Business Assignment help on : Retail Sector
Introduction
The retail food sector of South Africa is in growing state with the increasing trend of convenience shopping among middle and high class consumers. The expansion of the operations as a part of internationalization demands a deep and thorough analysis of the industry (Building a Sustainable South African Food Retail Sector, 2010). The food retail industry of South Africa is analyzed so as to gain complete insight on the food purchase and consumption pattern of South African people, thus understanding the food market of South Africa and decide on the entry mode in the country for eventual investment. The report analyses the food retail industry of South Africa through Porter’s National Diamond Analysis that includes factor conditions, demand conditions, related and supporting industries, firm strategy, structure and rivalry, government and chance; contemporary management issues and the market entry strategy. It helps in understanding developmental opportunities for business and the overall competitiveness of the food retail industry of South Africa along-with attractiveness of investment. Moreover, the report provides the outlook on the total business handled by the food retail industry of South Africa with identification of the opportunities and threats that are present for MNCs entry into the business in this South African industry.
Porter’s National Diamond Analysis
The Porter’s national diamond analysis provides assistance in identifying opportunities and threats present for doing business in food retail sector of South Africa.
Factor Conditions
Population: The population of South Africa is 49 million people. The level of education is not very high. People with HIV are 5.6 million. Over 2.5 million people have no schooling and more than 70% have not completed secondary education (Schalkwyk et al, 2011).
Cost advantage: presence of unskilled workers. 60% of unemployed hold low quality; labor cost is high; middle income country with per capita income of $3600 (Monitoring and Evaluation Report on the Impact and Outcomes of the Education System on South Africa’s Population: evidence from household surveys, 2006).
Physical resources: presence of modern infrastructure, focus on promotion of labor intensive methods, stressed physical infrastructure, 22.5% of total expenditure on food on independent retailers. Total food and grocery spend is 232.5 billion dollars (Schalkwyk et al 2011).
Quality of infrastructure: Most retail outlets have their own transportation system, transport is expensive, telecommunication growing faster, electricity and water services available in all urban areas. The health care system is not very good. Number of AIDS/HIV infected people high. Knowledge resources: The economy is becoming knowledge oriented. Gross domestic expenditure in R&D is 21041 million Rands which represents 0.92% of the GDP. Government is the main funder of R&D with business sector coming second. More than 50% expenditure dedicated to agricultural, social and the medical health sciences (Barnes, 2012).
Cost of capital resources is high i.e. almost 15%, meaning company needs high value added returns for success. South Africa is regional node of transport and trade (Kraak, 2004).
The population of South Africa is increasing with 51% of population below the age of 25. The education level is quite low and presence of large number of people infected with HIV/AIDS. This shows that the labor is unskilled and a majority of population is young, which means incurring of more cost on company on training and development. The cost is increasing and the educations is low, along0wth the challenges regarding expensive transportation system.
Therefore, factor conditions present threat to the establishment of business operations in South Africa with high cost and low skills and education.
Demand conditions
Size and composition of population: Population is 49 million with 24 million males and 25 million females. Youth of black African population is more than other population groups (Monitoring and Evaluation Report on the Impact and Outcomes of the Education System on South Africa’s Population: evidence from household surveys, 2006).
Size and growth rate of home demand: Growing demand for convenience, increased demand for house and private label food products, demand for longer store hours, demand for frozen food is strong due to lack of availability of fresh supplies specifically sea food (South Africa Republic of Retail Foods 2010 Annual retail food sector report, 2011).
Market Demand: increase in health consciousness; health, convenience and wellness foods are in demand; food labeling growing in importance, success of bottle water, increase in demand of shelf-stable products that do not require refrigeration (South Africa Republic of Retail Foods 2010 Annual retail food sector report, 2011).
Composition of demand: Informal shops supply only leading brand items as customers show brand loyalty; buying power of black population increasing, supermarket retail chains converting their less successful brand stores to more consumer targeted base. Buyer sophistication: Buyers concerned about convenience; increase in environmental awareness as well as ethical behavior; demand for private brand labels as they form good support in economic hardships; need for products that do not require refrigeration (Funke, 2006).
Ways of internationalization of domestic demand: Sophistication of food and beverage market; retail outlets available in all the formats convenience drugstores, specialty stores, small general dealers, chain stores such as groceries, household goods, etc. (Building a Sustainable South African Food Retail Sector, 2010)
Socio-cultural risk: Presence of vast inequalities in terms of purchasing power of black and whites; high levels of poverty specifically among black group; vast inequalities in distribution of income is challenge for business (Building a Sustainable South African Food Retail Sector, 2010).
Analysis: Considering the demand conditions of South Africa, the food retail market has good demand. There is an increase in the number of food retail outlets with focus on convenience and healthy food items. Rapid growth of the sector and sourcing of the 90% of inventories of consumer ready products domestically present good demand and supply market. However, vast inequalities in the distribution of income and presence of poverty are considerable points for business.
The demand conditions present opportunity for expansion of business in terms of growing demand, internationalization of food retail outlets, growth in demand, etc. But threats are present in terms of socio-cultural risk as well as differences in black and white population with unequal income distribution.
Related and supporting industries
Availability of supporting industries present an opportunity; supplier industries create advantage in downstream through efficiency and cost effective inputs; influence of retail sector on supply chain that are particularly owned by black people; advanced use of technology to reduce the fuel consumption such as Euro 5 technology and Bluetec technology; bargaining power of buyers and suppliers is high; suppliers given preferential tendering by the government for the shelf space so as to promote the products of South Africa; buyers price conscious with no brand loyalty (Building a Sustainable South African Food Retail Sector, 2010).
Analysis: The bargaining power of buyers and suppliers is high that is a potential threat to the business. However, the presence of technological aid presents opportunity in terms of reducing the operational costs related to fuels in South Africa.
There is presence of both opportunities and threats for the business.
Firm Strategy, structure and rivalry
Cultural impact on firm strategy: Hofstede data
PDI- 49- People have accepted the hierarchical order and need no further justification. Centralization is popular.
IDV- 65- The society is individualistic and there is high preference for a social
MAS- 63- It demonstrates masculine society of South Africa. People live for working and managers are expected to be assertive and decisive.
UAI- 49 – It reflects avoidance of uncertainty by society. It has rigid code for beliefs and conduct. There is need for rules.
LTO- no data (South Africa, 2012).
Competitive rivalry: Competition from other countries and products that are locally produced; the rivalry is high; presence of independent retailers, supermarkets and hypermarkets makes rivalry high; competition from locally produced products.
Threat of new entrants: The threat is high as demand for convenience and packaged food is increasing with large forms of retailing such as wholesalers, forecourts, supermarkets, hypermarkets, convenience stores and cooperative clubs.
Threat of substitutes: The threat of substitutes is high. If the consumers find the prices to be relatively higher, they can switch to substitutes, such as products from non-store competitors, internet sales and catalogs (Schalkwyk et al 2011).
Analysis: The industry has high level of rivalry among different forms of retail stores and there is threat of new entrants as well as substitutes that make the industry quite competitive and challenging to operate in. As the competition is high and threats are also high, there is presence of more opportunities than threats to the company entering the industry. Buyers can easily switch to substitute products as there is problem for storing the fresh seafood items.
The firm strategy, structure and rivalry present threats to the company for entering the market.
Government
Subsidies: There is youth wage subsidy hampering the creation of job and development of skills in the South African market.
Education policies: The current policies provide framework for adult learning with various acts in place such as the Higher Education Act, the Further Education and training Act, the Adult Basic Education and Training Act, etc. (Monitoring and Evaluation Report on the Impact and Outcomes of the Education System on South Africa’s Population: evidence from household surveys, 2006).
There is regulation of capital market with two regulatory authorities SARB (South African Reserve Bank) and FSB (Financial Services Board) (Independent Food Retailers in the Republic of South Africa, 2011).
The tax laws prove to be burden for the companies and increase their cost of operations, such as carbon tax along-with fuel tax and other taxes. There is vast inequality regarding black and white population. Black comprise of labor class, while whites are in higher positions, police and farmers.
Corruption in South Africa is high comprising of bribery, private use of public resources and presence of favoritism. Legal protection is given to domestic workers (Funke, 2006)
Analysis: The governmental policies are not very supportive regarding the business facilities and laws. Levying of various taxes increases the financial burden of companies operating in South Africa. Moreover, the inequality in Blacks and Whites is a cause of concern. Black population is more but it cannot be found in higher management positions, while White population is less and can only be found in higher management positions or in the role of police. It presents threat to the new start-ups as they cannot found suitable candidates for the jobs.
The presence of opportunities is in form of increasing attention on education while threats are lot more in form of increased burden of taxes, corruption, policies, etc.
Chance
Possibility of war-break due to great disparities among races; economy venerable to oil shocks as upwards trend in rise of crude oil prices, economy driven by external demand as it is susceptible to subdued European external demand with unemployment rate above 20% (Employment and international labor market competitiveness decline, 2012).
Analysis: The South African economy is highly susceptible to changes in the external demand from Europe. As there is weak global recovery of economies, the South African economy is also highly affected. Moreover, there is civil unrest due to rampant poverty and unemployment among youth accompanied by vast inequalities present among races that can break into a war.
Threats present in form of high civil unrest and venerable economy.
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