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DeMicco, F., Parsa, H., Gao, J. & Narapareddy, V., (2018). Chipotle Mexican grill: A sustainability champion going global with China. In SAGE Business Cases. 2020. 10.4135/9781529717617

The due date is the last day of this class and is listed in the Course Calendar and in the Assignment. No work will be accepted after the last day of the class.

Approach this Final Project Case Study as follows:

  • Read the case for the first time early in the semester.
  • Check out the student aid “How to Prepare a Case Study” in the Marketing Toolbox.  Download the worksheets to help you with your analysis.
  • Post any questions you may have in Ask the Professor. 
  • Read the case over a second time, minimally, prior to beginning your writing.
  • Conduct external research on the issues for relevance to support your opinions. Seek out counterarguments to ensure your opinions are well-grounded or to modify your opinions.
  • Do not focus on the history of the company. Focus on the global marketing challenge and how to solve it.

Produce the Final Project case study as follows:

  • Create it in MS PowerPoint software.
  • Save it as a PPT or PPTX extension.
  • Adhere to the APA academic style. This is used in business.
  • Employ the use of at least four (4) recent external sources and case authors to defend arguments or provide counterarguments.
  • Generate at least the minimum number of slides as suggested below, but feel free to use as many slides as you feel appropriate to communicate your case study content.
  • Demonstrate professionally prepared slide presentation work, free of typos and grammatical errors. (See Microsoft PowerPoint Tips in the Marketing Toolbox, or other source for effectively communicating in the MS Power Point format).
  • Post it in your Assignments folder no later than 11:59 p.m. of the due date.  Presentations will be graded in order of receipt.

Suggested Microsoft PowerPoint Presentation Outline

Prepare your slide deck following this suggested outlined.  Use as many slides as you may need to effectively but efficiently cover the topic. 

  • Cover Slide:    Name, section number, etc.
  • Title slide: Section 1— The Problem
  • Topic 1.a:  Statement of the marketing challenge
  • Topic 1.b:  Evidence in support of your statement of the marketing challenge
  • Title slide: Section 2—Analysis of the current situation
  • Topic 2.a: Macro-environmental factors affecting the case
  • Topic 2.b: Economic considerations
  • Topic 2.c: Political, regulatory considerations
  • Topic 2.d: Cultural/social considerations
  • Topic 2.e: Product review
  • Topic 2.f: Price review
  • Topic 2.g: Distribution review
  • Topic 2.h: Marketing communications review
  • Topic 2.i: Competitive analysis (focus on direct competitors)
  • Topic 2.j: Product/market analysis (country markets and/or consumer markets)
  • Topic 2.k: SWOT analysis
  • Topic 2.l: Conclusions regarding the current situation
  • Title slide: Section 3—Alternative strategic marketing solutions
  • Topic 3.a: Alternative 1 with pros and cons
  • Topic 3.b: Alternative 2 with pros and cons
  • Topic 3.c: Alternative 3 with pros and cons
  • Title slide: Section 4—Recommendation
  • Topic 4.a: Recommended marketing strategy from one of three alternatives
  • Topic 4.b: Product suggestions
  • Topic 4.c: Pricing suggestions
  • Topic 4.d: Distribution suggestions
  • Topic 4.e: Marketing communication suggestions
  • Topic 4.f: Any additional comments, if appropriate
  • Topic 4.g: Ongoing issues to monitor in the implementation
  • References
  •  Exhibits

Additional details for each section are as follows:

Section 1—Statement of the marketing challenge

Read the case carefully, several times if needed, to determine the primary global marketing challenge. Once identified, provide evidence from the case as to why you believe this is the most important challenge facing the marketing management of this company. Even though the case may discuss financial, operational, or other issues, be sure this statement is framed as a global marketing challenge. The other concerns will be important in your analysis, but not as the statement of the challenge. Do not summarize the case; only point out those case facts that support your opinion. Be sure your choice is strategic, not tactical.

Section 2—Analysis of the current situation

Think of this as a snapshot of the situation, or what is true at this point in time. Follow the outline above, which should conclude with a SWOT analysis and relevant conclusions. This sets the stage for your recommended strategies. Verify your findings as much as possible within the case or through your research. But, do not get bogged down if research cannot answer every question. Make educated guesses and note when they are approximations and when they are facts.

Section 3—Identification of at least three strategic alternative solutions

Based on your analysis, identify at least three possible marketing strategies that you would recommend for this unique global marketing situation. Each of your three alternative marketing strategies should include a discussion of the advantages and disadvantages of each alternative marketing strategy. They should be strategic alternatives and include possible product/markets, mode of entry, country markets, pricing and distribution strategies, and a product/marketing communication strategy. Do not discuss marketing tactics; rather, conclude each alternative with an assessment of how that strategic alternative might solve the marketing challenge.

Section 4—Recommendation of a specific marketing strategy

From your list of strategic alternatives, select the one alternative you believe is best suited to the situation. Be sure to state your rationale for your choice and some approaches to implementing the marketing mix.

Chipotle Mexican Grill: A Sustainability Champion Going Global With China

Case

Author: Fred DeMicco, H. G. Parsa, Jing Gao & Vijaya “Vi” Narapareddy

Online Pub Date: January 15, 2020 | Original Pub. Date: 2018

Subject: Asian Pacific Business, Emerging Markets, Culture & Strategy

Level: | Type: Indirect case | Length: 5125

Copyright: © 2018 International Council on Hotel, Restaurant, and Institutional Education (ICHRIE). All

rights reserved.

Organization: Chipotle Mexican Grill | Organization size: Large

Region: Northern America, Eastern Asia | State:

Industry: Food and beverage service activities

Originally Published in:

DeMicco, F. , Parsa, H. G. , Gao, J. , & Narapareddy, V. ( 2018). Chipotle Mexican Grill: A sustainability

champion going global with China. Journal of Hospitality & Tourism Cases, 6 (4), 59– 72.

Publisher: International CHRIE

DOI: http://dx.doi.org/10.4135/9781529717617 | Online ISBN: 9781529717617javascript: void(0);javascript: void(0);javascript: void(0);javascript: void(0);javascript: void(0);javascript: void(0);http://dx.doi.org/10.4135/9781529717617

© 2018 International Council on Hotel, Restaurant, and Institutional Education (ICHRIE). All rights reserved.

This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes. 2021 SAGE Publications Ltd. All Rights Reserved.

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This content may only be distributed for use within Univ of Maryland Global Campus. http://dx.doi.org/10.4135/9781529717617

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Abstract

Several U.S. restaurant chains that expanded their business into China include KFC, Pizza Hut, McDonald’s, Starbucks, and Subway. This case focuses on Chipotle Mexican Grill’s potential to develop its business in China and the opportunities and challenges it may face in the Chinese market. Students are expected to learn pros and cons of international expansion of U.S. restaurant firms. Additionally, students will learn the impact of unexpected operational challenges, such as foodborne illness outbreaks, on potential growth strategies and how to address the short term and urgent need to do damage control from foodborne illnesses or to modify and pursue the international expansion strategies.

Case Introduction

A Motley Fool’s article 1 sparked rumors that Chipotle Mexican Grill (Chipotle, hereafter) was contemplating expansion into China. Chipotle was no stranger to overseas expansion. Under the leadership of founder- CEO-Chairman, Steve Ells, and his co-CEO, Montgomery Moran, the Chipotle brand grew into a highly desired brand in the quick service food service industry. Its enviable position in the home market was the result of its unique strategy known as Food with Integrity, which reflected Ells’ passion for sustainable sourcing of quality food supplies locally. At a time when the term sustainability was little known in the industry, positioning the restaurant using this distinctive strategy gave Chipotle significant fist-mover advantages. Sales reached the $5 billion mark in 2015, from $820 million since its Initial Public Offering (IPO) in 2006. The overwhelming demand for the company’s shares on the first day of its 2006 IPO resulted in the doubling of the stock’s value that day, making it the most lucrative IPO since 2000.

Brief History and Development of Chipotle

Steven Ells, a graduate of the University of Colorado, Boulder, and the Culinary Institute of America in Hyde Park, N.Y., founded Chipotle in 1993 after working at a San Francisco restaurant. As a line cook earning $12 an hour, Ells found himself regularly “dining giant burritos at Taquerias in the Mission District.” 2 During his lunch hours, the long line of customers waiting for Mexican food day-in day-out sparked the idea of starting his own Mexican-themed restaurant.

It was not until July 13, 1993 that Ells could open his first restaurant. Armed with a loan of $75,000 from his father, Ells leased a space previously occupied by the Dolly Madison ice cream shop near the University of Denver campus in Denver, Colorado, made the renovations himself to the property, and opened his first restaurant. The restaurant was an instant success generating $450 on opening day, $800 the next day, and $1000 a day shortly thereafter. Within six months, sales per day grew to $3,000 3 . This high growth fueled by Ells’ novel concept attracted the attention of McDonald’s which took a minority stake in Chipotle in 1998, followed by a majority stake in 2001. This capital infusion allowed Ells to expand from sixteen restaurants in 1998 to over 500 by October 2006, when McDonald’s liquidated its equity in the company. McDonald’s was rumored to have reaped over 416% return on its $360 million investment in Chipotle.

Business Strategy:

Ells entered the highly competitive and fragmented quick service dining industry with a socially responsible strategy that he called Food with Integrity. He was the first in the industry to commit to serving only meats from animals that were not raised using non-therapeutic antibiotics and growth hormones. Dairy products like cheese and sour cream were obtained from milk produced by pasture-raised cows. Obtaining ingredients from responsibly raised farms reflected Ells’ love for promoting animal welfare and environmental sustainability. Similar high standards were enforced when Chipotle purchased mostly organically grown produce from

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farmers using sustainable farming practices within a radius of 350 miles from the restaurant where the produce was served. This combination of serving traditionally cooked food with high quality locally grown ingredients in a quick service environment while providing an interactive dining experience blazed the path to Chipotle’s success. The restaurant chain, which expanded through the strategy of company-owned stores, attracted celebrities and dignitaries, including President Obama. Using the same quick service concept, Chipotle opened thirteen Chop House Southeast Asian Kitchen restaurants serving Asian cuisine, as well as three Pizzeria Locale restaurants, specializing in pizza and Italian foods.

Products

A key competitive advantage that Chipotle had over its rivals was its fresh ingredients, local sourcing, healthy cooking practices, and ease of ordering. Chipotle offered menu choices that customers could pick and choose from. When ordering food, patrons could create their own burrito with their choice of meats, vegetables, beans, rice, salsa, guacamole, cheese or sour cream wrapped inside a Mexican-style whole wheat tortilla (a flat bread), rich in fiber. Alternatively, customers who preferred a gluten-free diet could order a bowl without the tortilla and still receive ingredients of their choice. Other menu choices included crispy corn tacos, soft corn tacos, soft flour tacos or salads. All ingredients were openly displayed. Several staff members standing on the other (opposite) side of the display counter filled the orders in real time as customers chose the main and side items while moving down the line towards the cash register. This ordering process not only shortened the wait time, but also gave customers the chance to feast on the attractive display of the fresh ingredients while their taste buds received stimulation from the exciting flavors that drifted from the freshly made menu items. Compared to other American quick service chains, such as KFC and McDonald’s, the food Chipotle offered was freshly prepared in the restaurant, nutritious, wholesome, and obtained from sustainable sources. This fixed menu concept became Chipotle’s source of competitive advantage as busy young professionals, millennials, and students were drawn to the convenience of home-style, high quality food, which offered a range of choices at competitive prices without long wait times.

Exhibit 1: Quick Service Restaurant Chains Ranked by Worldwide Sales in 2014.

Source: Statista.

Employees

By the end of 2015, Chipotle had a total 59,330 non-unionized employees, 5,100 of which were salaried employees. The remaining 54,230 were hourly workers. The company hired only high-performance employees and promoted general managers from within the organization to ensure that they embraced the corporate culture, passion, and vision while working in a high-performance work environment. Consistent with Ells’ passion for sustainability and social responsibility, Chipotle entered into partnership with Loomsdale, a sustainable clothing company that also engaged in socially responsible production methods. Chipotle’s employees wore organic cotton tee-shirts and hats made by Loomsdale, who also made Chipotle merchandise (graphic tees, polos, and woven shirts) sold online and in the store.

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Performance

In 2014, Chipotle ranked fifth in worldwide sales, behind McDonald’s, Subway, and Yum Brands (see Exhibit 1). With sales of $27.44 billion, McDonald’s was the largest player among all quick service restaurant chains. Subway ranked a distinct second with $20 billion whereas Yum Brands and Chick-fil-A ranked third and fourth, respectively. Chipotle, which came in fifth in this competitive segment had sales of $4.11 billion – approximately 15% of McDonald’s revenues. Chipotle was also ranked in fifth place among the top ten most valuable quick service brands in 2015. This brand recognition was noteworthy as there were key differences between Chipotle and its key competitors. While Chipotle expanded through company-owned stores, its rivals became global brands through franchising.

Exhibit 2: Chipotle’s Mexican Grill Consolidate Balance Sheet, 2011–2015

Balance Sheet Data

(All numbers in thousands)

December 31,

2015 20141 20131 20121 20111

Total current assets $814,647 $859,511 $653,095 $537,745 $494,954

Total assets $2,725,066 $2,527,317 $1,996,068 $1,659,805 $1,419,070

Total current liabilities $597,092 $245,710 $199,228 $186,852 $157,453

Total liabilities $597,092 $514,948 $457,780 $413,879 $374,844

Total shareholders’ equity $2,127,974 $2,012,369 $1,538,288 $1,245,926 $1,044,226

1Data adjusted to conform to the Financial Accounting Standards Board Accounting (FASBA) standards that required deferred tax liabilities and assets to be classified as non-current.

Source: MCG’s SEC 10K filings.

Chipotle stood out from its competitors with its strong commitment to environmental sustainability and social responsibility. Founder Ells’ culinary background influenced the way food was prepared at the Chipotle restaurants. Despite the high costs of obtaining from local and sustainable farmers as well as using organic ingredients wherever possible, Chipotle achieved strong profit performance. The company’s indexed performance shown indicates that it outperformed the S&P 500 Index and the S&P 500 Restaurants Index from 2010 through 2015. This high value created by Chipotle for its shareholders was also evident from the Balance Sheet data presented in Exhibit 2, which showed that Chipotle’s shareholders’ equity grew 203.7%, from approximately $1.04 billion in 2011 to $2.13 billion in 2015. The company’s Profit & Loss statement (see Exhibit 3) indicated that labor costs constituted one of the major expenditures in operations. Yet, Chipotle’s profits (i.e., Net Income) more than doubled between 2011 and 2015.

In spite of the highly competitive nature of the industry, a large number of restaurants were opened in the U.S. between 2004 and 2015. The continued and steady growth of revenues in the U.S. quick service sector may have helped Chipotle become a household name, but the company’s strategic site selection also contributed to its success. Chipotle restaurants were located in colleges, universities, strip malls, local and regional malls, downtown business centers, free-standing buildings, food courts, train stations, military bases, and airports.

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The site selection process was managed by an internal team, which sought the help of local real estate brokers. On-site visits were supplemented by a rigorous analysis of trade, business, and demographic data as well as the locations of direct and indirect competitors in the area.

The Chinese Market

As China was home to the largest population in the world, the Chinese government sought to legally control the growth of its population through its one-child policy. However, the population grew from 1.34 billion in 2010 to about 1.37 billion in 2014. With the relaxation of the one-child policy, China’s population was expected to exceed 1.4 billion by the year 2020. Even though it was home to the largest population, China enjoyed a rising prosperous economy, as measured by the country’s growing GDP (Gross Domestic Product) per capita. China lagged behind the U.S. in GDP. In 2015, while the U.S. had the highest GDP of $17,968 billion, China had the second highest with $11,384.76 billion. However, during the same year (2015), China’s share of global GDP based on purchasing power parity (PPP), was the largest at 17.24% as opposed to the U.S. (15.88% of the global GDP), suggesting that Chinese consumers had greater buying power than consumers in the U.S. or any other country. 4

Exhibit 3: Chipotle Mexican Grill Consolidated Profit & Loss Statement, 2011–2015

Statement of Income

(All numbers in thousands, except per share date)

Year ended December 31,

2015 2014 2013 2012 2011

Revenue $4,501,223 $4,108,269 $3,214,591 $2,731,224 $2,269,548

Food, beverage and packaging costs 1,503,835 1,420,994 1,073,514 891,003 738,720

Labor costs 1,045,726 904,407 739,800 641,836 543,119

Occupancy costs 262,412 230,868 199,107 171,435 147,274

Other operating costs 514,963 434,244 347,401 286,610 251,208

General and administrative expenses 250,214 273,897 203,733 183,409 149,426

Depreciation and amortization 130,368 110,474 96,054 84,130 74,938

Pre-opening costs 16,922 15,609 15,511 11,909 8,495

Loss on disposal of assets 13,194 6,976 6,751 5,027 5,806

Total operating expenses 3,737,634 3,397,469 2,681,871 2,275,359 1,918,986

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Income from operations 763,589 710,800 532,720 455,865 350,562

Interest and other income (expense), net 6,278 3,503 1,751 1,820 (857)

Income before income taxes 769,867 714,303 534,471 457,685 349,705

Provision for income taxes (294,265) (268,929) (207,033) (179,685) (134,760)

Net income $475,602 $445,374 $327,438 $278,000 $214,945

Earnings per share

Basic $15.30 $14.35 $10.58 $8.82 $6.89

Diluted $15.10 $14.13 $10.47 $8.75 $6.76

Weighted average common shares outstanding

Basic 31,092 31,038 30,957 31,513 31,217

Diluted 31,494 31,512 31,281 31,783 31,775

Source: Chipotle’s SEC 10K filings.

Exhibit 4: China’s Growing Trade Surplus.

Source: Statista.

Exhibit 5: China’s Economic Snapshot.

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Source: http://globaledge.msu.edu/countries/china/economy

Table 1: Blue and Red Ocean Strategy

Blue Ocean Strategy Red Ocean Strategy

• Create uncontested market space • Make the competition irrelevant • Create and capture new demand • Break the value-cost trade off • Align the whole system of a firm’s

activities in pursuit of differentiation and low cost

• Compete in existing market space • Beat in competition • Exploit existing demand • Make the value-cost trade off • Align the whole system of a firm’s activities with

its strategic choice of differentiation or low cost

Source: Blue Ocean vs. Red Ocean (W. Chan, 2005).

Society & Culture

China shares geographical boundaries with fourteen Asian countries, including Mongolia, Russia, North Korea, Taiwan, Vietnam, Laos, Burma, Bhutan, Pakistan, Afghanistan, Tajikistan, India, Kazakhstan, and Nepal. So, it was no surprise that ethnic minorities comprised of about 8% of the population and the Han Chinese made up the rest 92%. In addition to Mandarin and Cantonese, the Chinese spoke a multitude of dialects.

China was well known for its high context culture, where communication rested not only on the spoken words but also the context. Confucianism which dominated the Chinese philosophy and lifestyle promoted duty, sincerity, loyalty, honor, and respect for age and seniority, among others. Maintaining harmonious relationships was at the heart of creating a stable society. This collectivistic focus meant s that individuals acted in the best of interest of the group (family, work, etc.,) rather than their own self-interest.

Blue Ocean in China’s Market

In 2015, there were no Mexican quick service restaurant chains in China. The concept of quick service

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restaurants was not yet popular in China. As a result, if Chipotle were to enter China’s market, it would be the first U.S. chain restaurant offering a unique Mexican quick service food experience. Chipotle could explore a large “blue ocean” in China with greater opportunities than its competition. In this blue ocean, several strategies, such as developing distinct competencies, identifying high traffic restaurant locations, and expanding into the urban markets first could be adopted. The table given below describes the differences between Blue Ocean and Red Ocean.

Place

Location selection was the most critical issue for business expansion, especially in international operations. Traditionally most US-based restaurant chains entered the Chinese market by exploring major urban centers such as Beijing and Shanghai. Some of the attractive characteristics of these major urban centers included high per capita income, considerable purchasing power, fast-paced urban life demanding conveniences of quick service restaurants, access to technology, modern cultural food habits, exposure to and acceptance of international foods, large population of international and domestic tourists seeking American food. Typically, urban customers had pervious exposure to international cuisines, making it easier for Chipotle to enter the Chinese market. In Beijing, highly desired locations were the first floor of upscale office buildings in the Zhongguancun area, SOHO, and food courts in large shopping malls. These locations were often characterized by high foot traffic, thus, offering maximum exposure.

Menu Prices

Setting appropriate menu prices in China’s market could be a tough decision to make for most U.S. restaurants for the following reasons. Even with the dramatic increase in the size of the middle class in China, the per capita income still lags behind the U.S. Furthermore, news that China experienced high inflation would result in dramatic increases in the cost of raw materials, gas, transportation, labor, real estate etc. In addition, Chipotle must be cognizant of the Chinese culture where numbers are associated with distinct meaning. For example, number “4” is associated with death. Therefore, it is imperative that Chipotle avoid “4” in all menu price-ending choices. In contrast, number “8” is considered most lucky, so it is highly advisable to end all prices in digit 8 or other even digits, such as 6, 2 or 0. At the same time, odd digits are considered less desirable in Chinese culture since the times of Confucius (Hu, Parsa & Zhao, 2006). Albeit, one may find some McDonald’s using 9 as a price ending digit in certain locations of China following the policies of the US counterparts. It is more an exception than a rule.

In Beijing, the average price of a meal at McDonald’s and KFC is ¥30, which is the equivalent of US $5. In other words, this price ¥30 can buy a meal at McDonald’s and KFC in China. Chipotle must consider these facts in choosing its pricing strategies in order to be competitive. Subway tried to buck the trend by charging ¥70 for their 12″ subs. It was no surprise that consumers rejected it even though it was a good value for the size of a 12″ sub. Culturally Chinese preferred a 6″ sub for ¥30 over 12″ sub for twice the price. Eating large amounts of bread as is the case with a 12″ sub at a Subway is counter to the Chinese culture as they prefer eating rice and noodles more than bread.

Promotion

Carefully developed marketing strategies can considerably increase overall brand image and subsequent revenues. The most commonly practiced restaurant marketing strategies in China include: product bundling (meal specials; multi-course deals; lunch discount bundles); special edition gifts (equivalent to holiday specials in US; weekend specials; slow Monday deals), and coupon strategy (all types of coupons, product discounting to free food/drinks). Bundling can provide customers with a feeling of good value for money since things become cheaper when selling together. Chipotle China may want to consider offering bundled meals or platters to offer high value perception. Unlike some of the other cultures, lunch is the main meal of the day for most Chinese, thus, they prefer to have multiple items for lunch making it a whole meal. Chipotle may want to offer bundled meal deals and include a small dessert cookie etc.

Similarly, free refills on drinks are often perceived as a good deal in China. In China, it is not uncommon to see

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loyalty program where loyal customers accumulate points towards a meal. It plays on the saving psychology of China. A typical Chinese customer is most likely to participate in loyalty programs if there is a reward attached. To attract the younger generations, Chipotle may consider an application “App”, where loyalty points are tracked similar to the Starbucks “App” used in the U.S.

Physical Evidence

The physical evidence of a company is an impressive logo that can make more customers remember its image and maintain positive word-of-mouth advertising. Almost all popular food service chains in China rely on physical appearance, such as logos, to communicate their value propositions. For example, McDonald’s visual image is a yellow capital M, so customers associate the big yellow M with McDonald’s taste. KFC’s physical evidence is an elderly man with glasses (Col. Sanders), which displays KFC as a worldwide popular brand. Chipotle China, in consultation with local experts, could consider developing a catchy logo/figure for promotional purposes similar to Ronald McDonald of McDonald’s. To differentiate from the crowded quick service segment from USA, Chipotle may consider a Tex-Mex spokesperson as a champion of Chipotle brand. The hot pepper symbol can also be a good choice as presented below as the colors in the logo are appropriate for the Chinese culture. Color red represents prosperity, and the bright red colors of the logo and interior décor shown below may be well received by Chinese customers.

Table 2: Income Statement Projections per Restaurant

Item

Year 1: Quarters Ended (dollars in thousands)

31-Mar 30-Jun 30-Sep 31-Dec Total

Revenue 1003.8 1003.8 1003.8 1003.8 4015.2

Food, beverage and packaging 281 281 281 281 1124

Labor 302 302 302 302 1208

Occupancy cost 70 70 70 70 280

Other operating costs 50 50 50 50 200

General and admin. Expenses 100 100 100 100 400

Depreciation and amortization 50 50 50 50 200

Pre-opening costs 100 20 0 0 120

Marketing 90 30 30 30 180

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Total operating costs 1043 903 883 883 3712

Income from operation −39.2 100.8 120.8 120.8 303.2

Interest and other expenses 30 30 30 30 120

Income before taxes −69.2 70.8 90.8 90.8 183.2

Provision for income taxes 5 5 5 5 20

Net income −74.2 65.8 85.8 85.8 163.2

Exhibit 6: Market Shares of Leading Quick Service Chains in China.

Source: http://www.statista.com.du.idm.oclc.org/statistics/429950/market-share-of-leading-fast-foodbrands- china/

Distribution Strategy

Chipotle China has three options (and may be a hybrid of these three options) with its entry into China: 1) Direct Entry as the Chipotle corporate operated restaurants; 2) Joint partnership with a Chinese restaurant company or an investment company; or 3) franchise solely with local Chinese restaurant investors. All three modes were found to be successful by various companies in China. For example, Starbucks prefers to enter international markets as a Direct Entry. KFC and others prefer joint partnerships or franchising. Some companies prefer exclusive franchising arrangements. The mode of entry depends on the internal resources of the entering firm, socio-political and economic situation of the host country, the competitive nature of the market, and other macro-environmental markets. It is noteworthy that the Chinese Government banned the use of joint ventures between foreign and domestic Chinese companies in 2004, and that over 90 of Yum Brands’ restaurants in China were company-owned resulting in profit margins as high as 15 of its sales in China.

Sustainability

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Chipotle’s mission included sustainability and local sourcing. It may be a challenge for Chipotle as they seek local supply chains that are similarly committed to sustainability. Obtaining ingredients such as free range pork and free range chicken locally can pose a major challenge in China. Securing a supplier that can reliably supply safe, local produce can be another challenge. Crisis events like the Asian Bird flu virus in 2013 serves to remind the importance of establishing and developing good supply chains. If Chipotle could achieve sound local supply chains, it would be a major economic boost to the rural Chinese economy as well. Chipotle can be a good neighbor who supports local economies. It can set new precedence for other companies to follow the mantra of ‘doing good while doing well.’ At the same time, Chipotle China may learn from its local suppliers about Chinese taste preferences, regional differences, and cultural taboos.

Advertising Strategies

As a new brand entering a new market, Chipotle can be expected to invest extensively to build brand awareness. In addition, Chipotle may have to educate local consumers about burritos, a product which is not well known in China. Almost all Chinese office workers and college students heavily depend on the internet both for work and entertainment. Thus, online advertisement is one of the preferred means to reach these customers. Alternatively, Chinese youth use the Internet exclusively for entertainment. Thus, it would be best to use local social media to reach them.

Long-Term Plan

The urban strategy is highly attractive for Chipotle but should be deployed with caution. Slow growth with highly established supply chain systems would be the best method of operation when entering China. A long term plan may include about fifty Chipotle restaurants in China within the first five years. Most of these fifty outlets could be located in major cities like Beijing or Shanghai, or other major urban markets. To develop new methods and standardize the operational procedures, Chipotle may want to enter the market as a wholly- owned subsidiary of Chipotle USA for the first five years. It can be followed by selected franchising for other markets.

Financial Projections

The following section provides financial projection for Chipotle operating units in Beijing in the first operational year, and is based on the research for this paper. This situation analysis is based on previous experiences of other U.S. restaurant chains and the knowledge of the foodservice industry in China. The following estimations are presented.

Quick service retail sales in China depict the Asian quick service segment was a dominant component in the country. As shown in Exhibit 6, market shares of the top-5 quick service chains in China remained relatively stable. However, quick service sales in China were expected to grow from approximately $85.4 billion in 2013 to about $107.1 billion in the year 2016. Yum Brands announced that its subsidiary, Taco Bell, would reenter China in 2016 – eight years after the latter closed for business in the Chinese market.

The main question facing Chipotle was whether China was the right market for Chipotle to expand. “Do the right things in a right time at a right place,” a Chinese adage, properly describes Chipotle’s future path in China, which can be explained as exploring a brand new market with huge potential. Chipotle’s entry into the profitable Chinese market potentially could return very high returns on investment and could give Chipotle a worldwide reputation. Additionally, it could provide a platform for further expansion into Asian countries and boost them up the learning “curve.” Specifically, if Chipotle China performed well in China, its profit from China’s market could become another source of financing for further expansions. These profits could be used for further improvement, such as developing new products, setting more outlets up, and optimizing the internal management. Exploring China’s market could also bring Chipotle into a regeneration stage within a huge “red ocean” of competition, and similar to McDonald’s and KFC in China, Chipotle has the opportunity to become a household name in their new huge “blue ocean”.

If Chipotle were to enters the Chinese market, it could create an integrated supply chain with many logistics centers in China, which could, in turn, simplify further restaurant expansion into other Asian countries, such

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Page 12 of 13 Chipotle Mexican Grill: A Sustainability Champion Going Global With China

as India, Japan, and the South Korea, some of the largest economies in Asia. From a financial aspect, a successful expansion in China can enhance the company’s overall value, such as increasing the value of their stock and attracting more qualified human talent. In light of the 2015 recent foodborne illness reports from multiple states in the USA, the key question was whether it made sense for Chipotle to pursue expansion plans into China at a time when it was mired with food contamination issues in the U.S. Alternatively, Should Chipotle hold off its international expansion plans to China or even alternatively consider expanding into China slowly If Chipotle decides to enter China, what should be the correct mode of entry: totally company owned units; franchising; joint ventures; or some form of hybrid of the three modes of expansion?

As co-CEOs Ells and Moran sought to build their overseas business into a global presence, they faced many questions. Was China the answer to their quest for accelerated growth? Was it the right market for Chipotle? Could Chipotle embrace more sustainable development if it explored this new market properly? Could it gain high customer satisfaction and loyalty in the huge “blue ocean” market of China? Finally, was Chipotle in China a viable strategy for the company?

Notes

1. http://www.fool.com/investing/general/2014/04/26/1-thing-that-worries-me-about-chipotle.aspx

2. https://web.archive.org/web/20080403013733/ http://rockymountainnews.com/news/2006/dec/23/ chipotlefounder-had-big-dreams/; retrieved on March 17, 2016.

3. Ibid.

4. Based on the data presented in the Statista report on China.

http://dx.doi.org/10.4135/9781529717617

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Page 13 of 13 Chipotle Mexican Grill: A Sustainability Champion Going Global With Chinahttps://sk.sagepub.com/cases/chipotle-mexican-grill-sustainability-champion-going-global-china##i63http://www.fool.com/investing/general/2014/04/26/1-thing-that-worries-me-about-chipotle.aspxhttps://sk.sagepub.com/cases/chipotle-mexican-grill-sustainability-champion-going-global-china##i65https://web.archive.org/web/20080403013733/http://rockymountainnews.com/news/2006/dec/23/chipotlefounder-had-big-dreams/http://rockymountainnews.com/news/2006/dec/23/chipotlefounder-had-big-dreams/https://sk.sagepub.com/cases/chipotle-mexican-grill-sustainability-champion-going-global-china##i66https://sk.sagepub.com/cases/chipotle-mexican-grill-sustainability-champion-going-global-china##i87http://dx.doi.org/10.4135/9781529717617

  • Chipotle Mexican Grill: A Sustainability Champion Going Global With China
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