New store location strategy for Domino’s Pizza China

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New store location strategy for Domino’s Pizza China

 

1.      Introduction of Domino’s Pizza China

 

1.1    History

Domino’s Pizza is the second largest franchised pizza chain in the U.S.A., and it is also self-proclaimed as a world leader in pizza delivery. The history of Domino’s Pizza is similar to its rival Pizza hut; two brothers started it with borrowed equity in the sixties. Tom and James Monaghan bought a small Michigan Pizzeria called Dominick’s, which was jointly run by them until James traded his share for a second hand car. Tom revitalized the image by changing the name to Domino’s Pizza (Recipepizza.com 2010). The company opened the first Chinese Domino’s Pizza store in Shenzhen in 1995, a city with no history of pizza at that time (Counihan 2008) though it was a failure, and later the company has been concentrating in the market of Shanghai and Beijing only.

1.2    Expansion in China

Though the company targets at becoming the world leader in pizza delivery, its international expansion in the Chinese market seems to be slow in progress than the major competitors such as Pizza Hut. At present, the company only has its business in the two largest cities in China: Beijing and Shanghai.

 

1.3     Domino’s 30-minute guarantee

 

The Domino’s 30-minute guarantee gives out promises to the customers that from the minute when they call in or make order online it takes maximum 30 minutes for the customers to receive the pizza. It is believed that the Domino’s 30-minute guarantee is in Domino’s brand DNA (Bogusky & Winsor 2009, p. 81) which differentiates it from other fast food delivery services. Though it is supported by today’s advanced ordering technology available, the Domino’s 30-minute guarantee still require the stores to be located in locations that meet the necessary requirements such as proximity with customers.

Figure 1 The most recent store in Shanghai: the Wu Ding Store

The company came here in 2008 but, unlike Papa John’s or Pizza Hut, made barely a ripple in the foreign-outlets-coming-to-China news. It’s probably because their first location was near Century Park on Huamu Lu in Pudong which located along the east side of the Huangpu River and administered as the Pudong New Area. While they’ve opened up more stores since then, they tend to be still pretty out of the way for most expats (Putuo, South Xuhui, and more Pudong). With the most recent store opened in Jing’an district (shanghaiist.com 2011), together now the company still has only 4 store in Shanghai, a city with a total population of over 23 million as of 2010 (National Bureau of Statistics 2011). Now the company aims at further penetrate into the Shanghai market and attract more spotlight from the media and the customers in term of opening more stores.

 

1.4    Geographical facts of Shanghai city


Table 1The regional ranking by chain catering penetration rate in 2006

Source: China’s ministry of commerce

Shanghai is China’s most comprehensive industrial and commercial city, ranking the first in population and population density. As a tourist city, it attracts travelers from both home and abroad. Weather during November to April is the coldest and temperatures range between 3.5C to 13.7C. Climate in July and August starts to turn warm and temperature can go back to 28C (Moveandstay.com 2011). Statistics showed that the average yearly income of non-private sector employees in Shanghai was 71,874 yuan last year, ranking first in China followed by Beijing workers which ranked second with an average annual salary of 65,683 yuan (peopledaily.com.cn 2011). In term of the eating culture and behavior, Shanghai has been one of the most front-line cities in accepting the new fast food culture, mostly in form of chain restaurants. As the table reflects, in 2006 Shanghai was ranked the second in the chain catering penetration rate suggesting that customers in the city are among the people who are more acceptable to the western fast food.

 

 

1.5    Location, location, location

There are many factors that affect where people would like to dine, and according to Sharon L. Fullen (2003, p. 16), the most three important factors are location, location and location. And location considerations break down into three categories: Physical – is there enough physical space for the operations? Is it conveniently located for customer? Emotional – does the location feel safe and comfortable and fit in the food service style? Need – does the neighborhood need another restaurant of this type? Are there enough of potential customer nearby?  With the importance attached to a restaurant which could be more important to a larger sized chain restaurant like Domino’s Pizza China. This study will focus on developing a location strategy for a new store for Domino’s Pizza China in Shanghai to further expand the business in the most prosperous city in China.

 

2.        Current challenges

 

2.1    Fierce competition in the fast food industry

 

Market competition refers to the direct and indirect competitive threats faced by the firm (Thomas & Grensing-Pophal 2001, p. 55). The high level of competition in an industry could be a substantial threat and challenge to the companies operating in the industry, and the fast food sector in China is not an exception. Here we will check the level of competition within the fast food industry in China using the five forces model which is a framework for industry analysis and business strategy development formed by Michael E. Porter and by analyzing the five critical forces in the perspective of how they limit the profit the industrial profits (Ahlstrom & Bruton 2010, p. 131). The five competitive forces are: rivalry among the existing players, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, and entry of competitors. In following we will perform a competitive check to see how these five forces limit the profit making of the industry.  

 

2.1.1            Rivalry among the existing players

Table 2
 MacDonald and KFC dominate the Chinese fast food industry

Source: Lam, Chan, Thy, Xu, Parwani, Yu 2009

 

Rivalry among the existing players or the intensity of rivalry between competitors in an industry depends on the structure of competition, for instance, rivalry is more intense where the number of competitors is large and they are equally sized, and the degree of differentiation of the switching cost also help define the intensity of rivalry in the industry (Pradhan 2007). In China fast food market is a very competitive one with so many organizations trying to be the best. For years however, McDonalds and KFC has been at the top of this market without any real challengers. The likes Burger King and Wendy’s are growing very quickly and could cause strong competition for the industrial leaders in years to come.

 

In term of the major competitors in the industry, they have been very ambitious in expanding the footprint in China. According to the news, Chief Executive David C. Novak has touted how Yum’s dedication to ramping up in China has created an infrastructure for fast, efficient growth to come. The company also is building up a Chinese fast food chain and is seeking to acquire another national operation called Little Sheep Group Ltd.  Yum Brands Inc. (YUM) and McDonald’s Corp. (MCD) recently have fueled profitability with breathless expansion in China, where market growth has outpaced the U.S. Yum leads the pack, and it hopes to keep spreading not only with its traditional chains but also with home-grown Chinese brands (wsj.com 2011). And as mentioned above, if there is an absolute market leader with large market share, competitions could be reduced to some degree, but for Domino’s Pizza China because it is positioned to expand the franchised restaurant and compete with the industrial leaders, this will means strong direct competition with the industrial leaders.

 

2.1.2            Bargaining power of suppliers

 

The suppliers group is powerful if they comprise few companies which individually may also be financially stronger than anyone among the buyer group. And also if the products supplied are unique or switching to another product is costly or difficult, it will also add one to the bargaining power of the suppliers (Kühne 2010, p. 35). The bargaining power of the suppliers is relatively low in the fast food industry of China. Firstly, because of the comparably small size and large number of the suppliers to the chain fast food restaurants, there is already fierce competition among these suppliers to strive for the business opportunities to work with large chain food companies in term of partnership; secondly, fast food chain restaurants usually build up long term and consistent partnership with several suppliers and force these suppliers to standardize their products provide better and better products while at the same time bargaining down the price of the supplied products and raw materials.

 

2.1.3            Bargaining power of buyers

 

Buyer power is the capability of buyers, purchasing agents and customers of the industry to influence the price and the terms of the purchase. Concentrated buying groups with large volumes will have a lot of power over the suppliers (Stahl & Grigsby 1997, p. 146). Another factor that strengthens the bargaining power of the buyer is the similarity of the products offered in the industry. As in the fast food industry, products seems to be similar and price is sensitive to customers, therefore the buyers’ bargaining power could be strong though it is not very strong. Especially with the high inflation rate the high food price, customers right now are more and more sensitive to the price changes; as a result the economic conditions actually enhance the customers’ desire to use their bargaining power to get a lower price.

 

2.1.4            Threat of substitutes

 

Substitute products are ones that satisfy the same need despite being technically dissimilar, and substitutes affect industry profitability in the following ways: firstly, they put an upper limit on the prices the industry can charge without experiencing large-scale loss of sales to the substitute; secondly they can force expensive product or service improvements on the industry; and lastly they can render the industry technologically obsolete (Harris 2006, p. 148). But according to the recent news, there is strong and growing demand for the fast food than the substitute such as cooked food in a restaurant, because Chinese consumers may have more spending power, but they also have less time to cook: a perfect recipe for the growth of fast food in China and in urban China, high property prices, long commutes, gruelling working hours, a later marriage age and smaller families all add up to more fast food (Waldmeir 2011). Therefore, we can predict that though there are plenty of alternative products that customers could choose but difficult life and busy work leave them few options, as a result, the threat substitutes could be quite low.

 

2.1.5            Entry of competitors

 

The ease of entry for competitors to enter the market and to start competing is determined by the barriers to entry that may exist (Pradhan 2009, p. 56). The risk of the entry of competitors is high in the fast food industry, especially in China with a rapid growth in the market size of the fast food market. Because the major consumers of the products and services provided by the fast food franchised restaurant are white collar office workers in China, they are willing to pay for a quality and fast food services, thus the profit margin is high in the industry. And the high profit margin of the industry will stimulate more potential competitors to enter into the market. Also there are more and more local and internal normal restaurants want to enter into the franchise business and exploit the Chinese market. As a result for fast food industry, risk of potential competitors could be very high.

 

2.2    Lack of native preference and awareness

 

2.2.1            Pizza delivery is still new in China

 

Pizza Hut was the first restaurant chain to introduce pizza and Western-style casual dining to China in 1990 and the first to introduce pizza delivery to China in 2001. Today, Pizza Hut is the number one casual dining brand in mainland China with over 560 Pizza Hut Casual Dining restaurants in over 130 cities and over 120 Pizza Hut Home Service delivery units (Yum.com 2011). Though under the leadership of Pizza Hub, the pizza as a major food has been introduced to the Chinese customers, but still the concept of pizza delivery is still quite new among the Chinese customers. And in the traditional Chinese restaurant menu, principal food is all about rice, noodles and baozi and pizza is obviously not one of the principal foods.

 

2.2.2            Number of stores

 

Another key challenge that restricts the rapid expansion of Domino’s Pizza China is its small number of established stores. Currently, Domino’s Pizza China is operating in only two cities: Bejing and Shanghai, in Beijing, it has 9 franchise stores in 6 districts and in Shanghai it has 4 franchise stores in two districts. In comparison, McDonald has 144 franchise stores in Beijing and 103 stores in Shanghai. By making this comparison, we can see that the small number of stores has greatly limited the expansion of the business because even within a city the brand is not known to most people, it will be difficult for it to be franchised in a national wide basis. Hence it would be recommended that the company continue to increase its number of stores in the two cities while at the same time seek opportunities to open new franchise stores in other major cities.

 

2.3    Traffic jam and transportation difficulties

 

Traffic jam is a common transportation issue which could be found in major cities around the world but it becomes a major problem recently for the large cities in China which influence heavily the normal life of the people and economic activities. For example, In Shanghai, a city of more than 20 million where new car registrations are restricted to 6,000 monthly, commuter traffic has slowed to six to 10 miles per hour, well under the speed of a bicycle. The traffic’s a mess, even though only 20 percent of all daily trips in Shanghai are by car, compared to 80 percent in U.S. cities (grist.org 2011). In another major city, Beijing, the traffic jam is worse and most probably, there is no other place as jam as Beijing. A British website in the middle of this year released Automotive theme world’s most congested city traffic ranking, Sao Paulo, Brazil and China, Beijing, the first breakdown one or two. Ranked second place in Beijing, China, last year there have been 100 km-long traffic jam phenomenon (f-paper.com 2011). To Domino’s Pizza China like many other fast food franchised restaurants, the expansion of the concept of pizza delivery service is also limited by the heavy traffic jam in the major city of China which reduces the coverage of each store. While a single company or even the whole fast food industry could not possibly change the transportation situation in China, location strategies and logistics management become extremely important to the fast food restaurants.

 

3.        Location strategies

 

With the analysis above, we can see that the company’s challenge faced such as the lack of native preference and awareness, traffic jam and transportation difficulties and the high industrial competition all suggest that rapid expansion would be needed to follow up the pace of the industrial leaders especially in the two existing cities that the company has already entered. And as mentioned above, one of the objectives of this research is to identify a new store location in Shanghai and the relative location strategies for the company’s and franchisees’ future reference. Below we start from the identification of the location factors.

 

3.1    Location factors

 

Location factors refer to those forces that influence a company’s choice of site for a new investment (Clement 2000, p. 60). Below we will talk about some general location factors and also some specific location factors for food service organization.

 

 

 

3.1.1            General location factors

 

3.1.1.1      Proximity to customers

 

While location is an important consideration in the service industry, especially where customers are expected to travel for the receipt of the service (Needle 2010, p. 381), though for Domino’s Pizza China, the company has been focusing on the pizza delivery, but if the location is far away from the potential customers it will lose the opportunity to better promote the store and brand by physical presentation of the store to the customers and also it will lose the customers who are willing to dine on site immediately rather than waiting at home or at office. Including the Domino’s Pizza China, most service providers would prefer to locate their stores with proximity to customers especially when Domino’s Pizza China has a 30 minutes delivery promise which suggest that it will has to include as more customer as possible within the 30 minute delivery range. In this point, locating near to hospitals, office buildings and university and other similar building would be a good choice to get access to some large groups of people who share several nearby locations.

 

3.1.1.2      Labor availability and cost

 

Any company would need to have sufficient labor availability in the place where it operates. And labor availability requests the company to locate in the place where labor needed would be available to the company. Since in the city, the labor availability would not be too much of a problem especially to a city as large as Shanghai, the major concern would be the labor cost that it takes to hire the staffs to fulfill the operation and management needs. As for Domino’s Pizza China, choosing a location near a higher education institute such as a university could be a strategy to get access to a high quality but low price labor because most university students would be willing to work for part time and their pay tend to be low.

 

3.1.1.3      Proximity to suppliers

 

With proximity to the major suppliers, a fast food restaurant would be able to achieve low inventories because of the short transportation time between the suppliers and the company, and also the short distance will enable to keep the product fresh especially to the fruits and vegetable which is more perishable than other raw materials.

 

3.1.1.4      Land cost

 

Land cost could be the leasing cost that the franchisees pay each month to the property owner for using the store site, the benefit of a high traffic and high visibility location must be traded off against high rent payments (goinpostal.com 2010) and expected income of the store.

 

3.1.2            Specific location factors for food service organization

 

3.1.2.1      Proximity to competitors

 

In is believed that though there is competition relationship between different competitors the proximity to the competitors could also be important because more existing shop in that location would mean a larger potential population of customers (Needle 2010, p. 381). Therefore the Domino’s Pizza China could also choose such a location like locations in a shopping mall or a location where there are competitors being built around.

 

 

 

3.1.2.2      Number of customers & Quality of life

 

The number of customers directly influences the service coverage of the Domino’s Pizza China and here the customers should be those who enjoy medium or high quality of life rather than very low quality of life because the pizza product is not targeting at the low income people in China.

 

3.1.2.3      A good transportation system for supply and distribution

 

As mentioned above, the transportation issues such as the very frequent traffic jam in the large cities like Shanghai could bring very bad influence to the normal business operations, and it would be advisable that the company evaluate the candidate restaurant sites’ nearby transportation conditions to see whether the road conditions support the normal supply and distribution activities of the restaurants.

 

3.2    Application of location models

 

3.2.1            Weighted factor rating method

 

A sample of the application of the weighted factor rating method on selecting sites for business expansion of Domino’s Pizza China in Shanghai city will be demonstrated as below:

 

 

 

 

Scores 0 – 100

Location factorWeightSite ASite BSite CSite D
Proximity to customers

0.20

62.5

59

84.5

75.5

Labor availability

0.05

91.5

70

84.5

83.5

Labor cost

0.05

90.5

70

74.5

83.5

Proximity to suppliers

0.10

72.5

59

84.5

70.5

Land cost

0.10

67.5

79

54.5

75.5

Proximity to competitors

0.10

87.5

74

91.5

84.5

Number of customers

0.20

62.5

82

49.5

75.5

Quality of life

0.05

68.5

82

72.5

80.5

Transportation system

0.15

82.5

89

74.5

80.5

Table 3 Scores and weights of location factors

 

 

Weighted Scores

Location factorSite ASite BSite CSite D
Proximity to customers

12.5

11.8

16.9

15.1

Labor availability

4.575

3.5

4.225

4.175

Labor cost

4.525

3.5

3.725

4.175

Proximity to suppliers

7.25

5.9

8.45

7.05

Land cost

6.75

7.9

5.45

7.55

Proximity to competitors

8.75

7.4

9.15

8.45

Number of customers

12.5

16.4

9.9

15.1

Quality of life

3.425

4.1

3.625

4.025

Transportation system

12.375

13.35

11.175

12.075

In Total

72.65

73.85

72.6

77.7

Table 4 Solution of weighted factor rating

 

Hence, according to the weighted factor rating analysis, site D has the highest scores suggesting that based on the analysis on the nine identified factors, D is the best choices though more analysis will be needed in order to make a safe conclusion.

Site D

Site C

Figure 2

Site B

Site A


 Candidate cites in Shanghai for Domino’s Pizza China

 

3.2.2            Break-even analysis

 

The break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has “broken even”. And the break-even analysis is a simple technique that could be used for finding out the potential value of a proposed investment and it identified several strategic and operation decisions: a) identify the sale volume needed to be profitable; b) study the impact of expansion on the operation; analyzing the consequence of investment in equipments (Phadtare 2011, p. 123). Back to the case, besides the location factor analysis, the company could also apply a break-even analysis on the four candidate sites by measuring their fixed cost, approximate break-even sale. Though according to the weighted factor rating, site D is the best options, but if the break-even sale of D and fixed cost is much higher than other three sites, it could be a second choice rather than the best choices.

 

4.        Evaluation of the strategies

 

The above applied location factor rating and break-even analysis provide two major perspectives on the choices of the best sites for new stores to be located: features of the locations and cost of the locations. But it does not means that these two methods are not with pitfalls, for example in term of location factor rating, more factors should be taken into consideration while the weight assigned to different factors should also analyzed carefully to reflect the facts.

 

5.        Conclusions

 

Firstly, location strategic must be in consistence with the strategic business objectives and directions in term of different focus, such as speed of delivery and operating cost saving; secondly, analytical tools such as location factor rating and break-even analysis could be used to finalize the choices of candidate sites; thirdly, the company needs to perform more analysis and evaluations of the possible location choices to reduced the risks and manage the investment expectations.

 

 

Reference

 

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