Question

Overall, your team will study the case study provided and then conduct additional research on the country of China in order to get information to address the following questions:

How big is the Chinese market? What is the real GDP adjusted for Purchasing Power Parity?

What is the current state of the economy that you have chosen? Collect the latest available data on nominal GDP, real GDP, per capita real GDP, unemployment rate, inflation rate, interest rates, exchange rate(s), and any other important macroeconomic data.

How is this economy doing? What is the growth rate of the real GDP? What is the trend in this variable?

How fast is the per capita real GDP growing? This is an indication of the buying power.

Is the country experiencing an inflationary or a recessionary gap?

What kind of macroeconomic policy should this country follow?

Can you find the relevant data for the last couple of years or more?

At what stage of the Business Cycle is this country presently in? Is there an inflationary or recessionary gap?

What kind of fiscal and monetary policies is this country presently following? Expansionary or contractionary?

What is the price elasticity of demand for fast food in China? Is it elastic or inelastic?

How are the Western fast food companies doing in China? McDonald’s, Starbucks, and KFC are here. Can Tim Hortons learn something from the experiences of these companies in China?

What is the Income Elasticity of demand for coffee and fast foods in Canada? Can we assume that in China the elasticities will be somewhat similar?

What other issues with regards to the social, political, labour, or environmental practices in China should be taken into consideration by THI?

Is it going to be easy to find skilled persons to work at THI?

Your ultimate goal is two-fold:

to provide the best evidence to support your recommendations to Tim Hortons company; and

to do so in the most compelling, informative, and creative way you can.

CASE STUDY: Should Tim Hortons Expand into the Chinese Market?

Tim Hortons Inc. (THI)

Tim Hortons, arguably, is the best known Canadian brand. Its restaurants provide premium coffee, espresso-based hot and cold specialty drinks, cappuccinos and espresso shots, fruit smoothies, home-style soups, fresh baked goods, grilled Panini and classic sandwiches, wraps, soups, prepared foods, and other food products.

THI was founded in 1964 in Hamilton, Ontario, by Canadian hockey player Tim Horton. Tim Hortons franchises spread rapidly and eventually overtook McDonald's as Canada's largest food service operator. The company opened twice as many Canadian outlets as McDonald's and system-wide sales also surpassed those of McDonald's Canadian operations as of 2002. Tim Hortons commands 76% of the Canadian market for baked goods (based on the number of customers served) and holds 62% of the Canadian coffee market (compared to Starbucks, in the number two position, at 7%).

As of December 30, 2012, the company had 4,264 restaurants, including 3,436 in Canada, 804 in the United States, and 24 in the UAE and Oman. Tim Hortons’ international expansion strategy has been categorized as careful and slow. In comparison, Starbucks, a U.S. based competitor, has been very aggressive in international markets for several years, and has already expanded into China.

However Tim Hortons' international presence has some interesting features. To provide moral support to the Canadian soldiers in Afganistan, it opened a restaurant on a military base outside Kandahar, Afghanistan. Two more outlets are located in military bases at Fort Knox, Kentucky, and Naval Station Norfolk, Virginia. Tim Hortons' other international expansions include a small outlet at the Dublin Zoo. Tim Hortons also made a deal with the Spar convenience store chain in the UK and Ireland, resulting in Tim Hortons coffee and donuts being sold at small self-service counters in many Spar stores.

Its busiest branch is located in Fort McMurray, Alberta; its location in Iqaluit is the northernmost store.

In November 2010, Tim Hortons extended Interac debit payment system acceptance to most of its stores. The company previously began accepting Interac in its stores in Western Canada in 2003 and, later, MasterCard and MasterCard Pay Pass across most of its stores in 2007. The company often indicated the delay of broader or wider electronic payment acceptance was to "ensure speed of service." In 2012, Tim Hortons began accepting Visa cards.

Twenty years ago, Tim Hortons used to sell mainly donuts and coffee but today it offers breakfast and lunch menus. Product lines have been diversified and the stores are getting better furniture and free Wi Fi. Investors in THI stocks have been rewarded very well.

China

Since initiating market reforms in 1978, China has shifted from a centrally planned to a market based economy and experienced rapid economic and social development. GDP growth averaging about 10% a year has lifted more than 600 million people out of poverty.

With a population of 1.3 billion, China recently became the second largest economy and is increasingly playing an important and influential role in the global economy.

Yet China remains a developing country and its market reforms are incomplete. In 2011, China’s gross national income per capita of $4,940 ranked 114th in the world; over 170 million people still live below the $1.25-a-day international poverty line. With the second largest number of poor in the world after India, poverty reduction remains a fundamental challenge.

Rapid economic ascendance has brought on many challenges as well including high inequality, rapid urbanization, challenges to environmental sustainability, and external imbalances. China also faces demographic pressures related to an aging population and the internal migration of labor.

Significant policy adjustments are required in order for China’s growth to be sustainable. Experience shows that transitioning from middle-income to high-income status can be more difficult than moving up from low to middle income.

China’s 12th Five-Year Plan (2011-2015) forcefully addresses these issues. It highlights the development of services and measures to address environmental and social imbalances setting targets to reduce pollution, to increase energy efficiency, to improve access to education and healthcare, and to expand social protection. Its annual growth target of 7% signals the intention to focus on quality of life rather than pace of growth.

To that end, your group will need to produce a package consisting of the following:

A 6-7 page research essay (use same criteria as in the Individual Research Essay) in which all your information about THI and the Chinese market will be presented.

An accompanying media presentation of your findings. This can take any form your group has the skills to produce, remember it is where your package will really distinguish itself from the others.

This is not to be a live presentation, but the creation of some sort of digitally submittable file that will help support and sell your findings to your client. (If you need motivation, imagine that your client will only pay for the most interesting and engaging package submitted – your reputations are at stake!)

Your additional file may take the form of a PowerPoint presentation, an annotated photo collage, an audio or video recording – anything goes. Just be sure that you have permission to use any copyrighted materials (photos, audio, or video) because these packages will be shown to the class online, and in our online world, unlike the brick and mortar classroom, that constitutes “republishing” which is a copyright infringement unless you have permission.

Answer 1

Using Purchasing Power Parity to analyze buying power of Chinese market:- Purchasing Power Parity is a theoretical exchange rate that allows you to buy the same amount of goods and services in every country. PPP helps to understand which is the largest economy in the world in order to make investment decisions. For it is estimated that China's GDP in 2017 was $23.1 trillion which was higher against the US GDP of $19.4 trillion. Thus according to PPP China is world's largest economy.

Effect of exchange , inflation and interest rates :- For example China produced 127 trillion yuans worth of good and services in 2017 . Using the exchange rate of 6.37 yuan/ dollar, it's sums up to $11.97 trillion, however the US produced $19.36 trillion Now when the exchange rate changes China's GDP will also change With increase in inflation in China the prices will rise while the real interest rate will fall leading to depreciation of Yuan currency leading to increase in exchange rate.

Unemployment rate in China and it's affects:- Now we use the example of Big Mac of Mc Donald's .In 2018 US Big Mac costs $5.28 while in China the same burger costs $5.28 Because the price of the product depends on local labour and restaurant rental costs. Due to high unemployment in China , the labour is very cheap which helps to reduce the labour cost and thus the Big Mac costs less in China as compared to United States Expected price and income elasticity in China- The Chinese markets face highly elastic price and income elasticity .As the incomes are rising Chinese consumers are changing their diet and are demanding greater quality , convenience and safety of food While the income disparity is also very high , lowering the prices attract more and more customers

Modifications in menu :- Yes , THI should definitely make modifications in their menu in respect to addition of traditional sauces, kimchi salads and taste development salts in order to suit the Chinese taste Competition and it's analysis- The main competition in Chinese markets are from local producers as they have added advantage of market knowledge, own land , cheap labour and old customer base. Should THI enter the market:- Yes , China's market is the largest market in the world and with the highest population of the world it's provide a great opportunity to develop a large consumer base Tim Hortons can definitely enter the market by making some changes in its menu , partnering with the local producers,utilising Chinese labour and using locally grown produce to reduce costs and maximize profits.