Question

Case 18: Chipotle Mexican Grill, Inc.: The International Challenge

• Do overseas markets offer attractive growth opportunities for chipotle?

• If so should, chipotle replicate its US strategy in overseas markets, or does if need to adjust the local circumstances- if so how? In particular, should chipotle directly own and manage its overseas restaurants or should I opt for a joint venture or franchising?

• Complete a porter 5 forces analysis for the firm plus “1” technology impact?

Case 18 Chipotle Mexican Grill, Inc.: The International Challenge Since its founding in Denver, Colorado in 1993, Chipotle Mexican Grill had grown to a chain of 1783 fast-food restaurants by the end of 2014. Yet, of these, a mere 17 were outside the US (of which seven were in Canada). Chipotle's US focus was unusual for a major US-based restaurant chain, most of which had sought to exploit growth opportunities in overseas markets relatively early in their develop- ment. Table 1 shows the international presence of some of the larger chains. Was Chipotle missing out on a huge growth opportunity and, if so, what strategy should Chipotle adopt to expand its overseas presence? Chipotle Ventures Abroad Chipotle first ventured beyond the United States in 2008, when it opened a restau- rant in Toronto, Canada. In 2010, it opened a restaurant in London, England. This was followed by restaurants in Paris, France (2012) and Frankfurt, Germany (2013). However,comared to its pace of UIS expansion, Chipotles international growth was tentative (Table 2). The choice of London for Chipotle's first restaurant outside of North America was for cultural and economic reasons: London was perceived as similar to the urban environments where Chipotle had thrived. According to communications director, Chris Arnold: When we started in the U.s., we've primarily been in large cities. Almost all of our restaurants are in major metropolitan areas or suburbs of major metropoli- tan areas There's a great appreciation there for local and sustainably raised ingredients. Culturally, that aligns with what we do more than most options here in the U.S. do.1 Founder and co-CEO Steve Ells was similarly optimistic about Chipotle's UK prospects: This case was prepared by Robert M. Grant. 02015 Robert M. Grant. CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS 640 TABLE 1 The total and international outlets of leading US chains, 1994 and 2014 Total outlets International outlets 1994 8014 2014 1994 8450 15,950 425 9,407 11,325 7,684 5,079 9,300 21,919 9,655 9,827 5,739 6,224 5,846 780 278 1,238 274 42,230 36,258 21,366 14,197 13,602 12,947 10,913 6,515 Subway McDonalds Starbucks KFC Pizza Hut Burger King Domino's 5,712 18 4,258 2,925 1,357 840 Taco Bell Little Caesars Hardees 5,110 1,721 4,855 3,516 72 Source: Company websites We are very encouraged by the prospects for Chipotle in the UK. London has become an important food city over the years, especially because of the awareness of and desire for things like locally sourced, seasonal, and artisanal ingredients. These are all core values of Chipotle and we have been instrumental in bringing this kind of thinking to fast food in the U.S. We call it "Food with Integrity" and it is how we are changing the way people think about fast food. We believe Londoners will appreci- ate our efforts to serve food that is raised right and in a way that is so accessible When Chipotle opened on London's Charing Cross Road in April 2010, it followed its US model almost exactly: the same menu, the same assembly line operations, the same grassroots marketing efforts. According to Chris Arnold: "We really don't see why it needs to be any different going into Europe. It will all be the same. Part of the beauty of Chipotle is its simplicity. Developing a supply chain was not perceived as a major challe European food culture was seen as friendly to Chipotle's policy of "Food with Integrity" policies. However, getting tortillas made to Chipotle's specification proved a challenge TABLE 2 Chipotle restaurants by location (at year-end) 2014 2013 2012 2011 2010 1,556 1,399 1,226 1,079 US Canada UK France Germany Total international 1,783 1,572 1410 1,230 1,082 Source: Company websites 641 CASE 18 CHIPOTLE MEXICAN GRILL, INC.: THE INTERNATIONAL CHALLENGE Chipotle also applied the same human resource policies, particularly with regard to nurturing local talent. Start-up of the London store was led by managers and erations personnel from North America. After an initial period, locally trained staff op d replace most of the Us-based managers. Garden, Islington, and Wimbledon. Chipotle's International Experienc Subsequent Chipotle restaurants were opened in Baker Street, Soho, Covent es Chipotle's progress in London was slow in terms of both sales growth and brand awareness. According to Bloomberg, Chipotle's market research showed that only % of Londoners was familiar with the brand as compared with 16% for Pret A Manger and 23% for McDonald's. "It looks likely that London will be a developing market for a while, until our awareness is raised there," Steve Ells said during the earnings call.3 Chipotle's Chris Arnold attributed Chipotle's low brand awareness in London to its handful of restaurants-six compared to 40 in New York City. He explained that Chipotle's approach was "to build up the business organically, [which) gives us a chance to build up our crews and operations in a new location." A further challenge for Chipotle was Europeans' lack of familiarity with Mexican cuisine, compared to other non-European cuisines, such as Thai, Indian, Vietnamese and Chinese. Taco Bell's experience was salutary: it entered the UK market in the late 1980s, only to withdraw some seven years later. In 2010, it made a second attempt to enter the UK, but by March 2015 it had only five UK outlets Yet, even in London-one of the world's most multi-ethnic cities with a huge diversity of cuisines-Chipotle had clearly failed to make much of an impact. In Trip Advisor's March 28, 2015 listing of 161 Mexican/Southwestern restaurants in London, Chipotle's highest-ranked restaurant came in at #19. In terms of numbers of outlets, Chipotle lacked the market presence of other chains serving Mexican cuisine: Tortilla had 16 London restaurants and several elsewhere in Britain, Wahaca had 14 London restaurants. outside Chipotle's own reservations about its potential for profitable expansion the US were apparent from its discussion of "Risk Factors" in its 2014 annual report Our expansion into international markets may present increased risks due to lower customer awareness of our brand, our unfamiliarity with those markets and other lactors... As a result of our small number of restaurants outside the U.S. and the ively short time we have been operating those restaurants, we have lower awareness, lower sales and/or transaction counts, and less operating expe- rience in these markets. The markets in which we've opened restaurants outside , and any additional new markets we enter outside the U.S. in the future ve different competitive conditions, consumer tastes and discretionary spending erns than our U.S. markets. As a result, new restaurants outside the U.S, may successful than restaurants in our existing markets (theyl may take longer ramp up and reach expected sales and profit levels, and may never do so, affecting our overall growth and profitability. To build brand awareness in international markets, we may need to make greater investments in advertising and ha 042 CASES TO ACCOMPANY CONTEMPORARY SERATEOY ANALYSIS promotional activity than we originally planned, which could negaui profitability of our operations in those markets We may also find it more dificult in international markets to hire keep qualified employees who can project our vision, passion and labor costs may be higher in international markets due to increasedu d local market conditions. In addition, restaurants outside the U.S construction, occupancy and food costs than we may have difficulty finding reliable suppliers or distributors or ones provide us, either initi ing our quality standards. Markets outside the U.S. may also have re ences with the U.S. with which we are not familiar, or that subject us to significa have hadt or restaurants in existing markets, and ally or over time, with adequate supplies of ingredients have regulatory differ additional expense or to which we are not able to successfully adapt, whichm have a particularly adverse impact on our sales or profitability in those markets could adversely impact our overall results. may hipotle's direct ownership and management of its restaurants also handi capped the profitability of its international operations. Motley Fool questioned whether the Chipotle concept translated well to international markets and observed that: Chipotle has impressive margins, with its 16.5% operating margin besting that of Panera by about 3.5 percentage points. Looking at McDonald's metrics, it would appear that Chipotle still has plenty of room to grow its margins. McDonald's man- aged an operating margin in excess of 30% in 2013, nearly twice that of Chipotle. However, McDonald's has a very different business model than Chipotle, with a large portion of its restaurants franchised. Chipotle owns all of its restaurants, so the company will never even come close to McDonald's margins. McDonald's makes a lot its money by collecting franchise fees and rent, not selling burgers, and that's why the company's margins are so high. If anything, the difficulty in sourcing qual ity ingredients will lead to higher food prices and lower margins for Chipotle in the future.6 Overseas Expansion by US Restaurant Chains The international market offered substantial growth opportunities for US restaurant chains. Among the leading chains-notably Subway, McDonald's, Starbucks, and KFC-international sales accounted for up to one-half of total sales and a grow- ing proportion of total profit. However, the more traditional of the "casual dining chains-such as Denny's, Applebee's, T.G.I. Friday's, and Tony Roma's-had a much weaker presence outside the US and Canada. The attraction of overseas markets was that their restaurant markets were typically saturated than those of the US and most of the local competition was made up of independent, family-owned restaurants rather than large chains. In overseas man kets it was anticipated that market trends would follow those of the US, in particui that greater afluence and a declining role of family life would result in increased eating away from home. CASE 18 CHEPOTLE MEXICAN GRILL, INC:THE INTERNATIONAL CHALLENGE 643 By contrast, the Us restaurant market appeared mature and saturated-it was estimated that there were 192,000 franchised fast-food and restaurant outlets at the beginning of 2014 However, overseas markets also represented a substantial management challenge. These included: Market demand: The extent to which market demand existed for a particular type of restaurant depended on levels of disposable income, urbanization demographics, and a host of other social, economic, and lifestyle factors. Most critical to a specific company were national preferences with regard to cuisine and dining conventions. Even McDonald's, whose name had become synonymous with global standardization, had made substantial adaptations of its menu and business practices to local conditions. e Cultural and social factors are critical influences on customer preferences with regard to menus, restaurant facilities, and overall ambiance; they are also important with regard to employee management practices and entrepreneurial potential. e Infrastructure: Transportation and communication, basic utilities such as power and water, and locally available supplies were important elements in the decision to introduce a particular restaurant concept. A restaurant must have the ability to get resources to its location. Easy access to the raw materials for food preparation, equipment for manufacture of food served, and mobility for employees and customers were essential. . Raw material supplies: Overseas restaurant chains needed local supplies of food and drink. In 1995, the US International Trade Commission noted that: "International franchisers frequently encounter problems finding supplies in sufficient quantity, of consistent quality, and at stable prices. Physical distance also can adversely affect a franchise concept and arrangement. Long distances create communication and transportation problems, which may complicate the process of sourcing supplies, overseeing operations or providing quality management services to franchisees."B In 2015, these problems remained critical challenges to fast food chains seeking to expand internationally. While a franchiser could develop its own supply chain (e.g., McDonald's when it entered the Soviet Union), the investment of management time and money could be substantial. Regulations and trade restrictions: The principal challenges were national regulations relating to food standards, business licensing, and business contracts. Establishing new businesses in most countries involves far more regulation than within the US. Franchise agreements are an especially difficult area because they involve complex contractual agreements between franchisor and franchisee regarding trademark licensing, royalty payments and requirements for quality control and quality monitoring. In some countries some usual terms of franchise agreements have been vi ewed as ts on commerce. Employment law was also important, particularly with regard to restrictions on employers' ability to dismiss or lay off employees and requirements for union recognition and national collective bargaining arrangements over wages and working conditions.

Answer 1

Q) Do overseas markets offer attractive growth opportunities for chipotle?

Ans: I do feel Chipotle had huge growth opportunities in overseas markets due to changing market dynamics, shift in cultural values towards increased disposable income, more urbanization and change in social and cultural factors. Also, there is a high potential for outlets due to scarcity of time, ready to eat options and perceived quality. The major factors that are to be considered which say there are attractive growth opportunities for Chipotle are:

• Increased disposable income
• Rapid modernization and urbanization
• Shift in social and cultural values
• Improved infrastructure
• Shift in market dynamics

Q) If so should, chipotle replicate its US strategy in overseas markets, or does if need to adjust the local circumstances- if so how?

Ans: I think Chipotle should frame a strategy to improve their marketing dynamics in overseas markets. I also feel replicating US strategy doesn’t fetch Chipotle much and go heights in UK market. They need to adjust to the local circumstances and if they match with the local circumstances, they can be successful. Some of the major factors Chipotle should consider before entering overseas markets are:

• Proper segmentation and targeting local overseas markets
• Well managed distribution management system
• Marketing plan should match the local dynamics
• Advertising and promotional activities should take local markets into consideration while designing the plans
• Products or cuisines should match local needs

Q) In particular, should chipotle directly own and manage its overseas restaurants or should I opt for a joint venture or franchising?

Ans: Chipotle should try to focus on both strategies for international marketing. Chipotle cuisines mostly match with the metropolitan culture and cities. Therefore, in metropolitan cities of overseas markets Chipotle should enter on their own by managing their outlets

In majority of places, if Chipotle should become successful, they should increase their outlets and presence. For increasing their presence, they need to either think for joint venture or providing their franchise to the local players.

Q) Complete a porter 5 forces analysis for the firm plus “1” technology impact?

Ans: Impact of technology: Low to moderate

Technology plays a major role for providing more options to the customer like door delivery, feedback mechanism, continuous development, quality control measures etc.

Porter 5 forces analysis:

Bargaining PowerBargaining of buyers- Moderate .many options Competitive rivalry within industry - Moderate to high Threat from substitutes - Highentrants - High Readymade food Threat of new power of suppliers- Low .Consolidated Initial setup costs are low .Exit barriers are options are available even in grocery stores market with respectHuge competition ailable for buyers av minimal to suppliers Switching costs rom local chai r ns and international players Minimum loyalty forEntry costs are too between players is low to zero . Majority of players customer as they have many options to choose from have unique supply ow chain high integration is high Minimal sunk costs Demand elasticity is high Switching costs are Fast food chains, . Rapid change in local eateries, many restaurants are available leading to major threat Need for backward consumer tastes