Chipotle's Chinese Market Entry: Risk Analysis and Control Strategies

This report provides a comprehensive risk assessment for Chipotle Mexican Grill's potential entry into the Chinese fast-food market. The analysis identifies and ranks the top ten risks, including extensive competition, low-price expectations, cultural resistance, foreign exchange risk, supplier power, demand for sustainability, expectations for quality customer service, losing customers to new entrants, demand for healthy food, and legislative actions. The report then proposes risk management strategies for each risk, utilizing the four main approaches: risk avoidance, risk acceptance, risk transfer, and risk mitigation. For instance, to address extensive competition, the report suggests risk mitigation through menu differentiation by including authentic Chinese recipes. The report emphasizes the importance of adapting to local market conditions and leveraging various risk management techniques to ensure Chipotle's success in the Chinese market.

Introduction
In today’s globalized business era there are multiple internal an external risks which directly and
indirectly impact the projects’ success or failure. The risk is basically the uncertain condition or
event which can adversely impact at least one objective of an underlying project. In this regard,
risk management is significantly important no matter in which industry the project is about to be
executed. The risk management is the process of identification and assessment of risks associated
with a project and managing those risks for minimizing or mitigating the impacts of those risks
on project. The project selected for conducting the analysis of top 10 risks and proposing the
risk management strategy based on risk controls for identified risk is Chipotle Mexican Grill’s
entrance it Chinese fast food industry. Chipotle has shown exponential growth in UK, US,
Canada and many other countries, and now it is entering into Asian Fast Food industry and for
this, China is one of the most attracting region for global expansion due to the growth of its fast
food industry (Sozzi, 2014). In this regard, the underlying report is aimed at identifying and
ranking top ten risks in list which Chipotle is likely to face in Chinese fast food industry and
application of four risk managements strategies including risk avoidance, risk acceptance risk
transfer and risk mitigation to propose controls for all of the top 10 risks.
Risk measurement and ranking (“Top ten” risk list)
Rank Risk
1 Extensive Competition
2 Expectations of low prices

3 Cultural resistance
4 Foreign exchange risk
5 Power of suppliers
6 Demand for sustainability
7 Higher expectations for quality customer services
8 Losing customers to new entrants
9 Demand for healthy food
10 Legislative actions
Development of controls for the top 10 risks considering the 4 strategies of Risk avoidance,
Risk acceptance, Risk transference, and Risk mitigation
After identification and ranking of risk that Chipotle is likely to experience in China, this part of
the report is based on responding to these risks based on four main response strategies including
risk avoidance, risk acceptance, risk transfer and risk mitigation. The risk avoidance is the
strategy of making the changes into the strategy to avoid the risk and it is implemented when the
risk is likely to have significantly negative impact on the project outcomes. The risk acceptance
is the risk management strategy under which the project managers accept the risk and this
strategy is adopted when risk have less likelihood of occurrence or likely to have small impact.
The risk transfer is the risk management strategy under which, the risk is transferred when

commonly cannot effectively respond to it and neither avoid it. To transfer the risk the third
party services are hired and risk is transferred to third parties. On the other hand, risk mitigation
is another very important and commonly used risk management strategy where risk management
techniques are employed to limit the impact of a risk so that if it does occur, its impact can be
reduced and controlled and negative consequences can be prevented.
Risk 1: Extensive competition
The extensive competition is ranked as the top risk which can adversely impact Chipotle’s
business in China. This ranking has been given to this risk because Chinese fast food industry
has grown by 11.1% and has reached revenue of 17 billion Dollars in 2018. Due to the
attractiveness of this industry many leading international players are already operating in China.
McDonald, Yum, Ting Hsin International Group, and many other leading brands have already
established their market in Chinese fast food industry and such competiveness can have adverse
impact on sales of Chipotle (IBIS World, 2018). The four risk management strategies include
risk avoidance, risk acceptance, risk transfer and risk mitigation. This risk cannot be accepted,
nor it could be transferred (Hussein, Ahmad, and Zidane, 2015; Too, and Weaver, 2014).
Moreover, this risk can also not be completed avoided because competition is already revealing
into this industry and is likely to sustain in the future as well. So under these circumstances, the
most suitable strategy for addressed and controlling this risk is the risk mitigation strategy so that
when this risk will impose pressure on Chipotle it will be able to mitigate the negative
consequences. For mitigating the risk, Chipotle has an opportunity to differentiate itself from
other fast food brands by including some authentic Chinese recipes in its menu (PMI, 2005; Too,
and Weaver, 2014).

Risk 2: Expectations of low price
The second risk that has been identified after examining the project is the expectation of low
prices from Chipotle by the Chinese fast food consumers. It is a risk which can directly impact
the sales volume and profitability of Chipotle as when Chinese customers will find Chipotle
expensive hey will not buy from it and will switch to the other brands. This risk is very likely to
occur because Chipotle is having higher prices in UK and USA as compared to Chinese
restaurants. But this highly likely risk can be avoided. This is the risk which is under control of
Chipotle and it can adopt risk avoidance strategy to address it. Chipotle can completely avoid or
eliminate this risk by adopting the strategy of low price leadership as it will quickly attract the
Chinese customers and will convince them to try a new international brand (Harrison, and Lock,
2017; Cleden, 2017; Harris, 2017; Heagney, 2016).
Risk 3: Cultural resistance
Cultural resistance has been ranked as the third most impactful risk. This risk can leave
significant impact and is likely to occur because the Chinese cousin insignificantly different from
the western cousin and Chinese Population can also resistant Chipotle’s menu because it is a
Mexican Grill restaurant and Mexican cousin is not similar to Chinese cousin. But this risk
cannot be avoided because Chipotle cannot completely change its menu and be a new brand in
China as it also has to sustain its own brand image and recognition nor can this risk of accepted
or transferred as it cannot be ignored. This risk can also be responded to by adopting the risk
mitigation strategy (Nishat Faisal, Banwet, and Shankar, 2006; Talluri, Kull, Yildiz, and Yoon,
2013). Chipotle can respond to this risk by introducing some Chinese cousin item in is menu and
offer a combination of Mexican and Chinese menu. In addition to this, the cultural resistance can

also be caused by the taglines, language, and staff. So another strategy for mitigating the risk is
through hiring local Chinese staff at Chipotle’s franchises in China so the Chinese population
can relate to this chain instead of rejecting it due to its western culture. In addition to this, the
risk of cultural resistance to accept Chipotle can be reduced through marketing in Chinese
language (Walker, Grey, and Raymond, and Cooper, 2013; Milosevic , Patanakul, 2005).
Risk 4: Foreign exchange risk
All of the risks that have been discussed until now can have strategic and indirectly some
financial negative impacts on Chipotle, but the foreign exchange risk is a risk which can directly
impact Chipotle’s profitability. The foreign exchange risk occurs due to the fluctuations in value
of the currencies and it is likely to impact Chipotle because its financial transactions are
denominated in foreign currency and not in Chinese Yuan. Chipotle is a US based fast food
chain which is entering into China and it will earn in Chinese currency in China, so if it will
expose to any significant fluctuations in the exchange rate it can directly impact Chipotle’s
revenues and earnings. This is a risk which could be responded to through the use of risk
avoidance strategy and Chipotle can use hedging to prevent the negative impact of exchange rate
fluctuations. It can also use forwards or future contracts or swaps to manage this risk (Maheu &
McCurdy, 2007).
Risk 5: Power of suppliers
Chipotle cannot source everything so it need to source the materials for its food from within
China. As it is a western brand, Chipotle is having a risk of encountering higher bargaining
power of Chinese supplies. Chinese food and material suppliers can charge higher prices which
can delaine Chipotle’s revenues and can also force to raise the prices which is not feasible in

Chinese fast food industry where population already expects lower prices. So this risk which can
have substantial impact on Chipotle can be responded to through the risk transfer strategy. The
risk transfer strategy has been chosen so that chipotle can hire the services of a third party
organization which can handle the suppliers and deliver supplies to Chipotle. So it will outsource
the supply side of its supply chain to transfer the risk of bargaining power to supplier to the
contacting company (Aliza, Stephen, and Bambang, 2011).
Risk 6: Demand for sustainability
Chinese population is having significant awareness and demand for sustainability. Chipotle could
be judged by the society based on its social, environmental as well as economic responsibility
and sustainability. The risk of environmental sustainability can be accepted and Chipotle can
accept that if this risk will occur, it will deal with it in future by adoption of a relevant marketing
strategy to position itself sustainable and responsible. But the risk of social sustainability demand
cannot be neglected and Chipotle can adopt the risk avoidance strategy by responding to needs of
its employees and use relevant motivational theories and position itself highly responsible
towards its employees.
In the competitive business landscapes of China it has become significantly challenging for the
businesses to form a sustainable competitive advantage on the basis of product differentiation or
pricing strategies or any other resources. In these business scenarios, the human resource
management plays a central role to develop and keep the employees motivated and forming the
sustainable competitive advantage on the basis of this most important intellectual capital. To
attain the motivational goals there are many motivational theories and strategies that couple
suitable for the businesses depending upon their size, nature and the operations. Chipotle can

follow the expectancy theory of motivation which is based on an idea that an employee’s
workplace behavior is dependent upon what he/she expects as a result of their workplace
behavior. People decide what to do and how to do it based on what they will get as an outcome.
so as Chinese employees prefers t work for longer hours if they know that they will get pay rise
or extra time for their additional work so Chipotle will adopt a risk avoidance strategy by
adopting social sustainability initives based on expectancy theory and offer extra time or work
life balance facilities to its employees.
Risk 7: Higher expectations for quality customer services
Chinese population expected quality in almost everything and expectation of the quality
customer services from food brands is not new in this society. It is a social trend which can turn
out to be a risk for Chipotle and this risk can be responded to by the adoption of risk transfer
strategy. This risk management strategy is not commonly used, but Chipotle will use to transfer
the risk and its management to a third part customer service organization. as Chipotle is not well
aware of the culture of China, it will be feasible for Chipotle to after this risk by hiring the
services of third party customer service department based on local Chinese customer service
agents so that more relevant and more quality services can be delivered to the. Another aspect of
customer services is that Chinese customers also expect quality services deliver to the customers
on the digital communication channel such as social media channels. In this regard, the social
media services can also be hired as third party service providers and risk could be transferred to
them. These customer service or social media marketing third parties will be responsible for the
management of risk and will enable Chipotle to focus on the other important business functions
(Hajmohammad, and Vachon, 2016; Kerzner, and Kerzner, 2017).

Risk 8: Loosing customers to new entrants
The examination of the trends prevailing into Chinese fast food market has revealed that the risk
of entrance are low in the Chinese fast food industry due to which the independent new fast
food brands are rapidly entering into this market. These independent operators are imposing
significant threats to the leading global brands. The small scaled businesses are attracting the
Chinese population and main competitors to Chipotle are not KFC or other global brands but the
new entrants and street vendors. These domestic players are offering Chinese food and looking
for expansion and developing their brads and some of them are also offering western style food
at the cheaper prices. It is important to be taken into consideration that 84.2% share of Chinese
fast food industry is covered by the independent fast food brands (Andre, 2014). Considering
these statistics it is evident that Chipotle is likely to struggle and have risk of looking its
customers to the new entrants which are offering divers menu at cheaper prices and also have the
local experience and cultural awareness (Kerzner, 2013; Pryke, and Smyth, 2012).
This risk of losing customers to new entrants, the strategy of risk mitigation is suitable. Chipotle
cannot completely avoid his risk as it is not in its control to eliminate risk of new entrants. It
cannot accept it and or it can transfer it to a third party. So Chipotle has to mitigate this risk by
the use of a differentiation strategy. As new entrants are having low price the customers can
easily get attached to them. In response to this, Chipotle can differentiate itself from rest of the
new entrants based on quality and international standards. Another opportunity is to transform
the risk of demand of suitability as an attractive opportunity and positioning itself socially and
eventually sustainable and in compliance with the ethical codes of conduct. By differentiating

itself from rest of the new entrants, Chipotle can mitigate the risk of losing the customers
(Olsson, 2008; Caron, 2013).
Risk 9: Demand for healthy food
Although the demand of healthy food is a major concern in Chinese fast food industry, but this is
ranked as risk no 9 because it is not having significant impact on chipotle as its menu is already
much healthy as compared to other fast food brands. This risk is impactful but it is not likely to
occur in case of Chipotle, because its Mexican food menu is based on healthy ingredients. Even
if demand for healthy food will increase in China, Chipotle can avail it as an opportunity. In
response to this risk, the Chipotle can adopt the strategy of accepting the risk. This risk is
definitely prevailing in the market chipotle is operating, but this risk is not likely to negatively
impact Chipotle so this risk can be easily accepted (Bourgault, and Robert, 2009; Biesenthal,
and Wilden, 2014).
Risk 10: Legislative actions
Similar to the risk of demand for healthy food, it is a huge risk in Chinese fast food market but
this risk has been ranked at number 10 because it is not likely to impact Chipotle as it is
following all local, regional, national and international legislations in all of the countries in
which it is operating. There is no wonder that this risk is ranked as least impactful or least
important to be responded to but, it will not be accepted because of the cost of avoiding or
accepting it. Instead, risk avoidance strategy will be adopted beforehand, and Chipotle will
eliminate the risk of legislative actions against it by staying in compliance with all applicable
legislative frameworks and laws. For staying secure from this risk, the best approach is risk
avoidance because negligence of any legislation can cause the monetary as well as strategic

damage to Chipotle which it cannot afford in highly competitive fast food market of China
(Matuleviciene, and Stravinskiene, 2015; Müller, and Söderlund, 2015; Baldry, 1998).
Conclusion
The underlying study has adopted a critical and comprehensive approach to analyze the project
of Chipotle to enter into Chinese fast food industry and 10 top risks have been listed. Each of the
risk has been analyzed and a relevant risk management control and strategy has been proposed
and the strategic choices have been backed by the relevant theories and literature. The analysis
has revealed that Chipotle is likely to face many challenges and risk in China such as risk of
Extensive Competition, Expectations of low prices, Cultural resistance, Foreign exchange risk,
Power of suppliers, Demand for sustainability, Higher expectations for quality customer services,
Losing customers to new entrants, Demand for healthy food, and Legislative actions. The four
risk management strategies of risk acceptance, risk avoidance, risk transfer and risk mitigation
have been consisted to develop the controls for these top ten risks. The detailed analysis has
revealed that Chipotle which is a western Mexican Grill fast food restaurant is likely to face
many risks in Chinese fast food industry where demands, expectations, and many other factors
are significantly different but if it will apply the most suitable and result oriented risk
management strategies it can not only mitigate , avoid, accept or transfer the risk but can also
avail some very attractive growth opportunities which can help it in availing and sustaining a
strong strategy and financial position in fast food industry of China.

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