Chipotle
Step 2: Detailed Criteria
Step 1: Screening Criteria
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
-GDP: grew 7.7
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
-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
-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
- 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
- Food circulation 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
- loss of know-how to potential competitor
Business Model
-Fastest growing type of restaurant
-High food quality but high convenience
- Customer-directed assembly line system
-Self-service drinks
-Open kitchen allows customers to see food-
making
-Intuitive design of space
-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
-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
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
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
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
-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 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
- 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