Chipotle in Spain IBUS 300-007 - Dr. Sarah Mady Philipp Ebner von Eschenbach Ana Mirandés Isabella Parrotta Michelle Posch Anthony Sadler American ...

Chipotle in Spain

           Philipp Ebner von Eschenbach
                    Ana Mirandés
                   Isabella Parrotta
                   Michelle Posch
                  Anthony Sadler

               American University
                 IBUS 300-007
                Dr. Sarah Mady

Chipotle in Spain                          Page 2

Table of Contents

Executive Summary                                   3
Introduction                                        3
Internal Strengths and Weaknesses                   3
Company Overview: Chipotle Mexican Grill            3
Customers                                           4
Spain External Opportunities and Threats            5
Cultural Analysis                                   5
Industry analysis                                   6
Mode of Market Entry                                7
Location                                            7
Staffing                                            7
Primary Data : Interview & Survey                   8
Supply Chain                                        8
Timeline                                            9
Conclusion                                          9

Chipotle in Spain                                                                                   Page 3

Executive Summary

We recommend Chipotle’s expansion into Spain, through a wholly owned greenfield investment. Spain is

stable both politically and culturally and has been increasing its ease of doing business to encourage

enterprise. Madrid is an ideal location for Chipotle’s operations. The city is seeing substantial economic

growth along with a thriving quick service industry. We recommend a polycentric staffing approach to

take advantage of local networks and achieve more successful integration. Our Spanish venture should

utilize both local suppliers and imports from the United States to establish a lean supply chain. Chipotle

in Spain will hold true to the company’s overall brand message with approximately 20% of the menu

catering to local tastes.

Introduction

Expansion into Spain, through a wholly owned greenfield investment. Spain is stable both politically and

culturally and has been increasing its ease of doing business to encourage enterprise. Madrid is an ideal

location for Chipotle’s operations. The city is seeing substantial economic growth along with a thriving

quick service industry. We recommend a polycentric staffing approach to take advantage of local

networks and achieve more successful integration. Our Spanish venture should utilize both local suppliers

and imports from the United States to establish a lean supply chain. Chipotle in Spain will hold true to the

Internal Strengths and Weaknesses

Company Overview: Chipotle Mexican Grill

Chipotle is a Mexican style fast casual American restaurant that opened its doors to the public in 1993.

All of its restaurants are corporately owned rather than franchised, which allows the company to have

more control of its brand (Chipotle Mexican Grill, n.d.). Currently, Chipotle has over 2,400 locations with

29 of these being international in Canada, France, Germany and the United Kingdom (Statista, 2017;

eMarketer, 2017).

In August 2015, an E-Coli epidemic began in in California, Minnesota and near Boston College.

According to Public Health officials, almost 500 people in the United States became sick from Chipotle

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food in July of that year (Strom, 2016). Chipotle was very responsive to the situation, deciding to

implement additional safety procedures and audits in all of its 2,000 restaurants to ensure that robust food

safety standards were in place (Strom, 2016). Chipotle heavily struggled in the aftermath of this crisis due

to the company’s inability to win back customer trust. Specifically, a 13% decline in yearly sales, from

$4.5 billion in 2015 to $3.9 billion in 2016 (macrotrends, 2018). This decline is clearer in 2016’s

quarterly revenue where there is an evident collapse in the last quarter of 2015, when the outbreak began,

fluctuating until the first quarter of 2018, where quarterly revenue began to increase to the point where it

reached $1.26 billion, surpassing the highest quarterly revenue before the crisis which was $1.16 billion

(macrotrends, 2018).

Chipotle’s commitment to serving only ethically and naturally sourced ingredients has led to successful

marketing initiatives such as the “Food for Integrity” motto which has become integral to company

culture. However, this initiative has some costs such as higher ingredient price points and a dependence

on a small number of farmers (Business News, 2018).

Customers

Spain is a logical choice for Chipotle’s next venture because of the increasing number of tourists, who are

a key target demographic. Spain hosted 81.79 million tourists in 2017, a statistic that is second only to

France (Statista, 2018a). Tourism in Madrid has been steadily rising over the past four years (Statista,

2018b). Moreover, it is important to consider that of the millions of tourists coming to Spain, high

concentrations of the visitors are from Germany, France, and the US, all countries with Chipotle (Statista,

2018c). Statistics also show that interest in tourism to Spain is not ceasing, with a 2018 study projecting

that the total contribution of travel and tourism to GDP in Spain will be 224.3 billion in 2028 from 172.9

billion in 2017 (Statista, 2018d). Another target demographic will be students in Madrid looking for

affordable fast-casual fare with an American twist (see page 8 for primary data).

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Spain External Opportunities and Threats

Cultural Analysis

Located in western Europe, Spain has a population of around 46.6 million, 80% of whom reside in urban

areas (Europa World, 2018a; 2018c; World Bank, 2018a). In 1978 Spain ended fascism and established a

constitutional parliamentary monarchy, later becoming a member of the EU (Gillespie, 2018). Spain is

comprised of 17 autonomous regional communities and domestic politics has been governed by the

peaceful transition of power (Europa World, 2018b). Regionalism is a reality in Spain, the Catalonian

government voting to secede from Spain in 2017 (Europa World, 2018b). Although Spanish is the official

language, regional co-official languages are common (Europa World, 2018d). Spain’s Hofstede

dimensions have been influenced by its tumultuous past, as evident in figures 1 and 2.

Economic Analysis

Spain has a mixed capitalist economy that is currently recovering from the 2008-2013 financial crisis

(Spain Introduction, 2017). The country’s population is expected to increase at an annual rate of 0.3%.

(Europa World, 2018). Spain is considered a high-income country, with 41.8% of the population earning

in the top 20% of income (World Bank, 2018b). The employment market has improved in recent year,

with current unemployment rates at 15.2% (Razvadauskas, 2016). Spain holds the 29th highest GDP per

capita at $27,580, or about $36,340 on an international purchasing power parity basis (World Bank,

2018b). In order to revive its economy and encourage enterprise, Spain has lowered corporate income

taxes from 30% in 2014 to 25% in 2018 and enacted a Labor Market Reform in 2012 (Iberian, 2104).

These efforts have resulted in Spain moving up in the World Bank’s “ease of doing business” rankings. In

2014, Spain was ranked 33 and today has achieved the 28th spot (World Bank, 2016). It takes

approximately 12.5 days to start a business in Spain, which is less than the world average of 19.8 days

(Doing Business, 2018) (Figures 3 and 4). This has resulted in an increase in FDI with FDI net inflows of

$4,307 million, (BEA, 2017). As part of the Eurozone, Spain has been exposed to slow eurozone growth

and other factors have caused the Euro to lose value over the years. (Skinner, 2018). In 2012, Spain joined

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in a 7-year plan to grow the science, technology and innovation sectors. As we enter the latter stage of

their efforts, developments in these sectors appear to be materializing (What is H2020?, 2018).

Industry analysis

It is important to note that Chipotle falls into the recently emerged “casual dining” industry. Due to the

lack of available data for this industry, the fast food industry will be compared instead. With

approximately $4.2bn in industry revenue in 2017, Spanish fast-food operators were able to grow sales by

4%. This rate is projected to hold until 2022 (Euromonitor, 2018). The consistent high growth in Chicken

Fast Food revenue over the past three years, highlighted in Figure 1, is noteworthy. When comparing

these growth figures with aforementioned economic indicators, it becomes evident that revenue growth in

fast food largely mirrors changes in the overall health of the economy. As Figure 2 illustrates, the fast

food market size has grown at fluctuating rates over the past years as well, mirroring sales fluctuations

(Mintel, 2018). Within the industry, operators face a highly competitive environment, competing both in

quality and prices. The top two players are McDonald’s (27.9%) and Burger King (17.2%), nearly 35%

of operators are small-businesses (Euromonitor, 2018). Throughout the past 5 years, particularly Burger

King was able to grow market share while small-businesses have continuously lost share (Euromonitor,

2018). This trend highlights a favorable industry environment for larger fast food corporations. Chipotle’s

main competitor in Spain operating in the same market niche is Tierra Burrito Bar. The company

currently has eight locations within the greater Madrid area (Tierra Burritos, 2018) and an estimated

yearly revenue of $2.8 million (Owler, 2018). While Tierra Burrito has been successful with a menu so

far, some international customers have complained about poor flavor, too little seasoning, and subpar

meat quality (TripAvidsor, 2018). Headwinds mainly stem from regulatory pressure that has increased

significantly over the past 5 years. In 2015, the Spanish government implemented new food quality

protection laws that established food quality control systems and sanctioning regimes that fast food

restaurants must adhere. The legislation highlights increased public scrutiny on fast food and has

increased cost pressures for operators, denting profits (Kapelko, 2015).

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Strategy

Mode of Market Entry

           To enter the Spanish market, we propose a wholly owned greenfield investment. This in line with

Chipotle’s previous market expansions into Europe (Chipotle, n.d.) and will allow the firm to control

operations and marketing. Owning the Madrid location will allow management to adapt the Spanish

business model quicker and directly control its supply chain. Nevertheless, this mode of entry is far more

complex than others. Our proposal carries greater financial risk as Chipotle would stem the full cost of the

expansion compared to other modes of entry with less financial risks.

Location

           The chosen location for our venture greenfield investment will be Madrid. It is the ideal location

for a number of reasons. First, only Spanish is spoken in Madrid while in other areas both Spanish and the

regional dialect are spoken, allowing us to avoid potentially upsetting cultural issues. Second, at €50 per

capita, Madrid spends more on fast food than anywhere else in mainland Spain (EAE Business School).

Madrid is also a safe location politically compared to other urban centers such as Barcelona, Catalonia

(Gillespie, 2018; Europa World, 2018b). Finally, Madrid’s economy has seen substantial growth since the

recession. The regional population represents some of the wealthiest in Spain, with the city’s GDP per

capita 31% above the country as a whole in 2016 (Razvadauskas, 2016).

Staffing

A polycentric staffing strategy will be used, meaning that emphasis will be placed on localization and the

Spanish managerial perspective. We chose this based on Spain’s Hofstede Dimensions (see figures 1, 2).

There will be a degree of US and existing European corporate involvement given our mode of entry. A

polycentric staffing strategy will give a sense of participation in the community, emphasize Chipotle’s

long-term involvement, and decrease language barriers that can hurt our burgeoning brand image.

Disadvantages of this approach include a lack of strategic cohesion due to over-localization. With this in

mind, we believe our greenfield investment plan allows us to simultaneously respect Spanish culture and

maintain the necessary degree of corporate involvement.

Chipotle in Spain                                                                                    Page 8

Primary Data : Interview & Survey

We spoke with Matthew Putna, a senior manager at Hard Rock International in Asia from 2012 to 2015.

We took away three key items from our discussion: 1) adapt our menu to local tastes to capture the flavor

profiles and food presentation styles in Madrid, 2) stay true to Chipotle’s brand experience, message and

mission by adapting 20% of our menu to local tastes, and 3) utilize a mix of both local suppliers in Spain

and direct imports from Chipotles in the US. By importing our staple items and utilizing local suppliers

our meals will remain uniform in taste while incorporating local flavors. This advice coincides with our

transnational strategy to seek catering to local audiences while facing pressures to reduce costs.

        To determine the best marketing and branding strategy we gathered primary data through a

survey taken by 20 Spanish college students living in Madrid. The questions asked include age, restaurant

preferences, pricing, and opening and closing times. The results showed that Spanish customers will pay

up to €15 more for Chipotle than Americans (see page 16 & 17 for primary data). Additionally,

respondents indicated they would visit Chipotle between the hours of 14hr-16hr or 20h-22hr which are

traditional Spanish mealtimes. Our survey found that 85% of college students attending universities in

Madrid are interested in Chipotle and that 58% of them would stay at the restaurant for an hour during

Spanish mealtimes. Thus, our restaurants will require comfortable seating areas tailored to longer visits as

well as locations nearby universities.

Supply Chain

Thanks to Horizon 2020, the biggest EU Research and Innovation programme , we will be able to take

advantage of the SYNCHRO-Net system. SYNCHRO-Net will be the first synchro-modal supply chain

that incorporates a business modeling and stakeholder value proposition process into logistical planning

(Perboli et. al., 2017) . A synchro-modal supply chain brings logistical planning by cost and logistical

planning by time under the same roof, allowing us to optimize the supply chain according to both factors.

That optimization could potentially reduce truck kilometers driven by up to 30%, fuel costs by up to 25%

and most relevant to us, up to a 10% reduction in finished goods inventory holdings (SYNCHRO-NET

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Report Summary, 2017). Geographically, see Figure 12, we will use Spanish suppliers for our beef,

chicken and fresh produce items and our European regional supplier for pork. Then, staying on track with

our Level II Global Purchasing Style, we will import our staple items such as rice and beans from the US.

Process wise, see Figure 13, we will use Less-Than-Train/Truck Load Shipments every four days from

our suppliers to our Madrid distribution center to emulate a Just-In-Time Inventory, furthering this system

by importing only Full-Container-Loads via slow-steaming shipments as needed to our Madrid

distribution center. This will allow us to rent to smallest warehouse size possible to keep costs down.

Then from our distribution center to store, we will use cargo van freight with the precise amount needed

each day, six days a week – in line with our London practices (Chipotle Mexican Grill, n.d.). This supply

chain system will achieve an optimal balance across our various stakeholder issues while maintaining the

quality of our product for one of our most significant stakeholders: the customer.

Timeline

Beginning in the first quarter of 2019 through the third quarter of 2019, we will finalize our corporate

decisions as it regards to the entirety of this strategy. Then in the last quarter we will being our greenfield

investment into Spain as we build relationships, secure contracts and implant our managers to train our

polycentric staff. In the first quarter of 2020 we will secure a physical location for our store location along

with and distribution center and when the H2020 SYNCHRO-Net project is complete, will begin our

operations from start to finish.

Conclusion

To summarize, our strategy is to bring Chipotle to Madrid, Spain via a greenfield investment strategy in

line with Chipotle’s previous corporate ventures. Significant attention to cultural factors will occur by

employing a polycentric staffing strategy and tailoring our restaurant layouts, menu, and hours of

operation to Spanish norms. Our supply chain will include both local and American suppliers of different

materials to establish a lean supply chain. Tourists and students will be our primary market segments.

Chipotle in Spain                                                                                   Page 10

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Appendix:

       Figure 1: Chipotle Mexican Grill – Yearly Sales. Source: macrotrends, 2018

Figure 2: Chipotle Mexican Grill – Quarterly Revenue. Source: macrotrends, 2018

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Figure 3: Spain - Hofstede Dimensions. Source: Hofstede Insights (2018).

Figure 4: Spain - Hofstede Dimensions Analysis. Source: Hofstede Insights (2018)

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Figure 5: Starting a Business in Spain- Procedure, Time and Cost

Figure 6: Ease of Doing Business in Spanish Regions

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Figure 7: Industry Revenue - Fast Food. Source: Euromonitor (2018)

Figure 8: Fast Food Market Size. Source: Mintel (2018)

Figure 9: Survey Monkey – Chipotle en España

Translation: Age

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Figure 10: Survey Monkey – Chipotle en España

Translation: How much would you be willing to pay to eat at Chipotle?

Figure 11: Survey Monkey – Chipotle en España

Translation: How much time would you think you would stay to eat in Chipotle?

Chipotle in Spain   Page 18

Figure 12

Figure 13