Chipotle in China - Assignment Example

Research Paper - Chipotle in China Executive Summary The Chinese market is quite popular among international investors. The country’s extensive population and the strength of the local economy are considered as the key reasons for the market’s attractiveness. For Chipotle, a fast-food chain specializing in Mexican food, the entry in the Chinese market would result to a long-term growth. However, there are certain issues that need to be taken into consideration: a) in China the competition in the fast food industry is strong; the two major industry’s competitors, Yum! brands and McDonalds share the market’s dominance. In order for Chipotle to survive in the Chinese market it should seek for strategies to secure innovation, as an element that could attract Chinese consumers; b) the Chinese economy currently faces severe pressures. Of course, the economy’s performance remains at high levels while its future prospects are significant. However, delays in the economic growth of China have started to appear since 2013, a fact that denotes the existence of risks in all the country’s economic activities. This means that Chipotle should try to keep the costs related to its operations in China at relatively low level, so that the exposure to high risks is avoided; c) another important issue that marketers in Chipotle should review is the following: the pricing of the chain’s products in China should not follow the current industry’s practice, which is based on excessive markup. Efforts should be made to keep prices low, a fact that would offer to Chipotle a competitive advantage towards its rivals. Indeed, all foreign brands in the fast food industry of China tend to apply high markup on their prices, a practice that has led Chinese consumers to start reducing their visits to these restaurants. Therefore, low pricing could be a critical advantage of Chipotle under the terms that the relevant plan is carefully designed so that profit is not eliminated. Table of contents I. Introduction 5 II. The product A. Evaluate the product as an innovation as it is perceived by the intended market 5 1. Relative advantage 6 2. Compatibility 6 3. Complexity 6 4. Trialability 7 5. Observability 7 B. Major problems and resistances to product acceptance based on the preceding evaluation 8 III. The market A. Describe the market (s) in which the product is to be sold 1. Geographical region(s) 8 2. Forms of transportation and communication available in that (those) region(s) 9 3. Consumer buying habits a. Product-use patterns 9 b. Product feature preferences 10 c. Shopping habits 10 4. Distribution of the product a. Typical retail outlets 11 b. Product sales by other middleman 11 5. Advertising and promotion a. Advertising media usually used to reach your target market(s) 11 b. Sales promotions customarily used 12 6. Pricing strategy a. Customary markups 12 b. Types of discounts available 12 B. Compare and contrast your product and the competition`s product(s) 1. Competitors` product(s) a. Brand name 12 b. Features 13 c. Package 13 2. Competitors` prices 14 3. Competitors` promotion and advertising methods 14 4. Competitors` distribution channels 14 C. Market size 1. Estimated industry sales for the planning year 14 2. Estimated sales for you company for the planning year 15 D. Government participation in the market place 1. Agencies that can help you 15 2. Regulations you must follow 15 IV. Executive Summary/ front page V. Sources of information 16 VI. Appendixes 18 I. Introduction The expansion of a firm in the global market needs to be carefully planned depending on the firm’s available resources and the level of industry’s competition. It should be noted that firms that have unique characteristics can easier secure their global market position. Current paper focuses on the expansion of a restaurant chain, Chipotle, in China. Chipotle is a fast food chain that specializes on Mexican grill food (Chipotle, Organizational website, 2014). The firm combines the characteristics of traditional restaurants and fast foods, a fact that has been proved to be the firm’s major advantages towards its competitors. The firm was established in 1993 and has now about 1500 stores worldwide. The entry of this restaurant chain in China would be related to various challenges: existing competitors in the Chinese restaurant industry are quite powerful while the preparation of the chain’s recipes requires experience in similar menus. However, the Chinese market is quite dynamic and Chinese consumers seem to welcome innovative business initiatives, such as the specific restaurant chain. Also, the analysis of the Chinese market, as provided below, proves that in China the prospects for Chipotle are many; still, it should be necessary by the relevant marketing plan to be carefully designed so that delays and failures are avoided. II. The product A. Evaluate the product as an innovation as it is perceived by the intended market In order to estimate the potential response of the Chinese consumers to the specific fast food chain it should be necessary to check certain characteristics of the brand; these characteristics are able to influence the performance of the brand in the Chinese market. Marketers of Chipotle should review these brands characteristics before developing the chain’s entry in China. 1. Relative advantage A brand can be considered as having a relative advantage if consumers believe that this brand ‘is better from existing alternatives’ (Shimp and Andrews 2013, p.56). The superiority of a brand is decided taking into consideration the additional benefits that the particular brand can offer to consumers; in other words, the existence of relative advantage in regard to a brand is decided using subjective criteria, meaning ‘the personal perceptions of consumers’ (Shimp and Andrews 2013, p.56). In regard to Chipotle, the benefits that this brand could offer to Chinese consumers are the following: ‘high quality of ingredients and excellent customer services’ (Chipotle, Investor Relations Home, 2014). 2. Compatibility When referring to marketing the term compatibility denotes the alignment of a new brand with the needs and the lifestyle of consumers (Shimp and Andrews 2013, p.58). For example, the opening hours of a brand’s store can be an indicator of the brand’s compatibility. Chipotle can be characterized as being quite compatible with the lifestyle and the needs of consumers in China. Consumers in China highly value innovative design, the functionality of spaces and the involvement of technology in interior design, as these issues have been addressed in the interior of Chipotle stores worldwide (Photos 1 & 1a, Appendixes). Also, the opening hours of the fast – food chain are quite flexible and are set according to the local social life; for example, in London Chipotle is open from 11am to 23pm everyday, except from Sunday when the opening hours are 11am to 22pm (View London, Chipotle, 2014). 3. Complexity In regard to a new brand, the term complexity shows the structure/ accessibility of the brand’s innovative elements. If these elements are quite difficult to be used by the public then their value is significantly reduced (Shimp and Andrews 2013, p.59). The photos 1 & 1a (Appendixes) show the interior of one of the chain’s stores in New York. It is clear that furniture and equipment have been placed in such way so that simplicity in ordering and dining is secured. Therefore, the complexity of Chipotle, as the term is related to marketing, can be characterized as quite low. 4. Trialability Trialability means that consumers are able to check the product before they buy it. The provision of samples to consumers is the most common method that firms use for securing the triability of their products (Sumathi and Saravanavel 2009, p.633). For new brands trialability is vital for the following reason: consumers would not risk buying a new product if they are not able to try its products (Sumathi and Saravanavel 2009, p.633). In the existing stores of Chipotle worldwide no option of trialability of the chain’s products seems to exist. 5. Observability Observability, as related to a new brand, refers to the potential of the brand to attract the interest of people all over a particular area by using appropriate methods of communication (Sumathi and Saravanavel 2009, p.634). Popular art performers are commonly used by new brands for achieving a quite high level of observability, i.e. for attracting the interest of as many people as possible (Sumathi and Saravanavel 2009, p.634). In USA Chipotle has employed an innovative scheme for achieving high observability: those celebrities who make a positive comment for Chipotle publicly receive by the fast-food chain a card through which they can ‘enjoy a free burrito a day’ (Tuttle 2013). Many celebrities have responded positively to this initiative, a fact that is considered as a major success of the firm’s marketing team. B. Major problems and resistances to product acceptance based on the preceding evaluation The acceptance of the chain’s products in China could possibly face two key problems: a) since there is no option of trialability in regard to the food of Chipotle, Chinese consumers could be possible skeptical when having to visit one of the chain’s stores in China, b) in addition, the relative advantage of the chain towards its competitors may not be clear in the first instance; Chipotle will be a new brand a China and consumers would have to visit it and pay for trying its food. Since there are other fast foods, already well established in China, Chinese consumers could face difficulties in realizing the relative advantage of the specific brand, compared to other brands of similar characteristics. In other words, it could take a long time for Chipotle to secure its position in the Chinese market. III. The market A. Describe the market (s) in which the product is to be sold 1. Geographical region(s) China is a country with diverse geographical characteristics; desert co-exists with mountains and plateau (Figure 2, Appendixes). The major part of the country is of low level while areas with hills are also extensive (Figure 2, Appendixes). Cities and towns are placed mostly near the coastline, where the economic power of the country is concentrated (Figure 2, Appendixes). For new businesses that aim to attract a high number of visitors the establishment of a store in one of the cities placed near the coastline is suggested. 2. Forms of transportation and communication available in that (those) region(s) The transportation system of China is well designed; emphasis has been given to the potential of people in all the country’s regions, both rural and urban areas, to reach their destination with safety. Airplane is the country’s most popular transport means. However, China has an extensive train network, offering travelling even to destinations outside the country, such as Russia, Vietnam and so on (China Highlights 2014). The bus network of China is also important; buses secure that all people in China can reach their destination within a relatively low price (China Highlights 2014). In other words, the top managers in Chipotle would not worry in regard to the accessibility of the chain’s stores in China; in any place/ city the firm that the firm will decide to establish its presence the access of the customers would be easy, using existing transportation system. In China, Internet is considered the second most popular means of communication. In fact, the Internet users in China have been estimated to 618 millions (Yu 2014). Among them, a significant percentage, about 80%, accesses the Internet through a mobile phone (Yu 2014). 3. Consumer buying habits a. Product-use patterns In modern China the buying trends of consumers are highly differentiated compared to the past: young people are willing to pay more in order to secure that the product chosen is of high quality (Qiu 2011). In opposition, ‘older consumers tend to value price over quality’ (Qiu 2011, par.1). Moreover, in regard to the products chosen, older consumers are likely to focus on products related to the traditions, while young Chinese tend to buy products that are aligned with modern market trends, such as the products of advanced technology (Qiu 2011). b. Product feature preferences The preferences of Chinese consumers in regard to product features are differentiated according to consumers’ economic status. In regard to this criterion, Chinese consumers have been divided into five major categories (Wang 2012). Consumers in each category are likely to have different preferences as of the products’ features/ characteristics: a) those seeking for low prices; these consumers emphasize on the low price of the product and ignore its quality characteristics, b) high earners (Wang 2012); these consumers are likely to emphasize on brand’s name and brand’s benefits, c) those who are loyal to specific brands, d) those who follow the decision of the mass; reference is made in particular to people living in small cities or rural areas; those people seek for products that can respond to basic needs and no attention is given to a product’s brand name or its other qualities (Wang 2012 and e) those buying products mostly for covering specific personal needs; these people are likely to emphasize on brand name. Young people belong, in their majority, in the particular category (Wang 2012). c. Shopping habits The shopping habits of consumers in China highly depend on the age of the consumers. For example, consumers under 34 years old tend to buy products of personal care (Wang 2012). Also, shopping habits in China seems to be related to geography/ urban structure: in cities consumers are likely to buy products that reflect the consumer’s taste and which are of a nice/ attractive design (Wang 2012). For the people living in Chinese cities the functionality of products is of lower value compared to the appearance/ packaging of the product (Wang 2012). 4. Distribution of the product a. Typical retail outlets The fast food industry is one of the most powerful sectors of the Chinese economy. In 2013 the industry’s profits were estimated to $94.2 billion (IBIS world, 2014). During the last five years the specific sector has achieved an annual growth of 13% (IBIS World, 2014). Home delivery seems to be highly successful as a food delivery method in China, as also in Western countries (Jargon 2011). Initially, home delivery has been an option available only for pizza; Pizza Hut in China has been the first brand introduced such service (Jargon 2011). Today, all food products of fast food restaurants in China are delivered to consumers through home delivery (Jargon 2011); the average time for home delivery from KFC is 15 minutes (Jargon 2011). b. Product sales by other middleman As noted earlier, the most powerful fast food chains in China prefer the home delivery and online delivery as alternative product sales methods, in addition to the sales by the visit of consumers to one of these chains’ restaurants. In other words, the use of middleman in the sales of food products in China has been quite limited, almost abandoned under the influence of highly popular methods of product delivery, such as the home delivery (Jargon 2011). 5. Advertising and promotion a. Advertising media usually used to reach your target market(s) The advertising methods used by firms operating in the fast food industry of China are similar to those employed by fast food chains worldwide: ‘ads in television and websites’ (Fox 2010) are the most common advertising methods used in the specific sector. b. Sales promotions customarily used During 2013 fast food chains in China faced a decline in their profits mostly because of the bird-flu issue. For covering the relevant damage, fast food chains in China have decided to emphasize on their sales promotion. Coupons have been the most popular method for promoting sales; offers on meals are also included in the efforts of these brands to secure their profits in China. The Dollar Menu introduced by McDonald is an example of the methods used by the sector’s firms to promote their sales (Rubin 2013). 6. Pricing strategy a. Customary markups In China, the pricing of all foreign products is characterized by an excessive markup. In the fast food sector of the country a similar phenomenon appears (Hui-yuan 2011). Reference can be made, as an example, to McDonald’s: the brand has been found to add a 500% markup on its drinks (Hui-yuan 2011). The limitation of profits of the chains in the fast food industry, as reported from 2013 onwards, proves that the public in China has started to develop oppositions towards this practice. b. Types of discounts available Discounts are available in most brands of the fast food industry. For example, Combo meals in KFC are forms of discount because of the following fact: if ordering a combination of food products the customer pays less than if buying these products separately (KFC, Deals, 2014). B. Compare and contrast your product and the competition`s product(s) 1. Competitors` product(s) a. Brand name Yum! Restaurants China Co Ltd is the most powerful competitor in the Chinese fast-food industry. The company is part of the Yum! Brands, Inc., a fast food chain based in Kentucky, USA (Yum brands 2014). The specific company owns three major brands in the global fast-food industry: KFC, Pizza Hut and Taco Bell (Yum brands 2014). The brand uses the logo presented below. The specific logo has become popular as a sign of the brand’s uniqueness towards its rivals. Today, Yum! restaurants across China are estimated to 6,200, which is the highest number among the firms operating in the particular industry. The second most powerful brand in China, KFC, is also owned by Yum! Restaurants; KFC has about 4,600 restaurants in China (Yum brands 2014). The restaurants of all brands are mostly established in cities where lives the high percentage of the population (Yum! brands 2014). b. Features In regard to the Chinese market Yum! focuses on continuous expansion: in the organizational website emphasis is given to the fact that in the near future the number of consumers in China is expected to reach the 600 million people, i.e. 100% more consumers than today (Yum Restaurants China, Brands, 2014). The range of products available from the brands of Yum! is high: apart from the kitchen-based meals, of KFC, the firm also offers to its customers the chance to taste other types of food, such as pizza, through its brand Pizza Hut, Chinese food, through the brand East Dawning and hot pot through the brand Little Sheep (Yum! brands 2014). c. Package Shopping from KFC (source: Yum! brands 2014) The package of KFC, the brand of Yum in China, is standardized, i.e. it is similar to that used in the brand’s restaurants worldwide: the package has the logo of KFC so that the food product included is clearly distinguished as of the food chain involved. 2. Competitors` prices In 2012 one of the sector’s major competitors, McDonald’s increased its prices in order to face the limitation of profits, as a result of turbulences in the Chinese Economy (China Times 2012). In this context, McDonald’s most popular burger, the Big Mac reached the 18.5 yuan instead of its previous price, 17.5 yuan (China Times 2012). As for the Mc Chicken sandwich, its price changed to eight yuans instead of 7 yuans. 3. Competitors` promotion and advertising methods The advertising of Yum! brands is mainly based on media and Internet, including the social networking sites. The word of mouth, as a method for increasing the chain’s popularity could not be ignored. 4. Competitors` distribution channels Yum! brands as most other fast food chains in China highly emphasize on home delivery as a method for distributing their products to the customers. The purchase of the firm’s products by its stores is also feasible but it requires the visit of the customer to the store; however, because in many cases time may not be available for visiting one of the firm’s stores, then the use of home delivery is the most indicated ordering method. C. Market size 1. Estimated industry sales for the planning year The fast food industry of China has an impressive rate of growth. In 2015 the total value of the specific sector is estimated to ‘1, 4 trillion yuan’ (Haiyan and Yingqun 2012). This value includes the sector’s profits but also the assets of the industry’s firms. In regard to sales, the estimated 2. Estimated sales for your company for the planning year For the planning year, i.e. for 2014, the sales of Chipotle could reach a profit that would be at average level, compared to the firm’s annual profits in other countries worldwide; a reduction to this average profit would be made since the restaurants of Chipotle in China would be limited, at least for the first year of operation. For example, for 2014 the firm could expect a gross profit of $200-$300 million, under the terms that the number of its restaurants in China would reach a satisfactory level, i.e. at least 50-60 restaurants across the country. D. Government participation in the market place 1. Agencies that can help you The Agencies that could help Chipotle to overcome barriers in regard to its successful entry in the Chinese market would be the following: a) Primarily, Chipotle should contact CFDA (acronym of the China Food and Drug Administration), an organization that aims to support businesses of the food industry to align their operations with the rules of relevant laws, b) then, the firm could contact AQSIQ (General Administration of Quality Supervision, Inspection and Quarantine), c) the Food Standards Agency aims to secure that the rules of law in regard to the standards of food available across China are respected. 2. Regulations you must follow In regard to the food imported by its production units internationally, Chipotle would be obliged to follow certain rules, as for example (China laws and regulations of foods, drugs and cosmetics. 2014): a) Regulation (EC) No 669/2009 and No 1152/2009) b) Regulation No. 79; it refers to restrictions in practices used in food processing, c) Regulation No. 15, refers to the terms on which the advertisement of food needs to be based. IV. Executive Summary/ front page V. Sources of information China Highlights, 2014. China Transportation. Available at http://www.chinahighlights.com/travelguide/transportation/ China laws and regulations of foods, drugs and cosmetics. 2014. Available at http://www.chinafdc-law.com/laws/list_1-0_5-118_1.html China Times, 2012. “McDonalds raises prices in China.” Jan 20, 2012. Available at http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20120120000078&cid=1102 Chipotle, 2014. Organizational website. Available at https://www.chipotle.com/en-US/default.aspx?type=default Chipotle, 2014. The Company. Available at https://www.chipotle.com/en-us/company/company.aspx Chipotle, 2014. Investor Relations. Available at http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-irhome Euromonitor International, 2013. “Fast Food in China.” Sep 2013. Available at http://www.euromonitor.com/fast-food-in-china/report Fox, M., 2010. “Fast-food chains market products to kids: study.” Oct 11, 2010. China Daily. Available at http://www.chinadaily.com.cn/cndy/2010-11/10/content_11525661.htm Haiyan, H. and Yingqun, C., 2012. “Fast-food frenzy. June 15, 2012.” China Daily. Available at http://europe.chinadaily.com.cn/epaper/2012-06/15/content_15505019.htm Hui-yuan, C., 2011. “McDonalds China makes 500% mark-up on drinks: Xinhua.” China Times. Available at http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20110508000053&cid=1206 IBIS World, 2014. “Fast-Food Restaurants Market Research Report.” Available at http://www.ibisworld.com/industry/china/fast-food-restaurants.html Jargon, J., 2011. “Asia Delivers for for McDonald’s.” The Wall Street Journal. Available at http://online.wsj.com/news/articles/SB10001424052970204397704577074982151549316 KFC, 2014. Deals. Available at http://www.kfc.com/ Qiu, Y., 2011. Understanding Chinese Consumers. July 1, 2011. China Business Review. Available at http://www.chinabusinessreview.com/understanding-chinese-consumers/ Rubin, B., 2013. “McDonalds April Same-Store Sales Down 0.6% on China, Europe Weakness.” The Wall Street Journal. Available at http://online.wsj.com/article/BT-CO-20130508-707957.html Shimp, T. and Andrews, C., 2013. Advertising Promotion and Other Aspects of Integrated Marketing Communications. 9th ed. Belmont: Cengage Learning Sumathi, S. and Saravanavel, P., 2009. Marketing Research & Consumer Behaviour. New Delhi: Vikas Publishing House Pvt Ltd. Tuttle, B., 2013. “Stealth Celebrity Endorsement: No Money Changing Hands, Just Free Burritos.” March 21, 2013. TIME. Available at http://business.time.com/2013/03/21/stealth-celebrity-endorsement-no-money-changing-hands-just-free-burritos/ View London, 2014. Chipotle Information. Available at http://www.viewlondon.co.uk/restaurants/chipotle-info-62051.html Wang, H., 2012. “Five New Trends of Chinese Consumers.” Dec 17, 2012. Forbes. Available at http://www.forbes.com/sites/helenwang/2012/12/17/five-new-trends-of-chinese-consumers/ Yu, E., 2014. “China has 618M Internet users, 80 percent on mobile.” Jan 17, 2014. ZD Net. Available at http://www.zdnet.com/cn/china-has-618m-internet-users-80-percent-on-mobile-7000025291/ Yum! Brands, 2014. Organizational website. Available at http://www.yum.com/brands/china.asp VI. Appendixes Photo 1 – Chipotle in NY, Chelsea Photo 1a - Chipotle in NY, Chelsea Figure 1 – Map of China, based on the geographical characteristics of the country, as indicated in the left-upper part of the map (source: http://www.travelchinaguide.com/intro/geography/) Read More