Tim Hortons in India - Coursework Example

Tim Hortons in India 0 Introduction: Company Analysis Tim Hortons was founded in 1964 in Hamilton, Ontario. The company has grown by leaps and bounds to become one of the largest quick service restaurant (QSR) chains in Canada. Tim Hortons has always focused on providing highest quality fresh food at reasonable prices to its customers. The chain is also well known for its top-notch service and community leadership. The first Tim Hortons restaurants offered only coffee and donuts. However, over the years, the QSR has added numerous products in its repertoire including muffins, cakes, pies, croissants, cookies, soups & chili, sandwiches, bagels, yogurt & berries and cinnamon roll. One of most successful products in Tim Horton’s product assortment is ‘Timbits’. This ‘bite-sized donut hole’ is available in 35 different varieties and has become a household name in Canada. 95 percent of the population in Tim Hortons priority markets is aware of the company and 79 percent of this population finds Tim Hortons convenient. Tim Hortons coffee, hot chocolate, English Toffee and French Vanilla cappuccinos are also available in take-away packs (Tim Hortons, 2014). Majority of the Tim Hortons’ restaurants offer 24-hour drive-thru service. In addition to stand alone restaurants, Tim Hortons is also present in various other prominent locations like shopping malls, universities and highway outlets. Along with Wendys, Tim Hortons is also present in some combo unit locations. 1.1 Industry Analysis The restaurant industry can be broadly divided into two categories; full service restaurants and quick service restaurants (QSR). Tim Hortons operates in the highly competitive QSR category. Tim Hortons enjoys unparalleled market leadership, consumer reach and loyalty in Canada. The restaurant chain commands 42 percent of the QSR traffic which is more than the combined traffic of next 15 chains operating in the country (Tim Hortons, 2014). The Canadian coffee chain faces stiff competition from global behemoths like McDonald’s, Starbucks, Subway and Second Cup. In addition to the big players, there are numerous local and regional players competing to grab a larger chunk of the ‘away-from-home’ Canadian coffee market. Some of Tim Horton’s rivals have added couches and fireplaces in the stores with the objective of encouraging customers to stay longer at the outlets. Tim Horton’s however has lagged behind in this aspect. The recessionary conditions that have persisted in the North American economy for the last few years have made a huge dent in the consumer confidence. The high levels of unemployment have led customers to tighten their purse strings and reduce spending on discretionary items. Tim Hortons has worked assiduously to attain leadership position in the saturated Canadian market. However, during the last few years, the number of people visiting Tim Hortons outlets have been slowly, but surely declining (Toronto Star, 2014). Tim Hortons has 4,485 systemwide restaurants as of March 31, 2013. Of these, more than 3000 Tim Hortons restaurants are situated in Canada. 95 percent of these restaurants are operated by franchisees (Tim Hortons, 2014). Table 1 below depicts the status of Tim Hortons stores located in Canada, United States and other parts of the world. *Source: Data taken from Tim Hortons website and various other articles The chain has already set foot oversees and has more than 800 locations in the United States. It also operated 38 restaurants in the Gulf Cooperation Council (Tim Horton, 2014). Tim Hortons needs to pursue a two pronged strategy; first it needs to arrest the fall in traffic in its existing stores, second, it needs to develop new markets. Going international therefore becomes a sine qua non for Tim Hortons (Vanessa, 2013). Tim Hortons needs to enter an emerging market in order to increase its revenue. Roll out in new markets is part of the wider “Winning in the New Era” strategic roadmap that the company has devised for its growth strategy over the next five years from 2014 to 2018. As a strategy, Tim Hortons has decided to ‘Lead, Defend, Grow’ in Canada, forge ‘A Must-Win Battle’ in United States and ‘Grow, Learn, Expand’ in other international markets (Tim Hortons, 2014). The present paper details a country analysis of India and explores the suitability of the country as a destination for Tim Hortons. India is one of the BRICS nations and has attracted many companies from all over the world. India’s sheer size appears to be a mouthwatering opportunity for many companies. The country has also achieved high GDP growth rate in recent years indicating its robust economic fundamentals. On the face of it, India appears to be an attractive market; however there are certain issues that need to be dealt with. The challenges and risks of doing business in India have been discussed in the ensuing section. 2.0 Market Specific Issues, Challenges and Risks: India 2.1 Corruption and Red Tape India is plagued with corruption and red tape. The menace of corruption is all pervasive and spreads across all walks of life. Organisations find their work stuck up if they do not grease the palms of the corrupt officials. Tim Hortons will have to be wary of this aspect as it can lead to bottlenecks especially at the time of taking necessary approvals for entering and setting up business in India. 2.2 Costly Real Estate The cost of real estate is very high in India. The price of land, especially at prime locations in main cities and towns of the country, is exorbitant. Tim Hortons will have to carefully allocate the capital expenditure as owning land in India may be prove to be very expensive. 2.3 Diversity India is a very large country and is the second most populous country of the world after China. The size of the population at more than 1 billion is a huge attraction for marketers. Tim Hortons however needs to be aware of the fact that India is a land of diverse cultures (Kumar et al, 2013). This diversity means that the religion, food habits, language, tastes and preferences are different in different parts of the country (Euromonitor.com, 2014). Unlike the Americans, Indians do not eat, wear or drink the same thing. Tim Hortons will have to modify the product offerings to take into consideration the local requirements. There are 22 officially spoken languages in the country and hundreds of dialects (India Country Factfile, 2014). Thus, it will not be possible for Tim Hortons to devise its communication strategy in one language. 2.4 Employee Turnover India boasts of a very young and employable population. The cost of labor is low which tends to benefit organizations. However, the high rate of employee turnover proves to be problematic for most companies. It has also been seen that the entry level workforce tends to engage in unethical business practices (Kumar, 2011). 2.5 Legal and Regulatory Issues There are a plethora of laws in the country. At the same time, the law enforcement machinery is weak. It takes a long time to settle a case in the court of law. Thus a company engaged in a legal tussle in India tends to spend considerable time and money in legal battles. While some cases tend to linger on in courts for decades, some high profile cases especially the ones that involve celebrities or powerful multinationals grab immediate media attention (Kumar, 2011). Adverse coverage in the media tends to damage the reputation and goodwill of the person/company concerned. 3.0 Industry Specific Issues Tim Hortons may face the under mentioned industry specific issues in India. 3.1 Menu Preferences The restaurant industry as a whole is confronted with evolving and ever rising expectations from customers. The growing incidence of obesity especially in the developed world has led to a growing awareness and preference towards healthful food options. As a result, restaurants have had to include food and beverages that have natural ingredients, which in turn, add to the health and wellness of the consumers. Tim Horton may have to alter its menu in India keeping in mind these aspects. 3.2 Behavioural Shifts Indian consumers have become increasingly demanding and want top-notch quality products and services. Customers do not mind spending more if they feel that the product is commensurate with their perception of value (Mukherjee et al, 2012). The present day consumers become averse to brands that are even remotely linked to food contamination, food tampering and hygiene and cleanliness failures. 3.3 Technology The world has become a global village due to economic liberalization and globalization. The advent and advancements in technology have made communication extremely easy and fast across the world. Consumers connect and engage with brands through technology. It has been seen that consumers voice their opinion about brands on online social networks. All organizations, including Tim Hortons, must embrace technology in all facets of business to compete successfully. 3.4 Prices of Raw Material The prices of raw material especially grounded coffee are highly volatile. Any upward spike in the prices of raw material can put the profitability of restaurants like Tim Hortons under pressure. The Canadian retailer competes with Starbucks to procure the finest Arabica beans from the suppliers (Calleja, 2010). In the event of shortage in supply, the price of grounded coffee is likely to increase. 3.5 Supply Chain Disruptions Weak links in the supply chain may make the restaurants susceptible to losses. An increase in shipping or transportation cost, reduced supply of a certain food product or beverage, inclement weather, and risks associated with perishable food products are key issues to be taken into consideration. These factors gain more prominence in countries like India where the infrastructure is not very well developed. 4.0 Political and Economic Analysis There are various macro environmental forces that affect the functioning of a business. These forces can be termed as political, economic, social, technological, environmental and legal (PESTEL) forces (Yuksel, 2012). Each of these forces has the potency to increase or decrease the revenue of a company. Sometimes the magnitude of these forces may be so immense that they may threaten the existence of the firm. The ensuing paragraphs carry out a political and economic analysis of India and discuss the implications of these forces on the functioning of Tim Hortons. 4.1 Political Analysis India is the largest democracy in the world. The government is elected through voting for a period of five years. The party which bags the maximum number of votes nominates the Prime Minister who then leads the government. The President of the country has executive power and is independent of the legislature. India has adopted a multi-party system of government wherein there are state-level parties as well as national-level parties. The major national parties in the country include Indian National Congress (INC), the Bhartiya Janata Party (BJP), the Bahujan Samaj Party (BSP), the Nationalist Congress Party (NCP), and the Communist Party of India (CPI) (The Economist Newspaper, 2014). The political environment in India has a major affect on businesses in India. The ideology of the ruling party especially towards foreign companies will determine whether the government is pro Tim Hortons or anti Tim Hortons. A nine-phase general election is currently taking place in India. The election will culminate on May 12, 2014. The results to be declared four days later on May 16 will determine which party (or coalition) is voted to power (The Economist Newspaper, 2014). From a business perspective, it is important that a single party with overwhelming majority forms the government. In such a scenario the stability of the government is pretty certain for a period of five years. 4.1.1 Taxation Structure India has a well developed taxation structure. The taxes levied on the restaurant industry in the country are generally indirect in nature. This means that the businesses pass on the increase in cost to the ultimate consumer. Thus imposition of imposition leads to rise in prices for the buyers. Restaurants charge service tax at 12.36 percent (including cess). According to government regulations, 40 percent of the billed amount is subject to service tax. In addition to the service tax, restaurants in India charge 14.5 percent as value added tax (VAT) on the items that have been prepared by the restaurants. No VAT can be charged on bottled water, carbonated soft drinks and other packaged food items (Singh & Gupta, 2009). 4.1.2 Privatisation India embarked on the policy of liberalisation, privatisation and globalisation (LPG) in the early 1990s (Palaniswami & Prasad, 2002). The adoption of this policy considerably reduced government interference in the corporate world and also streamlined the processes and procedures for obtaining the requisite permissions and sanctions. Since then, India has attracted numerous multinational organisations to carry out their business operations in the country. 4.1.3 General Initiatives The Indian Government has taken numerous initiatives for the development of the general business activity in India. These include development of basic infrastructure, transportation, health care, education, and recreation. These facilities have been provided in the big cities and towns as well as in remote parts of the country. The government has strived to link the huge geography of India, spread over 3,166,830 square km through telecommunication and information technology. Such initiatives are bound to help all businesses including Tim Hortons. 4.1.4 International Relations India has strained relations with its neighbour Pakistan. The moot point is the dispute over Kashmir. While there have been some bilateral talks concerning the issue, no major headway has been achieved. At times, there are reported incidents of cross border terrorism. However these episodes are restricted to the northernmost parts of the country. The day-to-day functioning and business operations in all other parts of the country, by and large, remain unaffected due to these untoward incidents. Meanwhile, India’s relations with its other neighbor China remain cool. The two Asian giants, pegged to be the new economic superpowers of the future, have strengthened their economic and commercial ties. India enjoys good diplomatic relations with the United States and the European Union. India has longstanding bilateral relation with Canada. These relations thrive on "mutual commitment to democracy, pluralism, and people-to-people links.” 4.2 Economic Analysis India is one of the five BRICS countries that have caught the attention of the world due to their high growth trajectory. India is likely to achieve high GDP (gross domestic product) growth rates in the future and become one of the largest economies in the world (Rajghatta, 2012). India will benefit from its policy of opening up of the economy, increasing international trade, encouraging foreign investment and adopting technological innovations. Graph 1 depicts the GDP growth rate comparison between India, U.S. and the rest of the world from 2012 through 2016. It is evident that India is will outperform United States and other countries on this parameter in so far as the next few years are concerned. *Source: Euromonitor.com, Livemint, World Bank; Estimates for 2014-2016 4.2.1 Inflation One economic parameter that Tim Hortons needs to be wary of is the rate of inflation in India. While the government has tried to tame inflation through the monetary and fiscal policy, the prices continue to rise. Table 2 enumerates the rate of inflation in India from 2010 to 2014. *Source: Euromonitor; Estimates for 2014 It can be seen that the rate of inflation has remained pretty high during the last few years. Experts opine that the prices will continue to rise at an average rate of 7.7 percent till 2016. Inflation in the food and beverages (F&B) category was 6.6 percent last year. This high rate of inflation tends to exert a downward pressure on private consumption. 4.2.2 Disposable Income Disposable income is the amount of money that an individual has after paying taxes. The Ministry of Statistics and Programme Implementation (MOSPI) in India reports the disposable income levels in the country. Graph 2 depicts three important variables; annual consumer expenditure, annual disposable income and consumer expenditure on food from 2010 to 2014 in India. * Source: Euromonitor.com, Estimates for 2014 5.0 Entry Strategy There are numerous ways in which a company can enter foreign markets. These include direct exporting, indirect exporting, licensing, joint venture and setting up a wholly owned subsidiary (Green et al, 1995). Exporting is the least expensive of these modes and entails minimum risk and capital outlay. Since Tim Hortons deals with food and beverages products that have to be sold from the chain’s brick-and-mortar store, exporting as an entry mode strategy is ruled out. Tim Hortons can use licensing as an option to market its products in India. The company’s U.S. based rival Starbucks uses a similar strategy for expansion. Starbucks runs company-owned stores as well as licensed stores (Starbucks Coffee Company, 2014). An approved licensee owns and operates a Starbucks store. Such stores are closely evaluated to ensure that they meet the stringent procurement and quality control norms of Starbucks. The best possible option for Tim Hortons to enter India is to enter a joint venture with an Indian company. Walmart has inked a joint venture deal with the Bharti Group to set up its Cash and Carry stores in India. Likewise, Starbucks has entered into a strategic alliance with the Tata Group to set up its coffee shops in the country. Tim Hortons can scout for a well established Indian company/group and forge a similar partnership with it. The Reliance Group is one possible option that Tim Hortons can explore. The diversified Reliance Group is well entrenched in the Indian market and is well versed with the nuances of doing business in the country. By inking a deal with the Reliance Group, Tim Hortons will be able to mitigate the political risk of doing business in India. Reliance’s knowledge of the local market will enable the joint venture find suitable locations to set up Tim Hortons stores. The Tim Hortons-Reliance venture can subsequently expand its retail presence through the franchising route. Tim Hortons has made inroads in the Gulf Cooperation Council by granting a master license to Apparel FZCO. The master license arrangement has enabled Tim Hortons to make its presence in United Arab Emirates, Qatar, Bahrain, Kuwait and Oman. The deal is a royalty-based model wherein franchise fees are paid to Tim Hortons when a new location is opened. The onus of capital investment, real estate development, operations and marketing rests with Apparel FZCO (Tim Hortons, 2014). A similar model will work pretty well in India as well. The Reliance name will lend a lot of credibility to Tim Hortons and help it become a big brand in the second most populous country of the world. 6.0 Conclusion and Recommendations Tim Hortons has achieved stupendous success in its home market Canada. The coffee chain is deeply entrenched in the country which has reached a saturation point. Tim Hortons therefore needs to venture into international markets in order to meet its growth objectives. The company has some presence in the United States but has met with little success in that country. Tim Hortons has entered and expanded in a few Gulf countries in recent times. The need of the hour for Tim Hortons is to enter an emerging market so as to ensure a long term steady growth trajectory. India presents a lucrative growth option for Tim Hortons given its above average GDP growth rate, huge population base, burgeoning middle class, and rising disposable income levels. A thorough industry analysis and scrutiny of the political forces in India uncovers certain aspects that may prove to be stumbling blocks in Tim Horton’s journey in the country. These include corruption, bureaucracy, and political uncertainty. On the other hand, the economic situation in India appears propitious for Tim Hortons. It is recommended that Tim Hortons should enter India by entering into a joint venture with the Reliance Group. This will enable the coffee chain gauge the pulse of the Indian market with minimal capital investment. Tim Hortons will have to alter its menu as per the needs and preferences of the local market. India is a huge country with a lot of diversity. Tim Hortons will therefore have to custom its store set ups and product offerings according to the local customs and traditions. Tim Hortons should employ local workforce at all levels for its Indian operations. These people will be in a good position to fluently communicate with the local customers, understand their menu choices and serve them according to local norms. Such work force will also be familiar with local laws and will be able to adhere to the law of the land. References Calleja, D. 2010, What are they putting in that coffee? The Globe & Mail division of Bell Globe Media Publishing Inc, Toronto. Euromonitor.com. 2014. India Country Factfile. [online] Available at: [Accessed 20 Apr. 2014]. 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