Location strategies of TT Fast Food franchise restaurant

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Location strategies of TT Fast Food franchise restaurant

 

1.      Introduction

 

1.1    Company background of TT Food

Figure 2

Figure 1 The new dishes (top) and most popular products in TT Food

Source: ttjyw.net 2010

 

The TT Fast Food franchise restaurant (TianTian, it means everyday in Chinese) was set up by its current CEO, Zhang Shu An, in 2004 with the first store sitting in Dongguan City of South China’s Guangdong province focusing on providing the Chinese style fast food which is considered as healthier and more closed to the Chinese traditional cuisine culture than the western fast food chains which lead the current rapid growth of the fast food industry in the mainland of China. Since establishment the company by adopting the franchise strategy, the group right now possesses more than 100 restaurants in the River Pearl Delta area which include Dongguan, Shenzhen, Foshan, Huizhou in the southern part of China and also the market of several cities such as Wuhan and Guizhou in the middle and north part of China had also been exploited. In term of brand positioning, the company has positioned to provide a mix of both western fast food and Chinese style to the lower end and middle income customers who are living in a fast pace. And in term of corporate culture, the company promotes harmony, operating efficiency and saving to better serve the society with a lower consumption. Today, TT Fast Food franchise restaurant has become one of the most promising brands in the fast food franchise industry (Ttjyw.net 2011) to the investors and customers.

 

1.2    Business and company’s location strategies of the outlets

 

In term of strategic orientation, TT Fast Food franchise restaurant has adopted a differentiation strategy by offering everyday fresh and healthy food products with special recipe researched and developed by the food R&D (research and development) center which is located in Dongguan city where the headquarter is also located, the company tries to position the brand as different and unique compared to the industrial competitors. And regarding the location strategy which refers to selecting the general area in which a firm could be operating and determining whether the company will expand through clustering or a more scattered expansion strategy (Hsu & Powers 2002, p243), as the company has been using the market development strategy and franchise strategy expand the business and increase the brand awareness to country wide level, the location of the new food restaurant outlets has been critical in the company’s strategic vision to become the no.1 fast food service provider in China. And in detail, the company uses a special strategy to open a flag outlet directly under the management and ownership of the company and attract investors to open more than 10 outlets within the later three year in a chosen city to better promote the brand among the customers. Now as 2012 is approaching the management of the company has been planning to enter into another city that the company has not been involved with. The identification of a specific city and the first flag restaurant in the chosen city together with the relative location strategies will be focused in this study.

 

2.        Objectives of the paper

 

2.1    Analyze the major external and internal challenges faced

2.2    Select the most appropriate city for future expansion

2.3    Identify the site for the first flag restaurant in the chosen city

2.4    Evaluate the chosen operation and location strategies

 

3.        Challenges faced by the TT Fast Food franchise restaurant

 

3.1    Limits of management support team

 

Within a franchise business, both the franchisor (the TT Fast Food franchise restaurant group) and the franchisee can obtain significantly benefits from a well conducted franchise relationship. The franchisee receives that opportunity to start and own a business, even though the franchisee may have limited capital and/or experience because the franchisee also obtain access to the franchisor’s goodwill, training, and supervision as well as access to product suppliers and marketing expertise (Oswald 2011, p. 155). And in the perspective of the franchisor, it will receive sound capital inflow, profit and other invisible benefits such as good will enhancement. In this way, to expand the franchise business, the franchisor must have a powerful and resourceful management support team to support the new franchisees. And in the case of TT Fast Food franchise restaurant which is in the growth stage, the management team is still under development and also many of the existing franchise outlets would require support from the headquarter which the group should provide, it would be difficult for the group to exploit the market of two cities at the same time.

 

3.2    Fast growing food price

 

It is widely accepted that China holds one of the world’s fastest growth rate especially in term of GDP (Gross Domestic Product), China’s economic miracle of the last 3 decades has been impressive to say the least. But amid the rapid growth, came increasing challenges. In June 2011, China’s CPI (Consumer Price Index) reached a 35-month high of 6.4 percent. Stabilizing prices has become the country’s main priority for the coming few years (xinhuanet.com 2011). But as predicted by the IMF as shown in the figure below, the CPI is still expected to grow. And within the increasing trend of CPI, the food prices continued to be the biggest factor as they surged by 11.7%. The rising cost of food and commodities have pushed up the cost of living and become a hot political issue in China. Analysts warned that prices are likely to raise even further (bbc.co.uk 2011). Because the government dare not to slow down the fast economic growth pace which could lead to more social unrest and related issues, the high and still increasing food price is expected. It would post substantial difficulties to the fast food industry in which food products are the major operating inputs and thus will increase the cost of the business.

 

Figure 2
Figure 2 China consumer price index average

Source: Tradingeconomics.com 2011 & IMF

 

3.3    Competition in the industry

Figure 2
Figure 3 Porter’s five forces model

Source: adapted from Porter (1980)

 

Another challenge faced by TT Fast Food franchise restaurant is the hyper industrial competition within the fast food industry in the Chinese market. Below we will look into the formation of the hyper industrial competition using Porter (1980)’s five forces model which suggests that the competition in an industry is determined by its basic underlying economic structure, i.e. the five competitive forces:

 

l  Rivalry among existing firms

l  Bargaining power of buyers

l  Bargaining power of supplier

l  Threat of new entrants

l  Threat of substitute products or services

 

In following, we will perform an industrial competitive analysis using the Porter (1980)’s five forces model.

 

3.3.1            Rivalry among existing firms – medium

 

According to Porter (1985), intense rivalry among the established firms is related to the presence of several factors and some of those factors include:

 

l  Number of players

l  Industrial growth rate and capacity

l  Fix costs and value added

l  Product or services characteristics

l  Brand identification

l  Switching costs

l  Informational complexity

l  Diversity of competitors

l  Exit barriers

 

There are several factors directly resulting in a medium level of rivalry among existing firms. Firstly, the industrial growth rate is high and capacity will be increased in a fast speed. The country’s food service industry has recorded double-digit annual growth since 2003. But it’s still only half the size of its U.S. counterpart, which means that it has plenty of room to grow. With a large recorded volume at $303 billion in 2009, it should reach around $450 billion by 2014 (investmentu.com 2011). Secondly, the fix cost of the investment in the fast food industry is not that high, this means that the existing players would leave the industry as there has not been high cost incurred, and they tend to raise competition with the hope to survive. Thirdly, in term of product and services characteristics, the differentiation of the fast food products is significant. For example, western style fast food such as burgers and pizza are so much different from the products offered by Chinese counterparts that some direct competition could be avoided because market are further segments and companies tend to compete in their segments.

 

The competition in fast food industry in China is medium which means that the players will only invest mild effort to target customers who currently buy from other companies using attractions strategies such as publicity and advertising and they also tend to prevent the entry of new players (Analoui & Karami 2003, p. 83).

 

3.3.2            Bargaining power of buyers – medium

 

The capacity of customers to bargain with the suppliers depends upon the following: existence of fewer buyers, standardized or commoditized products, absence of switching costs, and possibility of backward integration, availability of full information to buyers and price significant fraction of the cost[1] (Phadtare 2011, p. 85). The bargaining power of buyers is medium in the case of the fast food industry in China because: on one hand individual buyer tend to have little bargaining power in the consumer business because they are individual customers and each purchasing alone has little influence over the price setting of the companies and also the desired full information is not available in the fast food industry like many other industries; but on the other hand, the large number of fast food brand choices and the fact that the fast food market is a buyer market has enabled the customers to have more bargaining power to lower the price by choosing another brand. Hence, with factors in both sides, the bargaining power of buyers will be medium.

 

3.3.3            Bargaining power of supplier – medium

 

The bargaining power of suppliers refers to the ability of suppliers to raise input prices or to raise the costs of the industry in others ways (Hill & Jones 2008 p. 54). The bargaining power of the suppliers in the fast food industry in China could be medium for two major reasons: on one hand most fast chain food players have a bigger size than the suppliers which tend to be in smaller size will increase the bargaining power of the fast food companies; and on the other hand because the suppliers who provide quality products are welcome by many industries, competition will for these suppliers will enable them to have more bargaining power to rise the transaction price.

 

3.3.4            Threat of new entrants – high

 

Some frequent determinants of the level of threat of new entrants include the economies of scale, proprietary product differences, switching costs, capital investment, and access to distribution and brand identify. As in the case of the fast food industry in China, since the capital investment is not necessarily high because a new franchise business could start as small as one new small outlet only, the barriers of entry because of the investment requirement will be lowered. Also the historical Chinese food industry created various tasty food products which could mean that with a fast growing market, many existing Chinese style food products could be redesigned to be sold in a fast food style which increases the threat of new entrants.

 

3.3.5            Threat of substitute products or services – high

 

It seems that the threat of substitute products or service in the in the case of the fast food industry in China is high because of three major factor. The first factor is that there are many options if people don’t want to dine in a fast food restaurant, they can cook themselves, they can buy food from other localized operating small restaurants, or they can buy packaged food such as fast noodles which is a very large market in China with various products provided in the market. The second factor contributing to a high threat of substitute product is that dining in the major fast food restaurants in many cases does not means that the service will be given in a short time and hence is not “fast” enough due to factors such as traffic jam which is common in the major cities of China, then the fast food service could actually be replaced by that provided by many traditional restaurants. A third factor is that by turning to a substitute product, such as cooking at home, there is little cost involved. The only significant cost seems to be the time consumed, and with increasingly high food price as mentioned above goes on, the forcedly raised food price in the menu of the fast food restaurants will also force more customers to turn to substitutes of the fast food products.

 

3.4    Comment on the five forces analysis and other challenges faced

 

ForcesLevel of power
Rivalry among existing firmsMedium
Bargaining power of buyersMedium
Bargaining power of supplierMedium
Threat of new entrantsHigh
Threat of substitute products or servicesHigh

Table 1 Summary of the five forces analysis

 

With the given summary of the five forces analysis, we can see that the general competitive level in the fast food industry in China is medium to high with “high” level of power found in the two of the categories and the other three are marked with “medium”. Also the limitations also come from the internally because of the company’s under-developed management team which is not big enough to support a very ambitious expansion of the franchise business and challenges also source externally such as the rapidly growing food price. But with such a large market and rapid growth trend, in a business perspective it would mean a great of number of opportunities by investing in the industry, hence in the view of the TT Fast Food franchise restaurant, expansion by market development is a statically correct move and but problems such as the high industrial competition should be lowered through a number of business and management techniques and strategic choices, and location strategies is a key part of such efforts. Below we will further specify and refine the location strategies for the next year expansion in a new city that the company has not yet been involved.

 

 

4.        Operations management strategies

 

4.1    City selection: which city to locate?

 

After the manage team’s tour and based on their experiences, we have identified three four major candidate cities: Beijing, Wu Lu Mu Qi, Hong Kong and Chengdu. Below we will apply a location factor rating which refers to a method for identifying and weighting important location factors (Russel & Taylor 2011, p. 302) to the decision making of which city to be chosen to locate the first flag restaurant according to the company’s strategic plan. For the convenience of research, based on the operating needs of TT Fast Food franchise restaurant the below factors are considered as important with different weighting in selecting the city to be targeted.

 

l  Local food culture compatibility

l  Political stability

l  Economic stability and growth

l  Transportation

l  Labor rates

l  Number of customers

l  Construction or leasing costs

l  Availability of sites

l  Strategic importance

 

4.1.1            Explanation of the importance and measurement of the location factors

 

The first location factor is local food culture compatibility which we could define it as degree to which the local people who probably live in a totally distinct food culture background accept the foods offered by TT Fast Food franchise restaurant which are more closed to a Cantonese food culture featured by the preference of cooking steamed food (rather than fired food) with frequent use of herbal materials. The second location strategy is the political stability which usually would not be a location factor for the restaurants in a country, but the China market is an exception, its south north part has relatively less stable political status due to the race extremism and existence of attempts to get the independence. For example, in 2009 vicious race riots in Xinjiang (south north part of China)’s capital, Urumqi, have caused the deaths of over 150 people and shown just what a hash the regime has made of fostering stability (Economist.com 2009). The third factor economic stability and growth which could be measured by the yearly and quarterly economic data and major economic indicators which could be found in the government’s and related departments’ publications. And in term of the location factor of transportation, though related data could be found in the government’s publications, but it would be better for the management team who had visited the candidate cities to score this factor because they had actually experienced how convenient and comprehensive the transportation in the cities would be to support the logistics and customer access. The fifth factor is the labor rate which will influence the direct labor cost of the restaurants because a number of waiter and supervisors would be needed on site to manage the operation. And the next location factor, the number of customers could be able to predict the market potential of the future franchising. And construction or leasing costs is another cost that needs to be taken into consideration because rental usually makes up a large proportion of the fix cost of the restaurants. Availability of sites refers to the availability of good restaurants sites. And the last location factor which could be very influential to the final decision of the choice is the strategic importance that the company attaches to the flag restaurant. In a strategic perspective, for the company could choose a location for a new market though traditional market analysis suggests that the chosen market is not the best option but the choice is within the company’s strategic plan, then it will still be understandable.

 

4.1.2            Location factor rating

 

Score (0 to 100)

Location factorWeightBeijingWu Lu Mu QiHong KongChengdu
Local food culture compatibility

0.1

70

65

90

80

Political stability

0.35

99

76

90

88

Economic stability and growth

0.065

98

76

80

88

Transportation

0.1

80

65

90

75

Labor rates

0.05

75

85

60

80

Number of customers

0.045

95

80

97

89

Construction or leasing costs

0.05

70

88

55

80

Availability of sites

0.04

76

88

78

85

Strategic importance

0.2

90

95

80

85

Table 2 Location factor rating

Solution

(The weighted scores for each site are computed by multiplying the factor weights by the score for that factor.)

 

Weighted scores

Location factorBeijingWu Lu Mu QiHong KongChengdu
Local food culture compatibility

7

6.5

9

8

Political stability

34.65

26.6

31.5

30.8

Economic stability and growth

6.37

4.94

5.2

5.72

Transportation

8

6.5

9

7.5

Labor rates

3.75

4.25

3

4

Number of customers

4.275

3.6

4.365

4.005

Construction or leasing costs

3.5

4.4

2.75

4

Availability of sites

3.04

3.52

3.12

3.4

Strategic importance

18

19

16

17

Total score

88.585

79.31

83.935

84.425

Table 3 Location factor rating scores

 

Based on the location factor rating, all the four candidate cities have final good results, and Beijing has the highest score followed by Chendu and Hong Kong, the last two share very similar overall scores in term of 83.935 and 84.425 indicating that the two cities have similar overall location conditions. Hence, we have selected Beijing as the next city to be exploited.

4.2    Design for the first flag restaurant

 

Below we will focus on the decision making of which site among the available sites in the selected city to be chosen to locate the first flag restaurant according to the company’s strategic plan and also how some the related location strategies would be defined.

 

4.2.1            Operating size

 

Though the franchise operation requires a lot of procedures and activities to be standardized, the operating size of the TT Fast Food franchise restaurants could be differentiated based on the needs. This is easy to understanding because even not every McDonald and KFC restaurant would be in the same size and a large shopping mall tends to have a bigger sized McDonald because the number of customers is large. As for TT Fast Food franchise restaurant, its first flag restaurant in Beijing should be in the largest size to attract investors to join the franchise scheme. And currently the large size design of the restaurant would be 450 square meters with two floors which would be adopted in the new flag restaurant in Beijing.

 

 

 

4.2.2            Site identification criteria

 

A site address: no. 7, south sporting ground road, chaoyang district, Beijing, China 100000
 VisibilityParkingIngress[2]AccessSynergy[3]Security
Excellent  
Good     
Average      
Poor     

Notes: Building is new, visibility is excellent

Table 4 Site A location features

 

B site address: no. 6, south stadium road, haidian districut, Beijing, China 100000
 VisibilityParkingIngressAccessSynergySecurity
Excellent      
Good 
Average     
Poor      

Notes: Building is existing post office, need remodeling

Table 5 Site B location features

 

 

 

C site address: level 2, no. 27, college road, haidian districut, Beijing, China 100000
 VisibilityParkingIngressAccessSynergySecurity
Excellent      
Good    
Average   
Poor     

Notes: The shop is an old one, but with good customer access.

Table 6 Site C location features

 

D site address: no. 33, east lotus road, xicheng district, Beijing, China 100000
 VisibilityParkingIngressAccessSynergySecurity
Excellent      
Good      
Average  
Poor    

Notes: Building is old and also need remodeling as well

Table 7 Site D location features

 

The above location feature or characteristics analysis provides comparisons in a list of five important site characteristics which are generally considered to be important for a restaurant’s operation (Arduser 2003, p. 91). Based on the results, site A would be the best option for new restaurant location though more analysis such as cost analysis is needed before the final decision could be made.

 

5.        Critical thinking about the findings and applied strategies

 

The most obvious disadvantage of our location strategies identification process is that we are over relying on the management’s evaluation on the cities based on their experience and judgments which means that more analytical tool and facts findings should be done to support the choices.

 

6.        Conclusions

 

Based on the analysis above, we are able to draw some conclusions in response to the project objectives that we had set in the beginning. Regarding the major external and internal challenges faced, internally the company has a limited management team that could not support an ambitious expansion in more than two cities at the same time and externally the high food price and high industrial competition creates pressure for the company’s operation though the market is still very promising to be further penetrate and developed. Based on our finding, we have identified Beijing as the most appropriate considering nine key factors which include the strategic importance of a city to the company. We also managed to conclude preliminarily that Site A in Beijing could be a possible best option that is available to the company but still more analysis will be necessary to finalize the choice.

 

 

Reference

 

Analoui, F. & Karami, A. 2003, Strategic management in small and medium enterprises. London: Thomson Learning. p. 83

 

Arduser, L. 2003, Restaurant site location: finding, negotiating & securing the best food service site for maximum profit. Florida: Atlantic Publishing Group, Inc. p. 91

 

Bbc.co.uk 2011. China inflation at 34-month high on rising food prices. Accessed on 04 Dec 2011 [online] http://www.bbc.co.uk/news/business-13758784

 

Economist.com 2009. Beijing’s nightmare: The Uighurs’ revolt undermines China’s idea that its people will always happily trade freedom for prosperity. Jul 9th 2009. Accessed on 04 Dec 2011 [online] http://www.economist.com/node/13988502

 

Hill, c. W. L. & Jones, G. R. 2008 Strategic Management: An Integrated Approach. p. 54

 

Hsu, C. H. C. & Powers, T. F. 2002, Marketing hospitality, New York: John Wiley & Sons, Inc

 

Investmentu.com 2011. Fast-Food Culture Grows in China. February 14, 2011, Accessed on 04 Dec 2011 [online] http://www.investmentu.com/2011/February/fast-food-culture-grows-in-china.html

 

Oswald, L. J. 2011, The Law of Marketing. Mason: South Western, Cengage Learning. p. 155

 

Phadtare, M. T. 2011, Strategic Management Concepts and Cases. New Delhi: PHI Learning Private Limited. p. 85

 

Porter, M. E. 1980. Competitive strategy: techniques for analyzing industries and competitors. New York: The Free Press.

 

Russel, R. S. & Taylor, B. W. 2011, Operations management. 7th edn, Danvers: John Wiley & Sons. p. 302

 

Tradingeconomics.com. China consumer prices index average. Accessed on 04 Dec 2011 [online] http://www.tradingeconomics.com/china/consumer-prices-index-average-imf-data.html

 

Ttjyw.net 2010. New product and top products. Accessed on 04 Dec 2011 [online] http://www.ttjyw.net/

 

Ttjyw.net 2011. Company introduction. Accessed on 04 Dec 2011 [online] http://www.ttjyw.net/about.asp?abt_id=1

 

Xinhuanet.com 2011. China revalues its development cost. Accessed on 04 Dec 2011 [online] http://news.xinhuanet.com/english2010/video/2011-08/01/c_131022744.htm

Appendix 1.0 Survey on the management team members regarding the evaluation of the candidate cities

 

Thank you for participating this survey, please range the importance (weight) of the nine selected city location factors and also score the four cities in each location factors to help identify the best city to be exploited in the next strategic expansion plan.

Score (0 to 100)

Location factorWeightBeijingWu Lu Mu QiHong KongChengdu
Local food culture compatibility

 

 

 

 

 

Political stability

 

 

 

 

 

Economic stability and growth

 

 

 

 

 

Transportation

 

 

 

 

 

Labor rates

 

 

 

 

 

Number of customers

 

 

 

 

 

Construction or leasing costs

 

 

 

 

 

Availability of sites

 

 

 

 

 

Strategic importance

 

 

 

 

 

Thank you for your time!



[1] When the component that is purchased by the buyers is priced high and forms a higher fraction of the cost of the buyers’ products, buyers are more likely to bargain.

[2]  Ingress refers to an entrance.

[3] Synergism or synergy effect refers to the extent to which the business will increase because of the proximity of other businesses.

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