissimilar from sweet and sour chicken. Yeah. But sweeter, I think. OK. And very orange. Well, their success has also come with questions. however, about low wages, working conditions. But first, let's find out how Peggy Chung engineered her first million, one dish of orange chicken at a time.

3:35Peggy Chung was born Peggy Siang in 1948 in Myanmar, then called Burma. And this was during a time of huge conflict as the country became independent from the British Empire. Peggy's family left for Hong Kong, where both her parents worked full time. Her dad was a PR executive and her mum was a travel agent. When she was around two years old, she and her older brother were sent to live with their grandparents in the countryside near Zhangzhou, China, so their parents could work full time. She fondly recalls her time in China with her devout Christian grandmother who was, perhaps unusually for a woman at that time, well-educated and encouraged Peggy's learning.

4:10Aged 11, Peggy moved back to Hong Kong to live with her parents in their high-rise apartment, which is a bit of a jolt, quite a move from her rural upbringing. At school, Peggy was good at maths and in 1967 she enrolled to study maths at Baker University which is a small Methodist college in Kansas over in the United States. She said she picked it because in her words it was easy to get into but also because of its supportive Christian environment. Remember she was raised religious. When she arrived in Kansas she said the biggest shock was the food saying that she'd never previously had pizza or Mexican food.

4:44She soon met Andrew Chung a fellow international math student who was born in China and had grown up in Taiwan and Japan. They fell in love and planned to graduate together and marry. But as he was a year ahead of her, she had to speed up her studies and finished in three years instead of four. Talk about the things you do for love. Well, after she was offered a full scholarship, Peggy decided to transfer to Oregon State University to complete her degree. And she stayed on to earn a doctorate in electrical engineering, specialising in computer simulation. Yeah, Chinese food seems a long way away from that, doesn't it?

5:17Meanwhile, as the son of a chef, Andrew had worked as a waiter in New York during the holidays throughout his studies. And his father was a well-respected chef, but hadn't owned his own business. Interesting that because Andrew was determined to set up a business for himself. So Andrew moved to California to help his cousin run a Chinese restaurant in Hollywood. But after a few months, Andrew and his cousin had some work disagreements. So instead, Andrew found a former coffee shop to buy in Pasadena, California to run as a Chinese restaurant. Him and his father, who would be the head chef, they scraped together$60 ,000 from savings, a bank loan.

5:52And they opened Panda Inn in 1973. Now, this is an interesting historical context here. Called the Panda Inn because US President Richard Nixon in 1972 had this historic trip to mainland China where he met Chiang Mao. And it ended over two decades of pretty hostile relations between the countries. And following that visit, China gifted the US two pandas, Sing Sing and Ling Ling, as part of what became known as panda diplomacy. For a second there, I thought you said my name. I was like, what? Yeah, and panda diplomacy has become a bit of a buzzword because China gifted over 20 pandas to nine different countries as kind of a diplomatic outreach effort.

6:35Outreach thing. Yeah. And any national news in the UK, the arrival of a couple of pandas was pretty far up the running order in the news. Yeah, queues around the block. Queues around the block to see the pandas. Although I understand that at one point, rather than giving them away, they started to lend them so they wanted them back in the long run. So not so much panda diplomacy as panda banking. Well, the restaurant became popular because, thanks to a combination of Chinese and Sichuan cuisine style, because most other Chinese restaurants in the US at the time were an American version of Cantonese fast food.

7:10So if you think of things like dim sum, that's Cantonese. But Sichuan cooking tends to be much more punchier. They've got strong, bold flavours. Like, you know, the aforementioned orange chicken is inspired by sweet and sour chicken. And Cantonese, just so I'm clear about regionally where we're talking. Hong Kong, for example, would be Cantonese, right? And also Guangdong, which is a part of mainland China. Got it. Well, Andrew roped in his parents, his brother, his sister, to work at the Panda Inn restaurant for free. And Peggy also worked at the restaurant on weekends when she visited. She said she was not actually very good at it.

7:42She said, I was there in a limited capacity at first. I could only do hosting and I was not a good hostess, not very efficient. I couldn't make cocktail drinks. But that didn't put off Andrew because by 1975, Andrew and Peggy were married and she had a PhD in electrical engineering. That was pretty unusual for the time. Less than 5 % of engineering PhDs in the mid-70s were awarded to women and she developed a computer programme that used an algorithm to scan heart x-rays to help detect heart disease. Again, a long way from food. She soon got a job at aerospace manufacturer McDonnell Douglas saying, we built a system to simulate a battlefield for the Air Force.

8:19I enjoyed it, but sometimes I had to stay until 4am to get the design done. I think if you work in the restaurant business, sometimes working in the kitchen does feel like being on a battlefield. I'm sure that's true. Well, after a few years, Andrew opened a second Panda Inn and Peggy got a new job closer to home in Pasadena as a software department manager at an electronics company. But in 1982, she left that job. She had three young daughters to look after and she worked a few hours a week to help with Panda Inn's accounts and payroll. Now, on New Year's Day 1982, a group of regular customers came in to eat before a big college football game.

8:54That's American football, by the way. It was the family of UCLA football team head coach Terry Donoghue. His brother, Pat, was the developer of the Glendale Galleria Mall and loved Panda Inn food to ask the Changs if they would like to open an outlet in the soon-to-be-launched food court. Glendale Galleria was one of Southern California's busiest malls at the time. And the new food court was one of the first of its counts. Opening a mall gave Panda Express one huge advantage over a traditional sit-down restaurant. So if you imagine a traditional sit-down restaurant, you're kind of trying to entice people in.

9:29But malls basically guarantee this kind of heavy foot traffic. Shoppers are in this kind of quick decision mindset. So they want to sit down. The food's already there. They don't want to leave to eat. and food courts offer this kind of visual display and free sample. So it makes it easy for customers to just choose on impulse unlike ordering Chinese takeaway where you might not know what you're getting. Yeah, and also that's so interesting, isn't it? Because your decision-making window is really tight. So you've got to have something that stands out. You've got to have something unique. You've got to have something that looks nice.

10:00And Peggy saw an opportunity that seemed obvious to her as an engineer but that wasn't so obvious to everyone else. Fast food restaurants required a system. So she ensured that the new Panda Express would use a POS system. This stands for point of sale, essentially a computerised till. And it was only two years after IBM introduced the very first point of sale technology. So she's right at the cutting edge here. Well, these POS systems came with generic software. But Peggy, remember, she knows what she's doing. So she wrote her own programs so Panda could more accurately track sales and spot which dishes were selling better than others.

10:36And Peggy told the LA Times, it was confusing at the beginning, especially when everyone got nervous and pressed the wrong button. But it made everything more efficient. We are very used to the idea of technology permeating every bit of every business. And data. And you take it for granted. But that early, when they've only just introduced this kind of technology, is quite trailblazing, actually. You can imagine that a lot of restaurants were just keeping paper records in a big book. Yeah, for sure. Well, Andrew was also doing something. So he adapted the most popular panda in lunch dishes into a smaller selection of options.

11:10So they chose dishes that could be prepped quickly, sit on the steam table service line without losing flavour or texture. Nobody wants a soggy vegetable on their plate. And Peggy looked at the kitchen processes and helped to streamline the cooking and preparation system. So these dishes could be made quickly. Peggy said, as an engineer, we're trained to get everything done in the best way we can. One of Peggy's key innovations was introducing this open kitchen design and a large glass front refrigerator stocked with fresh vegetables so people can see what they're going to get. Again, that was pretty unusual.

11:43That is basically a calling card to say, hey, we make things fresh. But there was an issue in the sense that some chefs were cooking things differently. So one would cook chow mein noodles with a light soy sauce. Others wanted a dark soy sauce. So she had them kind of talk it out until they decided a standardised recipe. Now, I know someone who founded a fast food chain in this country. And one of the key things he told me was that you have to have the replication of the dish so that when you go into one outlet, you get exactly the same thing. And you're expecting the same thing as you would get in another one.

12:16So that's standardising. I know what I'm going to get. Super important to customers. and soon they were tracking any new mall or food court openings and bidding for the best spots. In three years, they had nine outlets. Andrew said, I became addicted to malls and they used profits from the Panda Inn and the first Panda Express outlets to fund this expansion. So they didn't have any outside investors. They owned a lot. That's really remarkable. And with every new store, the Chung's would take an established team to the new location to help set it up and run it for a while. In Peggy's words, every team would live in one apartment for a month and your supervisor might sleep in the same room as you rather than go to hotels.

12:53No one complained about not having privacy. It built team spirit. We have people who joined us as kitchen chefs and waitresses who are now vice presidents of the company. That kind of esprit de corps thing is so important with a growing business. Again, the same person I was talking about earlier saying getting the culture right, making everyone feel they're part of a team, part of a family. Very important when you're trying to grow a business. You don't want to start up with a bunch of newbies in a new place. you'll take an experienced team a crack team who know what they're doing to get it going and then let it go off on its own and arguably even more important if you're in the restaurant business right i don't know if you've watched this tv show called the bear but that's essentially about a group of very disparate people in the restaurant business coming together and forming a family yeah i know incredible tv some of the best tv of the last couple of years although a little bit more high-end cuisine i think that they were serving in the bear than this kind of mall-based but probably not as successful as Peggy.

13:48It's true. I don't think anybody on the bear is going to become a billionaire anytime soon. Well, after four years in 1987, executive chef Andy Cao was sent to Hawaii to open the first Panda Express there. And this is going to be a really important trip because Andy was inspired by the local Hawaiian citrus to create a tangy, sweet, spicy sauce based on traditional sweet and sour recipes that you'll get from different regions in China. He initially made the orange chicken dish with bone-in, skin-on-chicken, whole dried chilies. But then, you know, this is America, so he quickly adapted to boneless, skinless pieces of chicken, milder spices to suit everyone's palates.

14:25And this orange chicken became Panda Express's signature dish. Now, orange chicken doesn't leap off the menu to me. And I think it's quite difficult for people outside the US to understand just how key orange chicken is in Chinese-American cuisine. It's not just popular, it's kind of a staple. It's like chicken tikka masala in the UK or something like that. It makes up about a third of Panda Express's sales. Amazing. And you'll find a version of it on menus at thousands of Chinese-American restaurants across the country, having seen its success. I did look up a recipe and it said, make it with orange juice, which feels so quintessentially American to do something with OJ.

15:02OJ, put in some OJ in there. So by 1991, after eight years, Panda Express had 18 stores. and Andrew said that these early outlets were averaging between six grand and seven grand a week. So, you know, not to be sniffed at. They were possibly bringing in revenue based on those figures between five and a half million and six and a half million in 1991. Now, we don't actually know the profits they were making, but over eight years, it's likely to be over a million. So it's the early 1990s. It's a good time to say Peggy Chung is officially a millionaire.

15:46Now, let's take Peggy Chung from a million to a billion. After nearly a decade in business, the Chung's were now wary of competition. And they decided to quietly branch out into another mall fast food chain. So this time they chose a fast casual version of Japanese teppanyaki grill restaurants, Hibachi-san. Have you ever had teppanyaki grill? Yeah, I have. That's where they have all the knives and they're doing it right in front of you. Very flashy, great skills on show. It's basically the flavours of this kind of teppanyaki style food without the actual live cooking on hot plates. Because, you know, you can imagine a mall wouldn't exactly take very well to that.

16:22The recipes are based on Andrew's family's own time living in Japan. Yes, Andrew said, we started hibachi-san in malls in 1992 as a defensive strategy, interesting, to keep the Japanese restaurants from selling against our Chinese food at Panda Express. So if you can't beat them, join them. And this small Japanese chain meant the Changs could use their leasing and operational know-how, that business acumen across multiple brands while keeping the competitors from grabbing prime mall spots. And at the same time, it gave them a safe space to test new ideas, whether that be operationally, marketing, menu development, without putting their flagship Panda Express brand at risk.

17:00So stick to your knitting on Panda Express, explore and innovate in other ways. And other brands have done this, right? So I can think of PepsiCo expanding into other beverages, you know, Mountain Dew is owned by PepsiCo, Tropicana, Gatorade. So, you know, they have all these smaller brands that don't threaten the bigger brands. It sort of gives you the illusion of choice. And like, for example, in the case of Procter & Gamble, one of the big fast moving consumer goods businesses, they own lots of the same washing powder brands like Ariel, Bold, Tide, Gain. They're all the same people. So you may think you've got a choice.

17:34They own them all. Yeah. And you may think you're choosing between Chinese and Japanese food more, but either way, you're kind of your money's going to the chums pockets. It's quite an interesting thing that, isn't it? Relations between Japan and China. They're not happy bedfellows at the best of times. I will say having been to America last year and actually not gone to Hibachi-san, but gone to a very similar kind of takeaway style fast food Japanese place. The food in those kind of shops is more like Chinese food. Don't kill me if you're listening to this, but I do think there's probably much more in common with those two cuisines in America than there is in actually Asia.

18:06Perhaps in the American consumer mind. Well, they just say, oh, I'd like some, you know, Asian food. Exactly. Well, by 1993, after 10 years in business, Panda Express had over 100 locations. Now, fast food giants usually turn to something called franchising at this point to grow further in size. And this lets individuals buy the rights to operate under a brand, gives them access to a name, proven systems, training, marketing support. But in exchange, you're paying fees and royalties to that parent company. Yes, it's a really proved a very effective way for letting some chains expand quickly with less capital because you're shifting the costs and the risks to these franchisees.

18:45and that way you've got a little army of people expanding your brand, which you don't have to do and you're not paying for. You're only paying a bit for to supply some of those things. And most major fast food giants have relied heavily on that. For example, McDonald's, 38 ,000 locations, 95 % of those are franchised. Subway's is nearly 100%. Also Yum! Brands, they own Taco Bell, KFC, Pizza Hut. That's about 98 % franchised. That's actually the norm. Well, Panda Express refused to use this franchising system to expand. So they are not the norm. Forbes actually estimated that choosing not to franchise may have cost them royalties of at least 4 % of sales each year.

19:26But the chungs stood strong. They said the reason they did this was because, in Andrew's words, we can run them better. And there is a trade-off in the franchise system, which is that you are actually sort of outsourcing your brand. So you are losing a bit of control. someone else is running it for. They're using your intellectual property, your branding, but you're not running it. So there is a decision to be made between fast growth and greater control. Yeah. And if they don't do it right, the heat comes onto you still. Yeah. Well, today, though, Panda Express does have a few franchises, but in locations where ownership isn't possible.

20:00For example, airports, military bases, where you're not actually allowed to own the real estate. But back to the late 1990s, Panda Express was successful. But being a food court staple was already losing a bit of its luster. Peggy said it is a captive market, but you're not able to build your own brand. People see you as the Chinese place within the mall. You know, you are part of a continuum of offers rather than perhaps a distinct one. So she took those more profits and she branched out into building freestanding stores, so street locations. Now, these proved actually more challenging than the malls because Panda Express outlets were competing with established Chinese restaurants.

20:38And there were over 15 ,000 of these places in the US by the late 90s. So Panda Express embarked on their very first street marketing campaign. Flyers, door hangers, you know, flyers hung on door handles were all spreading the word for Panda Express. And this gave the campaign a kind of local flavour as opposed to kind of blasting it on national television or radio campaigns. And I bet the local standalone Chinese restaurants were thrilled to see Panda Express rock up on their street. 1997 turned out to be a turning point for Panda Express. They opened their very first drive-thru in Hesperia, California, bringing their food to customers on the go.

21:18And that very same year, Peggy stepped up from operations manager to president and CEO. She also introduced, remember she's still an engineer at heart, a centralised supply chain to keep every single store running smoothly. And by this point, Panda Express was pulling in nearly$179 million in revenue. But they were setting their sights even higher. They wanted to be a billion dollar brand. And we're at the beginning of a new millennium now. And I think we need to talk about what's happening to America's food culture during this particular decade. You'll remember that fast food was in the headlines.

21:51First in 2001, Eric Schlosser's fast food nation was exposing the hidden costs of the fast food industry, its supply chains, labour practices and health impacts. And then in 2004, Morgan Spurlock's film Super-Sized Me took the message mainstream. It showed what happens when you only eat McDonald's for a month. So consumers wanted healthier options, they were getting scared and they were asking more questions about where their food came from. And this dovetails with a huge explosion in organic food sales from 6 billion in 2000 to nearly 25 billion in 2009. At Panda Inn, they were feeding real-time data into their centralised distribution centres.

22:31So Peggy was able to ensure fresh ingredients arrived on time, consistency was maintained. And in a way, this gave Panda Express a bit of an advantage. Agility would expand rapidly in the 2000s without sacrificing quality, when there was more of a focus on how good is the food I'm getting actually. Yeah, you can imagine if you're walking into a mall and you're thinking, do I get the fried chicken? Do I get the waffles? oh wait, I could just get grilled chicken and some veggies. That must have been really appealing. Well, palates also got bolder, right? So people began to crave more spice. They wanted more global flavours.

23:07Panda Express was basically ideally placed to offer exactly that. They tested dishes like firecracker beef, which is basically spicy stir-fried beef. When the feedback was positive, they'd add them to the menu. And Peggy has basically said, our job at Panda Express is to follow that journey of how palates have grown, which is a lovely way of saying people got less scared of spicy food. That's right. And this was also a time, though, when the American mall was in relative decline, mostly due to the growth of online, of course, which drove a coach and horses through lots of business models. This was bad for the food courts, and Panda Express, as a result, was losing customers.

23:44So instead, they started opening in what they call strip malls. We would call these retail parks in the UK. We have lots of different buildings. And then they moved into non-traditional spots, university campuses, casinos, hospitals, places with built-in traffic like malls once offered. Captive audience, basically. Exactly. You don't want to leave campus, just go get a Panda Express. Well, the company keeps details private, but it's known that they've also purchased land for many of their restaurants. And owning those locations gives Panda Express a level of flexibility and control that many competitors lack.