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Chipotle Essay

Executive Summary
It is the findings of this report that if Chipotle were they to expand and begin serving customers in China, they would experience growth that would rival that of its United States business after 6 years. Market and Industry Analysis

Overview of Chipotle
Chipotle opened its first restaurant in Denver, CO in 1993 with major investor; McDonald’s Corporation. McDonald’s fully divested itself from chipotle in 2006. Since then, Chipotle has grown very fast across the Unites States and they currently have 1450 stores located in 43 states. They have also expanded their business globally to obtain a bigger market share. Chipotle opened their first European restaurant in May 2010 in London, and then opened their second European location in Paris in May 2012.

Chipotle’s CEO Steve Ellis decided to change Chipotle’s quality of food and introduced naturally raised pork in 2000. Chipotle continued to expand on their naturally raised offerings and in 2002; they introduced naturally raised chicken to the menu. In 2004, they completed their quality of food transition by adding naturally raised beef and changing their frying oil to zero trans-fat oil.

2.1.1 Product/Brand
The value of Chipotle’s product is in the way they cook, the quality of food
they cook with, and the customizable experience that the customer has while they order their food. Their products value is increased by using sustainable, naturally raised food that is sourced locally with cooperating farmers. Their open space kitchen is designed to give customers the feeling of a fresh cooked meal and accentuate the smell that comes with it. The way the ingredients are displayed along the order line can also give the customer an impression of freshness and cleanliness.

2.1.2 Sustainability “Food with integrity”
Chipotle’s sustainability perspective is slightly different from what customers usually expect; which is environment friendly. Chipotle does use 100% recycled napkins and paper bags instead of plastic, less packaging in order to reduce their trash, and emphasizes environmentally friendly service; however their main focus of sustainability is focused on how their food is produced.

Chipotle decided to make their own produce standards and require farms to constantly meet them before they make contract with them. Chipotle puts a strong emphasis on sourcing their food locally from small farmers because Chipotle believes they care more about the way they raise their animals more than massive animal farms. Each of the locally sourced farms is located within 350miles from the Chipotle restaurant.

The following are requirements that farms must meet for Chipotle to use their product in its restaurants:

* Animals (chickens, pigs, and cows) are naturally raised with an organic vegetarian diet and stress-free environment thus eliminating the need for antibiotics to improve the product of the animals. * Milk and cheese: fully pasture-raised cows are a requirement. This means that cows have daily access to outdoor pastures, are never given added hormones, and are fed an all vegetarian, plant-based diet.

Chipotle’s focus is not on only serving natural, organic food but also on educating its customers. Their new approach to customer education and sustainability has helped Chipotle increase their sales and build a successful business model.

2.1.3 Product positioning
Chipotle is on the record as saying their products are more expensive fast food in order to assure their higher quality compared to other fast food restaurants. Their target market segment is consumers between the age of 18-35, with slightly higher average income and higher education more than high school diploma. Chipotle has differentiated their restaurants as a unique fast, casual dining restaurant. This means that the customer receives food in a short period of time, but they can also enjoy their meal inside Chipotle’s restaurant at a table with a modern, sophisticated atmosphere.

Chipotle’s availability and ease of product customization is also unique selling point. Their basic menu is very simple; they provide various toppings (both meat and vegetables) for customization that are added to the main meal at the direction of the customer. For example, one burrito has a selection of two kinds of rice, four to five kinds of meats, beans, vegetables, and multiple salsa options. This variety of food customization is also one of the Chipotle’s core competencies. Demographics of China

China has the highest population for a country at 1.334 billion people. While their growth has slowed considerably, they are still growing and expected to hit 1.5 billion people by 2025. At the end of 2012, China had a total urban population of 712 million, or 54.3% of the total population. This percentage keeps increasing exponentially and researchers expect nearly 70% of China’s population will live in urban areas by 2035. GDP Growth

The following chart show the gross domestic product (GDP) based on purchasing-power-parity.

| 2006| 2007| 2008| 2009| 2010| 2011|
GDP| 10170| 7099| 7973| 8818| 10090| 11440|
Growth in %| | -30.2%| 12.3%| 10.6%| 14.4%| 13.4%|

A nation’s GDP at purchasing power parity (PPP) exchange rates is the sum value of all goods and services produced in the country valued at prices prevailing in the United States. Most economists prefer this measure when looking at per-capita welfare and when comparing living conditions. From the table we can see that since 2007, this number keeps increasing with double digit percentage. In short, it means that people in China are getting wealthier and can afford a higher life style. Political and Legal Restrictions of China

Doing business in China for US companies involves considerations not only of Chinese law, but also of US law. Companies need to understand the impact of both countries’ laws on their business dealings with China. China’s commercial laws are changing rapidly to correspond to Western commercial laws. There remain many uncertainties because the process is not yet complete. China is not a political risk hot spot, with little political violence, business interruption, strikes or riots. They have stability with a one-party system, but there is little transparency in the rules and what the law says and how it is implemented are not always the same. Top 10 Fast Food Chains in China

The fast food market in China is considered to be a fragmented market where there are lots of small to mid size companies and even the “big players” have stiff competition. American style restaurants have been gaining in popularity since the 1990s. The following table shows the top ten largest fast food chains in China and their annual sales. As we can see from the table, four of them are owned by American companies. KFC is the top fast food company in China followed by McDonald’s, then Pizza Hut, and finally Ajisen Ramen.

Name| # of Restaurants in China| Annual Sales in Billions (¥)| KFC| 4260| 50.7|
McDonald’s| 1800| 26.5|
Real Kungfu *| 380| 2|
Li Hua Fast Food *| 80| .2|
Dicos *| 869| 2.73|
Pizza Hut| 889| 26.3|
Mian Dian Wang *| 45| 2.81|
Da Niang Dumplings *| 300| .3|
Ajisen Ramen| 320| .391|
Malan Ramen *| 439| .36|
* Local Companies
McDonald’s in China
McDonald’s entered main land China in 1990 and opened its first restaurant in Shenzhen. Now, McDonald’s has more 1800 restaurants in China’s urban areas. The table below compares the average income of people and the price of a cheeseburger in the United States and China. This information gives Chipotle the framework on how to set their prices. From the table, we can conclude that people in China are willing to pay more for dining in an American style fast food restaurant.

| 2010| 2011|
| USA| Shanghai|
People’s Average Income (Monthly)| ¥14,251| ¥4331|
Price of Cheeseburger| ¥6.7| ¥8.00|
Price of Cheeseburger/Income| .0005%| .002%|

In order to cater local tastes, McDonald’s China set up a special menu which is only available in China.

Products only in China:| |
McVeggie Burger| – only available during special/religion holiday| Park ball| – only in Chinese New Year|
Sakana Supreme| – Japanese style|
Double Wasabi Filet O-fish| – Japanese style|
EBI Burger| – Shrimp burger|
Others:| Curry Burger, Fish Finger, Seafood Balls, Crispy Chicken Wing w/ Curry Flavor Sauce or Lemon Sauce, Bento Box w/ Rice, Pineapple Pie, Banana Pie, Curry chicken Pie, etc.|

Difficulties We May Face While Entering Chinese Market
While entering the Chinese market, there are a few difficulties we may face. Like other food and beverage companies, we may have a hard time with the increasing food and commodity costs which could affect our margins and discourage the company from opening new restaurants. Chipotle may need to be concerned about other competitors in the Chinese market. In the U.S., the average amount spent per customer at a Chipotle restaurant is around $11, compared to less than $4 for McDonald’s. This clearly indicates that Chipotle’s Mexican food is way more expensive than burgers and sandwiches served at McDonald’s.

In addition, increasing food prices could result in lower visitor count or decreases in average amount spent per customer visit. This could eventually dampen the company’s plan of opening new restaurants.

Developing Chipotle China
Chipotle has already demonstrated their ability to expand into other markets with its successful European and Canadian eateries already having been open. The purpose of this section is expand on what Chipotle has already been doing in international markets and at home and how these advantages might be turned into a plan of action when establishing themselves in China. Competencies of Chipotle

Core Competencies in the United States
Chipotle’s competitive advantage is their product differentiation, which is formed with a combination of sustainable-high-quality food, a quick-reliable production process, well-trained employees that offer fast service, a unique casual dining concept, and product customization. While they focus on their reliable high quality food, they also focus on how they serve food. Their dining experience and quality food differentiate themselves from other fast food industry, yet they still consider themselves as a fast food. Chipotle’s concept is serve fast, and let customers spend more time on eating.

Chipotle has always pursued ingredient-sourcing options within local markets.

This commitment to freshness is almost unrivaled in the home market. Using a just-in-time sourcing system, Chipotle is able to maintain this level of quality in its numerous locations while still keeping costs down overall. Their well-trained staff and mangers for local restaurants use what resembles that of a traditional “kanban” or card system, which is often used in Japanese manufacturing. When a restaurant runs low on a certain ingredient, specific steps are taken immediately to get that ingredient restocked to optimum levels. These optimum levels generally only indicate the demands for a few days of orders, with new orders taking place after a pre-determined level of what has been used. As mentioned above, these food ingredients are locally sourced, that is to say, from local farmers that are within the area.

Chipotle believes that this strategy is important not only to maintain freshness, but also to avoid unnecessary processed food and increased pollution in transporting ingredients from farther away to achieve a lower price point. Well-trained staff and managers are also counted among some of the highest factors of success when discussing what makes Chipotle a winner in the home market. These individuals undergo a fairly standard but rigorous training regime that starts with, and what will be expanded on in section 3.3, the customizability of and the creation of the entire menu. Everyone staffed at Chipotle is capable of executing any order at any degree of customizability. Additional cost to customers, where it applies, is often tracked on their convenient top lids so that no confusion should take place at the register should the maker focus on the next customer. All of this turns into a well-greased burrito and taco making machine, pumping out order, after order. This machine is well satisfied as well, with Chipotle experiencing very low turnover. Core Competencies Entering China

Well-trained staff, though a concern to any business looking to expand abroad, is something that Chipotle can look forward to easily fitting within the Chinese restaurant experience. The serve fast, casual dining experience is unique to Chipotle because competitors like KFC have repositioned as a more normal dining experience and McDonald’s has not changed the way it serves food to customers. This style of dining might take some time to get used to but it’s expected to be very popular. Risk of Keeping Sustainable Competitive Advantage in China

Entering the Chinese market might be challenging for Chipotle in terms of implementing a locally sourced food system because it could be difficult to find local farms that can meet Chipotle’s quality standard. In order to solve this problem, Chipotle can gradually educate local farms to meet their standards before they make a contract. This would bring additional costs for training and time, however it is worth to implement this strategy in order to gain Chinese local people’s trust and maintain Chipotle’s food quality standards.

Competitive Advantage Entering China
From our outline in section 3.1, we find that Chipotle has a number of core competencies. Unfortunately, many of these are easy to imitate and do not necessarily give Chipotle an advantage over competitors. Truthfully, many of these competencies are and have been adopted from other restaurant chains that had come before Chipotle, or from McDonalds which initially had a large stake in the company. We have, however, identified one advantage that sets Chipotle apart, namely, the customizability and interchangeability of their menu. Where one might exchange regular fries for ones without salt at McDonalds, one might replace baked beans with guacamole at Chipotle. For the same base price, with minor additions depending on the nature of the addition, you may customize your dish dozens of times without sacrificing the quality of your meal. This advantage and the process of ordering from such a wide selection when entering China becomes less overwhelming when looking at their long history and culture of noodle making and how one might customize a noodle dish with a wide selection of ingredients based on a single product. Where that product may be a burrito or taco shell for Chipotle, this would be a simple buckwheat or flour noodle for classic Chinese noodle restaurants. We will address this advantage directly in our advertising media by showcasing our overall selection and customizability.

Core Strategy
Chipotle’s core strategy will be adopted primarily from restaurants, specifically American restaurants that have already experienced success in China. Though we do not seek to emulate these plans, they have proven successful and provide significant insight into what seems to work best with Chinese consumers. Product Positioning

In China, Chipotle will be still be positioned as a fast service, sit down dining restaurant. As an added bonus, Chipotle will take advantage of the country of origin effect, marketing its restaurants as “American-Mexican food” establishments. Their target market will be consumers between the ages of 15-40, with slightly higher average income and higher education more than high school diploma. This is also known as the emerging middle class. While Chipotle is targeting a larger market than normal, this will be handled by appealing to the younger ages with the “cool” and “hipness” of an American restaurant. Chipotle will market their healthy, hormone free produce, and locally sourced food to appeal to the older Chinese market. Product Adaptation

Portion size is one of the key examples of how Chipotle needs to adapt to survive. Chipotle’s large, almost twelve inch burrito wraps, are too large for Chinese consumers. The Chinese also have no tradition of taking home leftover food after finishing at a restaurant. These two factors combined provide significant insight in how the menu can be tweaked in its current form to facilitate Chinese consumers. Reducing portion size by 30% will help to increase Chipotle’s margins and allow for cheaper prices to stay competitive within the market. Burrito wraps, tacos and overall serving containers need to be drastically reduced in size, providing some cost savings. Naturally, the timeline for ingredients and freshness need to be re-evaluated on this same basis. This will allow Chipotle to operate in significantly smaller restaurants, or at least maintain smaller kitchen sizes.

Localize offerings by country and region in an effort to please local consumers. Additional ingredients may also be sourced from local farmers to lend themselves to a wider variety of Chinese pallets. Though certain regions may not be as receptive to spicier foods; seafood, a wider variety of beans/vegetables and alternative meat products will be introduced. These will initially serve as promotional items, but, depending on their reception, may become common on the menu. By adapting its menu to fit Chinese consumers, Chipotle still maintains its quality ingredients, but also expands into the average daily diet of the Chinese. Market Entry Strategy

The market has opened up considerably in China as they conform to Western laws. Chipotle will start a new company incorporated in China instead of doing a joint venture with an already established Chinese company. This new corporation will become a subsidiary of Chipotle and be almost entirely owned by Chipotle. To create a Chinese subsidiary, laws require that at least 25% of equity must be owned by China in the form of citizens, Chinese Corporations, or the Chinese Government. This will leave the other 75% to be owned by Chipotle. This will allow Chipotle to make a direct investment in China, hire local staff, develop and market products and services directly to China. This will allow Chipotle to become part of the Chinese community like they have in the United States. Pricing Strategy

Research done shows that while China’s average income is consistently growing from year to year, it is in Chipotle’s best interest to have prices similar to main competitors (KFC and McDonald’s) in order to not price themselves out of the market. Chipotle is positioning itself as a fast service, sit-down dining style of restaurant very similar to KFC and keeping prices in line with top competitors will help keep Chipotle competitive and help improve their market presence. By doing a direct translation of pricing from the US to China that would make Chipotle’s average meal cost around ¥50. That is why Chipotle will be using market oriented pricing. This pricing strategy uses research of the market to determine prices of the product in order to keep an organization competitive. | Cost Per Meal| Portions Reduced by 30%|

Chipotle| ¥50| ¥35|
KFC| ¥32| ¥32|
McDonald’s| ¥22| ¥22|
Conclusion| Directly translating prices will cause Chipotle to be too overpriced for effective market penetration.| Reducing portion size by 30%
will allow us to reduce costs, making Chipotle more competitive.|

Distribution – Chinese Farms Restaurants Customers
With its commitment to freshness and locally sourced food, we find that, even as Chipotle expanded internationally, we find that Chipotle continued to source food locally. We expect this practice to translate well into the Chinese market. Though the Chinese market is trending, and is expected, to trend toward more urban populations, China has a strong history toward farming. Many of our base ingredients are already trending well in farms around China and can be sourced within China for this reason. Many other ingredients, otherwise not readily available or necessarily demanded by western clients in the United States, are also available and allow us even further customization. Chipotle’s logistics and overall structure we expect, overall, to be unchanged, with only partners and distribution channels changing to accommodate the more prevalent and efficient rail system to rural parts of China. This means that we are able to translate our just-in-time system to fit China, and maintain the same level of quality and overall efficiency through our order system.

KFC, currently the top competitor, outlined in SECTION 2.4, enjoys a similar system, though their ingredients tend to favor poultry. By partnering with the Ministry of Agriculture of the People’s Republic of China, Chipotle will enjoy direct access to local farmers in rural parts of China, while also fostering goodwill with the country and government. It will also give Chipotle access to one of the most robust banks in China, the Agricultural Bank of China. Alternatively, Chipotle can try to gain direct access to local farmers through traditional channels. We expect this to be much less efficient overall, negatively affecting our go-to-country timeline outlined in section 3.3.

Promotional Policy
Chipotle will use an integrated marketing campaign to provide the same message to various segments through the use of several different mediums. Overall, Chipotle will spend 18,000,000 YMB to create a campaign to increase brand and product awareness. With over 988 million mobile phone subscribers in China, marketing through text messages, email, and Chipotle’s smartphone application is essential. This will allow Chipotle to reach their target market in areas only near Chipotle locations with the Chipotle Application to order or deliver food. It will also increase brand awareness and word of mouth through text message/email promotions and advertisements. Increasing Chipotle’s online and social media presence in China will help increase awareness with Chipotle’s brand. Many companies use special online or social media discounts or coupons in order to attract customers in to their physical stores. Chipotle can use this to their advantage to interact with potential consumers and to let them know everything that Chipotle has to offer.

Physical or virtual, word-of-mouth is an essential brand-building tool for companies in China. Sixty percent of Chinese consumers say friends and family members are a major source of product information, based on which they make purchase decisions. For these reasons, successful companies in China cluster investments in a few geographic markets. This allows them to gain a market share after which network effects kick in, accelerating growth and improving profitability. Since Chipotle is only targeting highly urbanized areas with a large installed population, using a word-of-mouth strategy is important for building brand awareness and consumer trust. Word-of-mouth can be kick started by offering free lunches to key influencers or persuaders in the community or by sponsoring events with lunches at Universities or schools.

Financial Projections
China has many cities that are based on agriculture, along with many rural areas. There is an abundant amount of farmland throughout China, therefore making produce and ingredient procurement very easy for Chipotle. According to our research, China remains the biggest driver of global GDP growth. Despite a “lower” forecast of 8.2% GDP growth in 2012, according to the World Bank, after a 9.2% rate in 2011, it is hard to argue that this country is doing anything other than booming. Chipotle had a five-year earnings growth rate of almost 40% and a stock price that has soared more than 575% since early 2007. Chipotle and China also share many of the significant similarities, for example the love for rice and beans. We believe by differentiating our product from our competitors and providing customization as well as catering and delivery services, our implementation plan will make money in the long term. Chipotle’s main competitors (KFC and McDonald) had set their price in China similar to the prices in United States.

Therefore, we believe that directly translating United States pricing will be feasible strategy. KFC and McDonald both require at least 15,000,000 YMB to become a franchisee in China. This 15,000,000 YMB this price includes building construction, equipment and décor, permits, initial franchise fee, development services fee, grand opening expense, real estate, start-up inventory, training expenses and many more. We believe it is safe to estimate our starting cost around 15,000,000 to 20,000,000 YMB, since China will be a new market for Chipotle. Chipotle increased their operating margins by 220 basis points as the company benefited from lower fixed costs such as labor cost and occupancy costs, as a percentage of revenue, primarily because of a 12.7% increase in comparable restaurant sales. According to Chipotle’s financial report, their operating cost is around $1,000,000 (6,190,000 YMB) per store every year in the United States, using that as a base, we predicts that operating cost will be less in China due to lower labor cost and such. Expenses for each store are as following, Break Even Using Direct Translation Pricing

Fixed cost| 300,000 YMB|
Variable Cost| 18 YMB|
Cost for Advertising in China| 18,000,000 YMB|
Sales Price to Customers| 50 YMB|
Currency Exchange Rate| $1 = 6.19 YMB|
Break Even in Units = 50x – 300,000 – 18,000,000 – 18x = 571,875 Break Even in Price = 571,875 x 50 = 28,593,750 YMB

Break Even Using Market Oriented Pricing
Fixed cost| 300,000 YMB|
Variable Cost| 12.6 YMB|
Cost for Advertising in China| 18,000,000 YMB|
Sales Price to Customers| 35 YMB|
Currency Exchange Rate| $1 = 6.19 YMB|
Break Even in Units= 35x – 300,000 – 18,000,000 – 12.6x = 816,964 Break Even in Price = 816,964 x 35 = 28,593,740 YMB

Operating Profit Analysis

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