How Panda Express brings Chinese food to the mall

Andrew and Peggy Cherng, now 65 and 62, respectively, opened their first Chinese restaurant in 1973 with $60,000 from savings and a Small Business Administration loan, plus relatives who worked for free. Today Panda Restaurant Group is the nation’s leader in Asian fast-casual eateries, exceeding $1.7 billion in revenue in 2012. Their Rosemead, Calif., company now manages a total of 1,500 Panda Express, Panda Inn, and Hibachi-San restaurants in 42 states and Mexico City, and it is celebrating its 40th anniversary this year. The co-CEOs’ story:

Andrew Cherng: I was born in Yangzhou, China, two years after World War II ended. I was 5 when my family escaped to Taiwan. Eight years later, we moved to Japan.

Peggy Cherng: I was born in Burma, and my family went to Hong Kong, where I grew up. I came to the United States for college and met Andrew at Baker University in Baldwin, Kans.

Andrew: We went on to the University of Missouri, where I got a master’s degree in applied mathematics. Peggy stayed a couple of years longer to get her Ph.D. in electrical engineering. Every holiday I had, I worked in New York, waiting tables in a restaurant. My father was a chef but hadn’t owned his own business. I didn’t like that. In my heart of hearts, I knew I wanted to be in business.

Peggy: I never thought about going into business. I was trained to be in the sciences.

Andrew: It’s just dumb luck that my cousin leased a restaurant in Hollywood called Ting Ho. He didn’t speak English and turned to me for help. So in 1972 I moved to California and worked seven days a week in the restaurant, getting paid $800 a month. After a few months, we had some work disagreements and I found a restaurant in Pasadena to take over. My dad and I borrowed some money from that same cousin and got an SBA loan, scraping together $60,000. We opened Panda Inn on June 8, 1973. The whole family — my parents, a brother and sister — all worked at the restaurant for free. We lived in a two-bedroom apartment in San Gabriel and didn’t have any money. Peggy would come to visit, and we got married in 1975.

Peggy: I worked in engineering for McDonnell Douglas and Comtal/3M until our third child was born.

Andrew: My dad passed away in 1981. I was very comfortable taking charge. I’m a driven person and I like to accomplish things. In 1982 we opened another Panda Inn in Glendale.

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Peggy: That’s when I joined the family business.

Andrew: Through my connections, I met the Donahue family. Terry Donahue was the head football coach for UCLA, and his brother Dan was the developer for the Glendale Galleria. They invited me to open a Panda Express in the mall. It was October 1983, and the first Panda Express worked out okay. So I opened more restaurants. In 1985 we went from five to nine stores in one year.

Peggy: It was opportunity driven. In the first 10 years, we were mall-based stores.

Andrew: At first we looked at them like a collection of individual restaurants. We didn’t have much infrastructure or control. In the late ’80s and early ’90s we began to experiment. I talked to Bill Davila [president of Vons], who was a customer. I convinced him to put us in Vons supermarkets. Then we began to put Panda Express outside the malls. I was conservative, so we opened small spaces that averaged $6,000 to $7,000 a week in revenue back then.

Peggy: Inside the mall, shoppers are your customers. It was more challenging to drive traffic to the street locations. So we did street marketing with door hangers and a discount program. We made sure that Asian cuisine was desirable in the area and there was a reasonable rent to ensure profit. The best location was on a corner, for good daytime traffic and nighttime access.

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Andrew: I’m the one who dealt with getting the stores open and functioning. After that, Peggy took care of the rest of it.

Peggy: It was clear to me as an engineer that you need a system. We were one of the first companies to use a computer in the 1980s, which made ordering easier. It could collect information about the most popular items people ordered by networking the stores to the corporate office. So we had more information.

Andrew: In the process, we made the restaurants bigger and improved the ambiance. That made a difference in people’s perception. Our food costs are on the higher side, so I wanted labor costs to be on the lower side. Good service can create more business, so you don’t want to be too lean. We cross-train people and have them multitask.

Peggy: In the late ’80s, Chinese food meant mom-and-pop restaurants. There were no chains. Before 1973, Chinese restaurants offered chop suey. As more Chinese immigrants came, they brought their cooking skills and cuisines. Panda Express moved the cuisine into more sophisticated, authentic food.

Andrew: This is our 40th year in business. We don’t have a single penny from outside investors, and we never borrowed heavily from the banks. We have a healthy balance sheet and more credit than we can use.

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Peggy: In 1997 we had 254 stores, and the revenue was $178.7 million. That’s when we set a goal of being a billion-dollar company. By then we had a supply-chain system that distributed to the stores through a third-party vendor and operated under a chain mentality.

Andrew: Most of our stores are company owned. When we deal with an institution, like universities, we license its operation and help it get set up. We have supervision and training for quality control, but business is really about empowering people to act like owners themselves. If people aren’t inspired to grow, another business comes in next door, and you go out of business.

Peggy: Andrew is the visionary who pushes for growth. I like my system process, so I work on how to enable the growth. Being married does not always make working together easy. We had to learn how to resolve business disagreements. It’s not “Your way is best” or “My way is best,” but the alternative way — which incorporates everybody’s ideas — is best. In 2010 we reached our goal and had sales of $1.069 billion.

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Andrew: Doing everything ourselves is out of the question, so licensing is important. We’re in Mexico now and will soon open in Canada. We’re in a lot of universities. Airports are challenging in terms of securing the real estate because there are others who are more connected politically.

Peggy: We have an all-in mentality. Because we’re immigrants, we have a can-do attitude. We’re also very frugal. From 1983 to 2000, with every new store, we would take an established team to the new location to help open the store. 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. No one complained about not having privacy. It built team spirit.

After all these years, what I’m most proud of is seeing our people and the business grow. We have people who joined us as kitchen chefs and waitresses who are now vice presidents of the company.

Andrew: I am most proud of building an organization where our people are inspired to better their lives. Empowering others to better their lives contributes an even greater impact to our communities and beyond.

Peggy: Back in 1973 it was about making a living for the family. Today it’s about challenging ourselves and seeing what all of us on the team can achieve.

Our advice

Details matter. At Panda, the little things are a big deal for us. We cut our vegetables daily. Our sidewalks are clean, and our washrooms are neat and tidy. When the little things get done, guests will notice it.

Anticipate the competition. We started Hibachi-San in malls in 1992 as a defensive strategy to keep Japanese restaurants from selling against our Chinese food at Panda Express.

Learn constantly. We maintain a list of recommended books about leadership and inspiration, including The Four Agreements: A Practical Guide to Personal Freedom, by Don Miguel Ruiz, and Steve Jobs, by Walter Isaacson. We buy them, then sell them below cost to our associates. That way, those who want to read them must pay something for them, and the company absorbs the loss.

This story is from the February 4, 2013 issue of Fortune.

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