Business Expanding Plan for SUBWAY in China

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Business Expanding Plan for SUBWAY in China

-For 2012 to 2014 financial years

 

1.        Introduction

 

1.1    Company

 

The first SUBWAY store (submarine sandwich shop) opened in Bridgeport, Connectiut in 1965 by Dr. Peter Buck and Fred Deluca with hope to subsidize Fred’s education to become a medical doctor by providing well-made, high quality product together with excellent customer service and low operating costs (Singer 2003, p. 110). By 1974 the two owners came to a strategic change in the expansion mode of their small business by adopting a franchising strategy which started the rapid growth that still continues to date. By focusing in the fast food industry, the SUBWAY® brand becomes the world’s largest submarine sandwich chain with more than 34,000 locations around the world and has become the leading choice for people seeking quick, fresh and nutritious meals that the whole family can enjoy (Adamson & Segan 2008, p. 262). The mission of the company is to offer the tools and knowledge to allow entrepreneurs to compete successfully in the Quick Service Restaurant industry worldwide, by consistently offering value to consumers through providing great tasting food that is good for them and made the way they want it (Subway.co.uk 2011).

 

1.2    Target country

 

The expansion of SUBWAY in one of the most vivid and fast growing economies, China, has been relatively slow and lagged behind. Until recently, according to the data posted in the SUBWAY China official website the brand only has about 140 locations in China (Subway.com.cn 2011) while its global competitor McDonald has more than 1200 outlet in China (Thu 2011). With the continuous fast economy growth in term of world-envy GDP growth and people’s increasing need of healthy fast food in a speed-up working and living pace, the expansion of SUBWAY in the near future will be promising though more detail business plan and careful implementation is still needed before any success could be granted.

 

2.        Situational analysis

 

2.1    PEST analysis of China

 

2.1.1            Political


Table 1 The political stability indicator for the selected countries from 1996 to 2002

Source: World Bank 2003

 

Since the beginning of 1979 which marked the official kickoff of the economy reform and opening up policy that boosted the economy with a focus on developing market economy in a socialist country, stability has been an overwhelming priority for the Chinese central government. As summarized in the figure above, the political stability indicator (PSI) from 1996 to 2002 has demonstrated that China is a relative stable country compared with most developing countries though it is still less stable than most developed countries. And as proposed by Guo (2006, p. 41) that notably, the level of stability fluctuated little over the years in China. The stability of the political and the fast growing economy has made China become one of the most popular destination of foreign direction investment (FDI) and expansion of multinational corporations (MNCs).

 

2.1.2            Economical


Chart 1 China Gross Domestic Product (GDP)

Source: Tradingeconomics.com 2011

 

As illustrated in the chart above, the rapid GDP growth has been sustained since the 1990s despite the 1997 Asian Financial Crisis and the most recent 2007 to 2009 US led global financial crisis. With the seemingly non-stoppable growth driven by a investment and export led growth mode, a resulted long term double digit growth eventually led to the fact that China passed Japan in the second quarter in 2010 to become the world’s second-largest economy behind the United States, according to government figures released in China (Nytimes.com 2010). This indicates that there will be an expanding market for any consumer products including the fast food.

 

2.1.3            Social and cultural

 

Together with the opening economy, the Chinese society has also experiencing rapid changes in term of values and cultural norms including the diet and food cultures. According to David Leffman, Simon Lewis and Jeremy Atiyah (2005, p. 51), there has been a fair amount of western and international food available in China together with the Chinese food cultural changes to increasingly accept the western restaurants and their food styles which is demonstrated in the booming of the KFC, Pizza Hut and McDonald.

 

2.1.4            Technological

 

Even though technological factors traditionally have not been the major source of the core competitiveness for the players in the in the fast food industry, still technology related to storage, heating and production is still critical in the industry. And China’s the central government has invested a huge amount of capital and human resources in developing education and technology which has been said as one of the four major factors that power the economy growth of China (Chinadaily.com.cn 2007). And the fact that China has become the world factory has ensured the supply of the needed production equipments and logistics in the expansion of SUBWAY.

 

2.2    Porter (1980)’s Five forces analysis

 

2.2.1            The threat of the entry of new competitors – High

 

Several factors decide a high level of threat of new entry by possible competitors outside of the fast food industry. The first factor is the low requirement of investment in fast food business in China. To start a fast food business, any existing Chinese restaurants with very good business mode could penetrate into the market and expand rapidly through franchising. The second factor is the weak patent or copyright awareness in China that allow easy and low cost follower strategy to be adopted by the new competitors. As in the fast food industry, there are not many patents for the fast food or procedures, and there are also difficult to keep most special formula or production procedures in the fast food industry. What is more, the fact that the low copyright awareness and low respect for patents and the widely accepted piracy products has made it easier for the entry of possible competitors.

 

2.2.2            The threat of substitute products or services – Medium

 

The long developed fast food industry in the world has been expanding in the past decades with the steady growth of the work economy, the need of the fast and convenient food in most developing and developed economies seems to maintain strong and the substitutes of such fast food such as the instant noodles and biscuits are not many and they are also not competitive enough because they could not be served as a normal meal in a traditional sense. And the long existing fast food industry and strong customer demand has proved that the threat of substitute products or services is not strong.

 

2.2.3            The bargaining power of customers (buyers) – High

 

Though fast food products offered in the fast food industry do not have strong threat from the substitute products, the bargaining power of the customer is still strong for the two major reasons. On one hand, due to the under development of the economy in China, the majority of people are still quite price sensitive which means that if the price increases a little significant customer loss could be seen because they could be forced to go to the competitors due to the price sensitivity. Secondly, the great bargaining power of the customers could also source from the fierce competition within the fast food industry; it incurs little cost for the customers to change to another fast food provider such as McDonald, KFC or any other local and international fast food chain restaurants.

 

2.2.4            The bargaining power of suppliers – Weak

 

The bargaining power of suppliers refers to their ability to raise prices and/or reduce the quality of goods and services (Peng 2009, p. 41). And the bargaining power of the suppliers in the fast food industry in China is weak for two major reasons: firstly, the products provided by the suppliers in the fast food industry usually are the raw food and agricultural products that are in low degree of differentiations; secondly, also due to the low degree of differentiations because of the nature of the supplied good, there is low switching cost for the fast food business because they would not incur too much cost to change to another supplier and actually there are already too many suppliers to compete for a cooperation relationship to the fast food business entities.

 

2.2.5            The intensity of competitive rivalry – Strong

Table 2
 Selected fast food brands in China in 2009

Source: French & Crabbe 2010, p. 122

 

The intensity of competitive rivalry is strong in China. As shown in the table above, major global fast food giants are expanding their chain in China in a very rapid speed. For example, McDonald entered the Chinese market in 1990 and owned 850 outlets as of 2009 according to the above table but this number has increased to more than 1200 as mentioned previously. With the fierce competition from dozens of expanding foreign fast food chains and also quickly improving local players that are eager to compete with the foreign competitors in fighting for their own market share in a rapid growing economy.

 

3.        Objectives

 

3.1    Business objectives

 

As mentioned above, the mission of the company is to offer the tools and knowledge to allow entrepreneurs to compete successfully in the Quick Service Restaurant industry worldwide, by consistently offering value to consumers through providing great tasting food that is good for them and made the way they want it (Subway.co.uk 2011). And Fred has had a clear vision for the future of the SUBWAY® brand. As the company continues to grow, the SUBWAY people are guided by his passion for delighting customers by serving fresh, delicious, made-to-order sandwiches.

 

3.2    Marketing goals

 

In term of the detailed marketing goals, within the coming three financial years, the brand is anticipating to expand its franchise in China to double number of the SUBWAY locations to increase the current number of 128 to 400 in the end of 2014 financial year. This rapid growth will probably push the brand to become the top five fast food brand in China.

 

 

 

 

4.        Business strategies

 

4.1    The generic strategies

 

Figure 1 The generic strategies

Source: Wickramasinghe & Lubitz 2006, p. 167

 

As illustrated in the figure above, Porter (1980) identifies in the framework of generic strategies three generic strategies which are cost leadership, differentiation and focus.  The concept of generic strategies is based on the premise that there are a number of ways in which competitive advantage can be achieved depending on industry structure (Porter 1985, p. 22). And according to Porter, every company should select one of the three generic strategies in order to maintain competitive in the market and choosing any position in between the generic strategies would lead to incompetency and policy and company strategic confusion. As in the case of SUBWAY, in the Chinese market it will continue to use the differentiation strategy for the following reasons: in the dimension of strategic target, the SUBWAY fast food products are designed to serve a wide range of customers; and in the dimension of competitive advantage, by providing fresh, delicious customized sandwiches in reasonable prices SUBWAY generate great uniqueness as perceived by the customers compared to other products provided by the competitors. The identification of the generic strategy will assist the company to clarify the positioning of the brand and the marketing strategies to be adopted to promote the products.

 

4.2    Entry strategy

 

In term of the selection of entry strategy in the China market, the company will continue to use the franchising mode which refer to the system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system (Zimmerer & Scarborough 2008). And as the franchisor, SUBWAY will provide a range of rights and resources in term of serious production system, training and other kind of support and help to the franchisee to maintain the same way that it is operated in other parts of the world.

 

4.3    Marketing mix

 

4.3.1            Price

 

In term of the pricing strategy, SUBWAY could use a penetration strategy to recommend the franchisees to price the food and service less than its normal, long-range market price in order to gain more rapid market acceptance or to increase existing market share (Longenecker, Moore, Palich & Petty 2006, p. 338) and in return the company could offer the franchisees with competitive membership fees or offer more resources to them in order to encourage them to accept a penetration strategy.

 

 

4.3.2            Product

 

The first product strategy to be used by SUBWAY China is to downsize the size of the sandwich which is too big to the Chinese customers and even attract complaints as we can see many on the internet as commented by many of the Chinese customers that the size of the SUBWAY sandwich is too big that they could not take a bite. This change is also in accordance with the company’s differentiation strategy to better service the customers in the particular market. The second product strategy that could be used by SUBWAY is to localize and diversify its menu to better fit the Chinese customers’ needs. New products such as soup and new taste of the sandwich could be developed based on the market and customer behavior analysis to increase the diversification and localization of the products. What is more, the company could also try to release hot food such as rice combo to diversify the product lines. This change has not happened in any SUBWAY outlet in all over the world, but it worth a try in the Chinese market because the majority people in China probably due to the cultural traditions are more comfortable to have hot food such as rice and noodles while having lunch and supper.

 

4.3.3            Distribution

 

In term of placing strategy, as the company is going to expand its business by franchising, it is important that the company build up two to three logistic center in China such as in Guangzhou, Shanghai and Beijing which are the three largest cities in China in the South, Middle and North part respectively.

 

4.3.4            Promotion

 

In term of promotion mix selection, the company could use several techniques. Firstly, it should increase the brand awareness by investing heavily in the advertising in the major traditional media such as TV and news paper. The second technique is to use the new social media such as RenRen (similar to facebook) to promote its products and attract enough of attentions from the society. Thirdly, the company could focus on promoting the healthy fast food which correspond with the traditional Chinese cultural that encourage the harmony with the nature and the fresh and healthy food products provided by SUBWAY could arouse the Chinese customer’s interests.

 

5.        Budgeting and action plan

 

 

Table 3 Marketing budget and action plan in 2012

 

 

 

Table 4 Marketing budget and action plan in 2013

 

 

 

Table 5 Marketing budget and action plan in 2014

 

 

6.        Conclusion

 

In conclusion, with the budget and action designed above the company will be heading toward to a fast business growth in China using an ambitious expansion strategy. But still there are several follow up jobs need to be done by the company.

 

Firstly, it should monitor the market environment of China which includes the macro environment and the industrial environment to spot the changes that could possibly request for an alignment from the company strategies. As observed recently, the Chinese economy has witnessed some trend of economy overheat marked by continual growing food price and some signs of asset bubbles. Such uncertainties and risks in the whole economy system should have attracted enough of attention from any business that is operating in the market. What is more the labor force cost is also increasing which will add to the overall operation cost of the business.

 

Secondly, the company should closely monitor the implementation of the budgeting and action plan to make sure that the marketing targets will be gradually achieved while the vision and mission of the company are still adhered. For example, as the company is targeting at increasing the number of the locations by 272 in the next three financial years from 2012 to 2014, this expansion of outlet number could not be finished within one single financial year, so the company needs to divide the target into small gradual and short term goals such as 15 new outlets every two months. And closely monitor the fulfillment of the short term goals to ensure that the ultimate target of increasing 272 new outlets could be achieved by the end of 2014 financial years.

Reference list

 

Adamson, M. W. & Segan, F. (2008), Entertaining from Ancient Rome to the Super Bowl: A-G. Westport, CT: Greenwood Press. p. 262

 

Chinadaily.com.cn (2007). Four factors bolster China’s economic growth. Accessed on 30th Sep 2011 [online] available: http://www.chinadaily.com.cn/bizchina/2007-06/18/content_896806.htm

 

French, P. & Crabbe, M. 2010, Fat China: How Expanding Waistlines are Changing a Nation. London: Anthem Press. p. 122

 

Guo, S. J. (2006), China’s “peaceful rise” in the 21st century: domestic and international. Hampshire: Ashgate Publishing Limited. p. 41

 

Leffman, D., Lewis, S. & Atiyah. K. (2005) Rough guide to China. London: Rough Guides. p. 51

 

Longenecker, J. G., Moore, C. W., Palich, L. E. & Petty, J. W. 2006, Small business management: an entrepreneurial emphasis. Mason: South – Western Thomson. p. 338

 

Nytimes.com (2010), China Passes Japan as Second-Largest Economy. Accessed on 30th Sep 2011 [online] available: http://www.nytimes.com/2010/08/16/business/global/16yuan.html

 

Peng, M. W. (2009), Global Strategy. 2nd edition, Mason: South – Western Cengage Learning. p. 41

 

Porter, M. E. (1980), Competitive Strategy: Techniques for Analysing Industries and Competitor, New York: Free Press

 

Porter, M. E. (1985), Competitive advantage: creating and sustaining superior performance : with a new introduction. New York: The Free Press. p. 22

 

Singer, A. J. (2003), The Cincinnati subway: history of rapid transit. San Francisco CA: Arcadia Publishing. P. 110

 

Subway.com.cn (2011). About us [关于我们]. Accessed on 30th Sep 2011 [online] available: http://www.subway.com.cn/

 

Subway.co.uk (2011). Frequent Asked Questions. Accessed on 30th Sep 2011 [online] available: http://www.subway.co.uk/business/franchise/faqs.aspx

 

Thu, C. (2011). McDonald’s Growth in Asia. Accessed on 30th Sep 2011 [online] available: http://bizantu.com/content/mcdonalds-growth-asia

 

Tradingeconomics.com (2011). China Gross Domestic Product (GDP). Accessed on 30th Sep 2011 [online] available: http://www.tradingeconomics.com/china/gdp

 

Wickramasinghe, N. & Lubitz, D. K. J. E. V. (2006), Knowledge-based enterprise: theories and fundamentals. London: Idea Group Publishing. p.167

 

World Bank (2003). Wordld Bank Policy Research Working Paper 3106. Accessed on 30th Sep 2011 [online] available: http://wbi.worldbank.org/wbi/

 

Zimmerer, T. W. & Scarborough, N. M. (2008) Essentials of Entrepreneurship and Small Business Management, New Jersey: Pearson Prentice Hall

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