The food offering has a price of demand that is elastic in China a corresponding increase in demand for fast food, increased its price, and this is not an exception for THI, with regards to its fast food products. Rapid urbanization and increased income among the middle class are some of the factors that drive demand for fast food products in China (Mankiw & Kneebone, 2013). Coffee consumption has also been increasing at a double-digit rate, for instance, in 2006 the consumption of coffee was at 45,000 tons but in 2020, it is expected to reach 300,000 tones. It is not however expected to slow because its price has proven to be inelastic. Instant coffee products have been driving the retail coffee markets, and they make up to 99% of the Chinese market according to Euromonitor reports, and only 1% is coffee bean products, which is consumed by a few consumers. In 2015, the sale of instant coffee grew by 3% compared to 11% in 2011. The economy of China is growing, and it implies that the demand for coffee in China has increased correspondingly (Mattingly, 2016). Coffee retailers such as Costa, Starbucks that currently holds the largest share, McCafe and Kentucky Fried Chicken have continued expanding their coffee products in China although they have a high priced offering (Nan, n.p).Starbucks has the largest market share of coffee in China accounting for almost 31.5%, while Costa Coffee accounts for 5.5%, McDonalds account for 6.1%, UBC accounts for 22.5% while Zhejiang Liangan accounts for 7.7%. The rest including Kentucky Fried Chicken account for the 26.7% (Nan, n.p). Tim Hortons Inc. can capitalize on this factors to build a strong brand equity against Starbucks and McDonalds by investing heavily on branding and shaping the customers attitudes towards their product through the provision of quality services and tapping into the potentially lucrative market in China.
The price elasticity demand for fast food is elastic. This is also driven by rapid economic development, urbanization and cultural exchanges that have created change in peoples lifestyles (Morrison, 2012). The fast-food industry is rapidly expanding in China this is indicated that over the past five years, the fast food industry has been growing at the rate of 11.2% annually, and the fact that there are about 2.3 million fast food outlets and restaurants in China and the Western food culture has been its major driver (index Mundi, 2017). For example, KFC opened 4260 chains in China in less than 30 years, with McDonald expanding at the rate of 10 restaurants per week. The fast-food industry has proven to be highly elastic in China powered by high demands and changing eating patterns among the younger generations (Ramasamy, Yeung, & Laforet, 2012).
The coffee and fast food elasticities in China and Canada are not the same, especially for coffee. While the elasticity demand for coffee in Canada is elastic, the opposite is true in the Chinese markets (Ragan, 2013). The Canadian demand for coffee is highly dependent on price. With regards to fast food, both countries have elastic price demands for fast food, and it is driven by the fact that food consumption patterns have changed (Ragan, 2013). Tim Hortons can capitalize on the Chinese market which is experiencing rapid economic growth and consistent changes in customer preferences from traditional Chinese lifestyles to a more westernized cultural adaptation as noted among the Chinese middle class, who live in cities.
Purchasing Power Parity is a unit that compares economic productivity as well as the standards of living among countries across a given time (Index Mundi, 2017). This tool is crucial in determining the purchasing power of China and Canada respectively. In China, the buying power is highly dependent on the income of an individual. The middle class in China enjoy a higher income, but comparing their purchasing power among the Canadian population, the Chinese purchasing power is lower (Index Mundi, 2017). Hortons needs to consider this measure before establishing its chains in the Chinese market. One of the factors that influence PPP is inflation rate, which has faced China in the recent past, thus reducing their purchasing powers due to increased product prices compared to Canada where it is relatively stable (Taylor, 2013). Venturing into the Chinese market requires that Hortons adopts the standard pricing of coffee that has been set up by the top players in the Chinese coffee industry for instance Starbucks.
THI is a foreign company in the Chinese market, and therefore it is subject to market conditions such as exchange, inflation and interest rates (Mankiw & Kneebone, 2013). The Chinese inflation rate is up to 10% per year (Hassan, 2016). This has a ripple effect on the economy; as first, it increases interest rates, as well as exchange rates (index Mundi, 2017). The effect of these three factors includes low purchasing power among the consumers, less competitive domestic products internationally which then affect exchange rates (Hassan, 2016). Firms including foreign entities have been forced to provide higher wages to employees and this forces the companies to increase their commodity prices (Morrison, 2012). It is therefore recommended that THI does a microeconomic analysis before expanding to the Chinese market that is highly volatile. Although other franchises such as Starbucks have succeeded, they have to consider taking a unique strategy to allow them to venture into the market.
Hassan, H. (2016). Inflation and its impact on the Chinese economy. [online] Foreign Policy News. Available at: http://foreignpolicynews.org/2016/09/23/inflation-impact-chinese-economy/ [Accessed 5 Dec. 2017].
Index Mundi (2017). China GDP (purchasing power parity) - Economy. [online] Indexmundi.com. Available at: https://www.indexmundi.com/china/gdp_(purchasing_power_parity).html [Accessed 5 Dec. 2017].
Mankiw, G., & Kneebone, R. D. (2013). Principles of Macroeconomics, 6Ce (Vol. 6). Nelson Education.
Mattingly, J. W. (2016). Coffee in China: Market Trend and Consumer Demand.
Morrison, W. M. (2012). China's economic conditions. Current Politics and Economics of Northern and Western Asia, 21(3/4), 289.
Nan, Z. Coffee Market in China: Trends & Consumer Strategies.
Ragan, C.T.S., (2013). Macroeconomics (14th Canadian ed.). Don Mills, Ontario: Pearson Education Canada.
Ramasamy, B., Yeung, M., &Laforet, S. (2012). China's outward foreign direct investment: Location choice and firm ownership. Journal of world business, 47(1), 17-25.
Taylor, M. P. (2013). Purchasing power parity and real exchange rates. Routledge.
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