Smoke’s Poutinerie

Submission Date: April 11, 2013

BMGT 20140 Global Business
Word Count:
Tracy Kapraun
James Dillon
Adam Doyle
Andrew Ellison

Word count (without references): 3097.

Table of Contents:

1. Company Profile: P2-3

2. International Business Environment: P3-7

3. Recommendations P7-11

4. Bibliography: P12-13

5. Project Honesty Declaration: P13

1. Company Profile
Smoke’s Poutinerie has been in business since 2008 and went national in 2 years.
Smoke’s is a unique fast-food chain in Canada specializing in the Quebec’s classic
Poutine. Poutines consist of fries, seasoning, gravy, curds, and various toppings.
Smoke’s Poutinerie has 40 locations in 9 provinces around Canada. Their key product is
Poutine dishes (with over 22 types) in the fast food industry. Smoke’s Poutinerie runs
its business through franchising. This means that individuals will own different locations
of Smoke’s but will share the same production, marketing, sales systems, name, and
procedures.
Smoke’s Poutinerie has been successful expanding nationally, but we believe
there is an opportunity for them to now expand globally. The new business opportunity
we see for this company is to expand into the United States. Through a brief SWOT
analysis this expansion can be further explained.
SWOT Analysis
 Strengths: unique product, strong national presence, operates as a franchise (see
opportunity), was successful growing nationally in a short time
 Weaknesses: unknown product for the America, can be seen as unhealthy,
difficulty transferring profits to foreign franchises, finding people interested in
franchising who understand the product
 Opportunity: franchising reduces the costs and risk that comes along with
foreign expansion, easily access local knowledge in America through franchising,
increase profit, diversify customer base
 Threat: hard to control the foreign franchises, may create a competitor through
franchising, many well established fast-food chains in America, shift to healthier
food, many fast food competitors
Why America?
 Unique product that is not offered in America
  Steady and dependable revenue from fast food franchises
 Fast food franchise owners make back their cost within a year on average
 Fast food is popular in America (about 44% of Americans have fast food daily and
spend over $100 billion every year) [statistics brain, 2013].
 Well developed market of international fast-food franchises

2. International Business Environment

International Business Environment
Political, Economic and Geographic factors:
When gazing into the intimidating galaxy of globalization, the importance of politics
within the target country is often underplayed. However, a failed attempt by CNOOC, a
Chinese oil company, to purchase the US owned Unocal in 2005 illustrated the potential
political minefield the US can be for globalization. Trade tensions between the US and
China at the time led to Congress deeming the potential acquisition ‘along national
security lines… and CNOOC admitted that the political climate made it impossible to
continue with its’ offer’ (Nie & Wang, 2013).
While political relations between China and the US may be bullish at times, Canada and
the US enjoy a blossoming relationship epitomised by the great John F Kennedy who
eloquently described how ‘geography has made us neighbours. History has made us
friends. Economics has made us partners.’ On practical grounds, both countries embody
democratic liberal market economies (LMEs) allowing free trade to flourish sans
significant government intervention.

However, Canada and the USA’s political crown jewel glistens through the NAFTA which
was conceived to facilitate seamless trade between Canada, the US and Mexico. This
agreement has thus led to increased ‘output, profitability and efficiency across all 3
countries’ (Rakhmayil & Yuce, 2012). Between 1993-1997, the agreement led to a
‘highly significant’ increase in median operating efficiency in Canada from 0.9012 to
1.1632 (Rakhmayil & Yuce, 2012). This agreement has thus helped nurture Canada and
the US as the largest economic relationship in the world with daily trade in 2010 totaling
$645 billion in 2010 according to the Canadian government. Thus, instead of hurdling
political threats or mines, Smoke’s finds itself politically buttressed for its’ proposed
expansion into the US.

In the economic sphere, a significant gap has emerged between the two countries. Last
year, for the first time in history, Canada was declared wealthier than the United States
with an average Canadian’s net worth $40,000 greater than that of a US counterpart
(Haddow, 2012). While this may appear an economically daft time to roll out a new
business venture in the US, we believe this represents a golden opportunity for Smoke’s
to instigate its’ move to the US. This is largely due to the ‘recession proof menus’
(Gutierrez, 2008) offered up by fast food chains with flag bearer McDonalds’ store to
store sales rising 8.2% in 2008 (Gutierrez, 2008) during the chaotic swing of the
recession. As consumers begin to neglect higher end restaurants and their taste buds
become immune to the charms of a Big Mac, we believe that this is Smoke’s time to
stake its’ claim in the US fast food industry.

The biggest economic pitfall that exists between the two countries lies with the currency
risk inflated by both the Canadian and US dollar. The seriousness of currency risk is
highlighted by the fact that 45% of India-based CFO’s viewed exchange rate volatility as
their biggest threat to growth (Srivats, 2013). While the problem may not loom so large
amongst the Canadian and US dollar, it still needs to be addressed through currency
hedging. We believe the best strategy for Smoke’s to combat this is to construct a
natural hedge by finding American suppliers and therefore offset sales and expenses in
the US dollar.

As geographic neighbours, Canada and the US possess amazingly similar geographic

characteristics with each possessing brilliant infrastructure and major cities dotted
across the country from New York to Los Angeles in the US to Toronto and Vancouver in
Canada. This serves as the perfect platform to replicate Smoke’s growth model in the
US. However, as Ryan Smolkin the founder of Smoke’s himself describes, ‘Smoke’s
didn’t expand through the normal way of doing things which may entail starting with a
nice local geographic expansion and then deciding to cover an hour’s drive radius… our
growth pattern is different’ (Smolkin, 2012). Smolkin instead decided that their growth
will come from existing franchises with ‘territories in all the major cities such as
Vancouver, Halifax and several franchises in Ontario’ (Smolkin, 2012).

Due to the US and Canada’s geographic similarity mainly with respect to each countries
major cities being nestled in varying parts of the country, Smoke’s can easily replicate
its’ phenomenally successful Canadian growth strategy in the US. This would curtail
expanding to major US cities such as Los Angeles, San Francisco, New York, Chicago et
al. This, in turn, would enable Smoke’s to ‘have the start-up costs of small franchisers,
but offer the revenue dollars of the big boys’ (Smolkin, 2012)

Legal Factors

From a legal perspective, Smoke’s faces a significant threat in it’s’ expansion to the US
due to the flood of anti-obesity laws being rolled out across America to target its’
notorious obesity problems and one of the primary targets of these new laws is the fast
food industry. This change in attitude was illustrated by a recent survey whereby 80% of
Americans said that they would support government intervention to prevent childhood
obesity (Koebler, 2013). This has in turn prompted the US government to pressurise
food companies to reduce their excessive advertising of junk foods to kids in response to
obesity rates in the US almost tripling since the 1980s (Reuters, 2011)
The most publicised legal movement in this area came through the recent ‘Happy Meal’
laws(Reuters, 2011) erected in San Francisco which required McDonald’s ‘Happy Meals’
and other restaurant meals for children that are sold with toys to meet certain
nutritional requirements. This was a huge step legally and the proposal is being floated
in other US states. This legal measure represents a very real threat to Smoke’s as the
anti-obesity movement seeks to infest other states across America and draft in more
‘Happy Meal’ laws.

Social and Cultural Factors

The USA offers perhaps the most welcoming cultural environment for an expanding
Canadian fast food chain like Smoke’s. Americans and Canadians share the same
language, as well as similar tastes, values and attitudes. Transitioning between the two
cultures would be relatively easy. In terms of America’s fast food culture, The US fast
food industry is by far the largest in the world, and has spawned such global brands as
McDonalds, KFC, burger king and subway, as well as US only options such as Chick-fil-a.
This has been facilitated by a large market with a love of quick and easy, good tasting
food. In 2011, the fast food industry generated total revenue of 190 billion U.S. dollars
in more than 300,000 restaurants, employing 3.9 million people. Despite this
intimidating market, Smoke’s could find a place among the many generic
burger/pizza/chicken restaurants as a unique niche option.
Demographics
A key concept for an expanding business is to locate in places where people are likely to
buy their products. Fast food consumption levels vary from state to state within the
USA, so an expanding fast food outlet would do well to locate in those states with higher
fast food consumption rates. For example in Alabama, Fast food accounts for 60% of
people dining-out spending habits, and in Kentucky the same number is 57%
(health.com). However most of the top 10 states in terms of fast food consumption are
located in the south of America, with Ohio being the northernmost area on the list, with
a 50% level of dining-out spending. Ohio would therefore be a key target market for an
expanding Canadian business like Smoke’s due to its proximity to the border and high
demand for fast food. Another demographic factor for expansion would be the
concentration of Canadians in the areas Smoke’s would be looking to set up. This would
increase sales as Canadian expats would be likely to buy authentic cuisine from home.
 According to the results of Census 2000, Canadians account for 0.3% of the total
population. In northern states such as Vermont (1.3%), Maine (1.2%), and New
Hampshire (1.0%), Canadians made up at least 1% of the total state population. These
areas therefore would also be targets for smokes.
Fashions and Trends
While fast food is as popular as it ever has been, over the last few years there has been
a growing trend in healthy eating among the American consumer. McDonalds
recognised this and catered to it with the introduction of salads to their menu in 2005.
Currently Smoke’s does not have any healthy alternative options and may consider
introducing some in its expansion to the USA.

3. Recommendations
Smoke’s Poutinerie should go International and expand their franchise to the US market.
They have a product which would be unique to the US market and by continuing their
current expansion mode of Franchising they will be able to expand in a fairly risk-free
fashion. There are many examples of Canadian fast food franchises that have
successfully expanded into the United States. These companies show the path which
Smoke’s can take and how the large but competitive US market can be lucrative to
Canadian chains.

Tim Horton’s is an example of a successful Canadian fast food franchise that have made
the jump;[below] [Tim Hortons, 2012].
Yogen Fruz have also succeeded in the U.S market, they were only established in 1986
but are rapidly expanding and are due to open stores in 6 new states. ‘Pita Pit’ is the
final example of a successful Canadian franchise making big strides in the US. Their
model is also the one which I think would benefit Smoke’s Poutinerie the most. Their
restaurants are usually located in College towns and open till late hours. This allows
them to target late night eaters and groups on nights out on the town, something which
Smoke’s are already doing successfully in Canada. These three companies are examples
of Canadian franchise success stories across the border which shows the potential
success Smoke’s Poutinerie could experience if they were to expand into the US. There
are numerous opportunities and threats to expanding into the US fast food industry:

The biggest opportunity this expansion faces is the size of the US market. The US has
approximately 10 times the population of Canada; this represents a much larger market
for Smoke’s to operate and expand in and a huge opportunity without having to cross
language or large cultural barriers. Smoke’s product, the Poutine dish is unique to fast
food restaurants but is not completely unknown to the US market. It is found in some
parts of Northern U.S.A which will make those areas easier to break into, and perhaps
the starting point of Smoke’s expansion. The state of the US economy is another big
opportunity for the franchise. Just coming out of recession with 12 million jobs expected
to be created over the next 4 years, the US is in an ideal state for new companies to
 launch. [Forbes, 2012].

There are also various threats which Smoke’s Poutinerie will have to face when entering
this market. Due to health concerns and growing levels of obesity in the US, we may be
seeing a switch to healthier alternatives to fast food restaurants in coming years. This
represents a threat to Smoke’s expansion as the Poutine is quite an unhealthy dish.
However, with fast food sales growing year on year there is evidence to suggest that this
may not affect their expansion much at all, particularly if they are to target college
towns and late night eaters. The biggest threat, and issue with expanding into the US
market are the competitors. There are already countless fast food chains across the
country. Many of which Smoke’s will have already faced such as ‘McDonald’s’. Smoke’s
have already shown that they can prosper despite the presence of the large
multinational chains, however the US also has national chains such as ‘Chick-fil-A’, who
will provide further competition for Smoke’s.

• How it should go International:

Entry Modes:

Joint Venture: Smoke’s could team up with a US based firm for a Joint Venture. This would
allow them to gain the expertise of an indigenous firm during their expansion. Joint
ventures allow firms to enjoy the benefits of each other’s resources and knowledge of
the industry however there are many drawbacks, particularly for Smoke’s Poutinerie. It
is difficult to have a joint venture in the fast food industry. There would need to be huge
levels of planning involved and strict divisions of control between the firms. They would
also need to consider at what point they would end the partnership, and how the assets
would be divided thereafter. The complexity of a joint venture and the lack of benefits
to a fast food chain such as Smoke’s make it infeasible.

Licensing: This is a financially risk-free method of expansion and allows the firm to make
 money from their knowledge of the product and their restaurant set up. However there
are numerous issues with licensing, particularly for Smoke’s. Licensing brings in a far
lower level of revenue than other forms of expansion; Smoke’s would only expect to
receive ~5% of the gross sales, after the initial fee for the license. They will also have no
control over the speed of the expansion and the quality of the restaurants. This could
have a major impact on their reputation and they would find it quite difficult to control.
For these reasons I think that Licensing isn’t the correct entry mode for Smoke’s.

Franchising: Franchising is Smoke’s current method for expansion. They require an initial fee
of $30,000 and a full investment of $300,000 from the franchisee, in return for training
and expertise. [Canadian Franchise Association, 2012]. They also receive a percentage
of. Franchising is the best choice for Smoke’s to continue their expansion as they already
have the procedures in place to set up franchises and the benefits outweigh the
drawbacks. Franchises are relatively financially risk free, whilst also being more lucrative
than Licensing. It allows the Company to expand quickly and is the chosen method of
expansion for the 10 most successful fast-food chains in the world. The drawbacks
include; a greater level of investment required than licensing, potential for their
reputation to be ruined by a bad franchisee and the difficulty of finding franchisees in a
new country where Smoke’s may not be so well known. Despite these drawbacks I think
that franchising is the best entry mode for Smoke’s. I have already shown several
examples of successfully Canadian franchises in the US and I think that Smoke’s could
well be the next.

Foreign exchange risks: There should be little to no risk of losing money through foreign exchanges.
They should be able to fix the exchange prices with their suppliers (or find suppliers in
the US) due to the stability of the exchange rates between the two currencies. The
exchange rate between US dollars and Canadian Dollars fluctuates very little, with a high
of 1.035 and a low of 0.975 US dollars to Canadian Dollars over the last 12 months. They
can price their products differently in the US to make up for different costs and currency
 exchanges. The upfront fee and percentage of sales they will receive from franchisees
may be slightly devalued if the Canadian Dollar is strong, however due to the low level
of fluctuations in the exchange this should have minimal impact on revenues.

Marketing: Smoke’s currently do not use traditional forms of media to market their restaurants.
Instead, they successfully use online marketing and social media to advertise and spread
awareness of their brand. This has been very successful at reaching their target market
of teenagers and people in their twenties who are extremely active online, on social
media in particular. Their product may be quite unusual to many of their target market
so it is crucial for it to be depicted correctly in order to draw these people in to try a
new dish. Market research must be done in order to gauge the reaction to their
Canadian brand and they should also consider the successes of Pita Pit who largely base
their marketing on promotions, brochures and flyers directed at their target market.

Adaptations to the company’s current activities which will be needed:

Due to the similarities between the two countries, the narrow currency exchange difference and the
common language, there should be few changes necessary to the company’s activities
for this expansion to be successful. Smoke’s will need to ensure that their suppliers can
deliver to the US and if not, they will need to source new suppliers. This will apply in the
case of both machinery and food ingredients. Depending on the area they may need to
source their ingredients locally due to cultural or legal issues. They will need to change
their prices in order to take into account the exchange rate and possible new costs. This
shouldn’t have a major impact due to the stability of the exchange rate. They will have
to expand their marketing practices, perhaps to include more traditional forms of media
and also by creating flyers and brochures to hand out on campuses and in letterboxes.

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 GLOBAL BUSINESS
BMGT 20140, Spring 2013
GROUP PROJECT HONESTY DECLARATION
Project title: Smoke’s Poutine expands to the Unite States of America
Group number: B6
We confirm that:
1. We are the original authors of this project report.
2. This report does not contain any material taken from unaknowledged sources and all material
has been adequately referenced.
3. This report has been prepared for assessment in this module and has not been presented as
course work in any other module.

Group Member Student Number Student Signature

Andrew Ellison
Adam Doyle
James Dillon
Tracy Kapraun