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Chipotle

Step 2: Detailed Criteria

Step 1: Screening Criteria

  • Food culture

  • Expats (US, UK, CANADA)

  • Few Direct Competitors

  • Suppliers available

Shanghai!

PEST Analysis

New entrants to industry

Policy Issue

Economic Issue

  • Growing food and beverage market in China -Opportunity for industry profitability

  • Strict government policies present time and cost barriers to entry

-Companies like Chipotle can overcome with

their excess capital

Conclusion

  • A SMERT (Shanghai Municipal Foreign Economic Relation & Trade Commission)
  • Environment Bureau for Land Procedures
  • Shanghai Health Department
  • Property right
  • Economic condition:

-GDP: grew 7.7

  • Tax

1. Income Tax

2. Transaction Tax : Business tax

  • 3. Other taxes: Vehicle and vessel license tax, Stamp tax, Property tax, Deed tax
  • Human Development Index

1 Beijing 0.821

2 Shanghai 0.814

3 Tianjin 0.795

+ Waigaoqiao ftz commercial center (zone c)

The rivalry amongst current competitors in the industry

Substitute products or services

  • Low opportunity for competitive innovation in food industry

  • McDonalds, Subway, KFC, and Pizza hut have many stores in Shanghai

-Chipotle must raise advertising expenses to grow brand awareness

  • Low switching costs for fast food consumers…BUT

  • Chipotle is not traditional fast food

-Substitute products will not deliver equal quality

Law

  • Laws and regulations

-Food safety Law of the PRC

-Company Law

-Advertisement Law

+ don’t have to rent a room in an office block

+ don't need to apply for consultancy

Porter's 5 force model

Technological Issue

Social culture Issue

Bargaining power of customer

Bargaining power of suppliers

  • Customers in Shanghai are not as price sensitive as many other locations

-Hard to force down prices

  • Not many authentic Mexican food alternatives

  • High switching costs for Chipotle to find suppliers that uphold the company’s standards

  • Very few substitute inputs for natural/organic ingredients

  • Shanghai has abundant suppliers to choose from!

1. Demographic

  • Population in Shanghai: 23,710,000
  • Workforce population: 16 million

- High Availability of labor force

2. Social institution

  • Major center of higher education in China with over 30 universities and colleges
  • Students (our target customers: young adults)

1. Infrastructure

  • Extensive transportation network

- Shanghai Metro

- Shanghai Maglev Train

- Expressways

  • international airports

-Shanghai Hongqiao International Airport (1929)

  • -Shanghai Pudong International Airport (1999)

- High visitor arrivals – large amount of tourists

  • Shanghai financial center
  • Highly attractive to foreign investors

Social Culture Issue

3. Customs

  • Shanghai cuisine: rice, thick and rich sauce, chilly meat
  • Chipotle’s ingredients: rice, beans, meat with sauce
  • Mexican style food match with chinese’ taste

4. Business practices

  • provide incentive for new established enterprise

 as a fast growing and financially strong

company,

 has potential to expand Asian market

 enjoy lots of benefits on different aspects in

Shanghai

 wholly-owned subsidiary mode : have higher

autonomy

➢ avoid leakage of information to competitors

Choosing a market to enter

Conclusion

 easier for Chipotle to further develop in China

 Short run: pay attention to cost reduction

➢ adaption of the service style to local market

 Long run: cost pressure will be not that high

 with the high standard on food and service

➢ Chipotle can make a roaring success in this prosperous city

Mode of entry

Consideration

Background

Wholly-owned subsidiary

Why Choose?

  • A company that is completely owned by another company called the parent company or holding company. The parent company will hold all of the subsidiary's common stock. Since the parent company owns all of the subsidiary's stock, it has the right to appoint the subsidiary's board of directors, which controls the subsidiary

  • Greenfield & Brownfield strategies

  • More direct and easier control

  • Sufficient cash to support

  • Enables global strategic coordination (i.e. further expansion in China)

  • Realizes location and experience economy

Drawbacks

  • Requires overseas management skills

  • High risk and cost for collecting local market information (i.e. customer preferences/ govt. regulations etc.)

  • May respond slower to market changes than existing competitors

Joint Venture

Joint Venture- Disvantage

  • Sharing of profit

  • Loss of control over technology and managerial know-how

  • Complicated set up and registration procedure

Joint Venture

  • strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its parent companies

  • partners share in ownership of an operation on an equity basis

  • E.g.: Shell-MS, Kellogg Company And Wilmar International Limited (in China food market)

Wholly-owned Subisdiary

How does Chipotle operate in Shanghai as a wholly-owned subsidy (Wholly-owned Foreign Equity) ?

Solutions towards the drawbacks

3. Obtaining Documents

1. Preparing registered Capital

2.Choosing a Chinese Name

  • For Food & Beverage industry, it is suggested to be around RMB 1 million (min. RMB 800K)

-Initial Pay-up: 20%

-Remaining balance have to be remitted

within 2 years

  • Business License from SAIC

  • Hygiene permit for public places

  • F&B service certificate

  • Food circulation certificate

  • Alcohol certificate

  • Employ some local professionals in the top and middle level of management

-Being more familiar with the local business Practice

-Communicating with different parties easily (Suppliers, Government etc.)

-Avoiding leakage of know-how knowledge to too many parties

  • Hire local business consulting firm in Shanghai

-Seeking Help on setting up the business

-Asking for advices on the strategies and plans from time to time

Make sure the success of Chipotle in Shanghai

  • The official company name in China must be in Chinese and formatted as following.

-Chipotle Food & Beverage (Shanghai) Co. Ltd

  • Permission from The State Administration of Industry and Commerce (SAIC) is required.

-Do “Name Pre-registration” with proposed name and a few alternatives

Franchising

Disadvantages

  • Lack of direct control over quality

  • Growth may be slower depending on franchisee's intentions

  • Arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications

  • E.g.: McDonalds Corporation, Burger King, Häagen-Dazs, Pizza Hut, Kentucky Fried Chicken

  • Sharing of profit "pie"

  • loss of know-how to potential competitor

Business Model

  • “Fast Casual”

-Fastest growing type of restaurant

-High food quality but high convenience

  • Customer-directed assembly line system

-Self-service drinks

  • Store layout

-Open kitchen allows customers to see food-

making

-Intuitive design of space

  • Employee Team structure

-25 employees per store (in shifts)

-Dedicated jobs that focus on efficiency

  • Customers can order before entering

Fax, online, iOS or Android app

Menu: Ingredients

  • Meats

-Marinated grilled chicken and steak

-Carnitas (seasoned and braised pork)

-Barbacoa (spicy shredded beef)

  • Vegetarian black and pinto beans
  • Sofritas (vegan protein made from organic tofu)
  • Brown and white rice (with lime and cilantro)
  • Cheese, sour cream
  • Lettuce, peppers, onions
  • Variety of salsa (tomato-based sauces)
  • Parentheses uacamole (made from fresh avocados

Steve Ells – Founder and CEO

Mission Statement

  • Higher-quality ingredients and cooking techniques to make great food at reasonable prices
  • Food With Integrity

-mindful of the environmental and societal

impact of our business

  • Attracting and building teams of top performers empowered to achieve high standards
  • Want like-minded customers

-change the way people think about and eat

fast food

Shanghai

185 new stores opened in 2013

Total number of stores now: 1,595

Chipotle goes public!

2006: Chipotle’s opens to public investors.

IPO on the New York Stock exchange

Likes to cook; considers himself a chef first.

Attended the Culinary Institute of America in New York

Financial Status

  • Large amount of cash on hand

-Primary use in new restaurant development

-Short-term investment balance of over $578

million USD

  • Very financially stable

Financial Status (2013)

  • Highest profit margin: 26.6%
  • Revenue: USD $3.21 Billion

-increase of 17.7% over last year

  • Net Income: USD $327.5 million
  • Earnings per share: USD $10.58
  • Stock price: USD $563.88
  • Number of shares outstanding: almost 31,000 shares

Current Locations

  • 7 stores in Canada
  • 6 in England
  • 2 in France
  • 1 in Germany
  • 1,572 in the United States

7

1

6

2

1572

Slowly Expanding

  • Two years after first store, in 1995: expanded to open 2nd and 3rd stores

  • 1998: first time Chipotle brings on outside investors

-Already 8 stores by this point

  • 1999: Started opening stores in different states

-First step in “internationalization” process because states in the US are generally independent of each other

Supply Chain

Chipotle’s Beginnings

  • 23 independently owned and operated regional distribution centers (in US) purchase from suppliers
  • Suppliers carefully selected based on quality and their understanding of our mission
  • Seek to develop mutually beneficial long-term relationships with suppliers.

  • original mission statement: to serve gourmet burritos

  • The organic and naturally-raised initiative that now defines Chipotle did not get started till much later

  • First store opened in 1993 in the Denver area in the United States

Adjustment of Mission Statement

  • 2000: Started differentiating by serving only naturally-raised pork
  • 2002: added naturally-raised chicken to their products

-to further differentiate themselves from other

fast Mexican places.

  • Naturally-raised and organic become a part of the mission statement of Chipotle

Later Stage: Multi-Domestic

  • local Responsiveness remain high

  • Cost pressure decrease

-Lump sum fix cost have been paid in the

earlier stage (fix cost decrease)

-Direct material cost will decrease contributed by the

maturely developed supply chain

e.g. Food ingredients (Variable cost decrease)

Earlier Stage: Transnational

  • High local Responsiveness

-Changes to service style

-New products favorable for Chinese customers

Earlier Stage: Transnational

  • High Cost pressure

(High fix cost+ low variable cost)= High cost pressure

- Fix cost: set up cost, registration, construction cost,

finding local consultant etc. (lump sum)

-Variable cost: Food ingredients, wages, electricity etc.

(relatively low)

Local Responsiveness

  • Relatively high

  • No major changes to product itself (ingredients, etc.)

  • Changes to service style to accommodate cultural preferences

  • Strict government regulations

Shanghai ranked 158th/189th in “Doing

Business” 2014

Cost Pressure

  • Relatively high due to large initial fixed costs

-Supplier research & outreach

-Promotions to increase brand awareness

  • Natural & organic food costs comparatively low in Shanghai

-Dongtan: the sustainable city

-Abundance of nearby organic farms

  • Cost pressures likely to decline over time

International

strategy

Group Member:

Aditi Bhandari 1155050593

Au Kit Long 1155034008

Au Tsz Ling Janice 1155026408

Chan Hoi Suen 1155034999

Chan Man Yi Mandy 1155033357

Chan Ying Kar 1155033806

Chow Yuen Ling Wendy 1155033831

Ho Chun Hong 1155033026

Mitchell Lolley 1155050740

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