Environment management assignment help online:: South African food retail industry
Introduction
The South African food retail industry is very dynamic and has undergone various transformations from time to time. Various factors like consumption patterns of the consumers, improvements in supply chain, entry of multi-national food chains etc. have structured the market in such a way that there is a fierce competition. The earlier oligopolistic market structure has now changed to a competitive market consisting of multi-national food joints, regional franchisees, independent caterers etc. The food and beverage market consists of local as well as imported brands.
The economic factors like globalization, urbanization and growing segment of middle-class have posed new set of challenges for the industries working in this arena (Lee & Carter, 2005). With rising incomes, people are moving from home cooked meals towards fast foods. Retail outlets have also undergone changes and now are in the form of cafes, speciality stores, chain stores, small departmental stores and small general dealers. The concept of hypermarkets is also prevalent in South Africa. This has led to the change in the customer expectations and hence customer service, brand promotion, seasonal offers etc. have become prominent in this field. Accordingly, the companies have changed their market strategies from time to time. For a new player to enter into this market and record a sustainable growth is a big challenge (Batra, 1997). The market entry will also involve huge capital investment and lots of other risks which any investor should always take into account. The legal requirements should be thoroughly studied and compliance requirements must be clearly understood. These factors are changing at rapid pace in South Africa during the recent past and will continue to change in the future as well. The opportunities in food retail market are vast but some challenges will have to be met.
Porter’s National diamond model
The competitiveness of South African market can be assessed based on Porter’s national diamond analysis (Kotler & Kelly, 2008) as below:
Factor conditions
Population characteristics
South Africa consists of diverse population groups and hence provides a different set of segments for any business to handle. In terms of ethnicity the majority of the population consists of Black Africans (about 79%) while around 10% are white and rest from different nationalities (CIA- The World Factbook, 2012). Since apartheid was prevalent in the region in the past, any business should understand the sensitivity of the population towards religious sentiments and rituals. In terms of religions there are majority of the people following Christianity and few from Muslim communities as well as from other religions. People belonging to a particular religion or race have different preferences in items of food retail.
Around 62% of the population lives in urban and semi-urban regions of South Africa and consists of individuals with good education and healthy income. This factor is ideal for any food retail MNC to enter into the market as the purchasing habits of these people are changing to the tunes of population of the western developed nations. Hence, the company can decide to focus on these urban and semi-urban pockets and create a demand for the concepts like hypermarkets and convenience stores.
The high unemployment rate of around 48% can help the company establish its name by creating employment for the youth as well.
Infrastructure:
The infrastructure of the country is improving with time. The country has total of 567 airports (as of 2012) which shows that country is congenial for the new businesses especially by the MNCs. Total railways network of about 20,000 km provides convenient medium to transfer of goods across different regions. This is combined with more than 3.5 lakhs of roads network consisting of around 73,000 km of expressways (CIA- The World Factbook, 2012) shows the strength of the transportation network which is a pre-requisite for any business in the food retail industry. The major ports and terminals are available at towns like Cape Town, Durban and Port Elizabeth which facilitate export based industrial houses. So different options are available for the company to manufacture/ export its products and distribute among different regions and hence grow its business.
Demand conditions
The current population of South Africa is 48,810,427 which ranks 26th in the world. In terms of demography, 65% of the population is within the age group of 15-64 years. Majority of population can be assumed to be young and hence they look forward to the new food items particularly influenced by the western culture. There is also a healthy inflow of immigrants in this region from adjoining regions like Zimbabwe as well as from countries from west who are looking to establish their business here.
The growing urbanization is the key factor that will drive the food retail business expansion for the company in South Africa. It is expected that overall retail sector shall constitute 38% of the total population by 2015 (First National Bank, Bureau for Economic Research).
Geographically, there are customers from rural to semi-urban and urban markets. The rural based customers have to rely on the local retailers whereas the urban regions have witnessed the concept of supermarkets. Overall, there have been many changes in the consumer’s expectations over the years. The customers have now become more health conscious and focus more on the quality and the ingredients of the food products. The pricing expectations have also changed as in some product segments; the customers prefer local private labels over the established brands which makes economic sense for them. Ready to eat and ready to cook items have gained popularity with the advent of hypermarkets.
With changing lifestyle, there is a demand for late night stores so that customers can purchase after working hours. Hypermarket chains that work round the clock are more popular. A typical customer does not have the time and patience to do research on such products; hence availability of variety of options is very necessary under one roof. A small population of the customers also prefer online purchasing of food and cosmetic items due to lack of time.
Customers have high bargaining power in this market. Especially with the emergence of hypermarkets, there is a direct purchase between manufacturer and customer which has led to the obsolescence of local retailers and hence hit their margins. Customers are also getting variety of brands for their choice of products. The switching cost is less and hence there is a continuous competition for market share among the players. Most of the products are low margin products and their success depends upon the volume of sales, hence the influence of customers’ purchasing behaviour on the pricing is always felt (Anderson, Fornell & Lehmann, 1994). The prices can be increased only to a limited extent. There is also very less brand loyalty among the customers and hence companies have to comply with the changing customer expectations from time to time to retain them (Anderson & Sullivan, 1993).
Related and supplementary industries
Although there are many distributors and retailers present in the market, yet few of them have presence across the country. In order to tap the whole potential, the reach of the products should be till every region in country and hence the company has to rely upon handful of the suppliers. Owing to this factor, the suppliers hold heavy hand in the market and hence have high bargaining power. The company can take the price advantage by shortlisting multiple buyers from time to time and selecting the most economical and reliable one. However, with experience, the company may think of building good relationships with the local suppliers in different region and hence tap economies of scale and cost efficiency together.
Firm structure, strategy and rivalry
Cultural factors affecting firm structure and strategy are as below (South Africa- Geert Hofstede, 2012):
- Power distance: South Africans believe in hierarchical structures within the organization which must be taken care while designing the organization structure.
- Individualism: South Africans are considered individualistic in nature and hence not very social people. This factor should be considered while assessing consumer behaviour.
- Masculinity / Femininity: South Africa is a masculine society and hence people are very competitive and hard working. This can be a big advantage for the company.
- Uncertainty avoidance: South Africans are risk averse and also apprehensive of deviating from their beliefs. Hence it will be difficult for the company to convince customers to switch to their brand.
- Long term orientation: People are not long term oriented and hence short term rewards can be fulfilling for the employees of the organization.
Threat of new entrants
The obvious entry barrier is the threat of new entrants due to huge capital investment that is required to set up the business. Since the company is eyeing a large scale business, hence presence in every geographical region should be the long term goal (Kotler & Armstrong, 2007). A huge capital investment is the risk that company should be ready to take. The business will start earning profits in a span of 4-5 years, which the company should accept in the first place.
The other entry barrier for the company is to comply with the laws of the land. The policies like Broad-Based Black Economic Empowerment (B-BBEE) need to be followed diligently which pose constraints on the percentage stake of the parent company. Similarly other labour laws must have to be complied with.
The other entry barriers include the cross cultural issues that company will have to tackle with especially when it comes to places like rural Africa where apartheid was once very prominent. The company should take care of the sentiments of local population (Keegan, 1989). Apart from that, the establishment of strong distribution network is also a big challenge as the current players in the market must have strong relationships with the distributors and retailers which they can use to prevent them to network with the new company (Hollensen, 2001).
Competitive rivalry:
Competition is fierce and margins are low in this market. Since the products are fast moving products across the value chain, the speeds of delivery as well as the quality of the products are the key differentiating factors (Korey, 1986). There is no pricing power that is available with the players due to the presence of organized as well as unorganized retail players supplying the products to the market.
Hence, on the basis of Porter’s national diamond analysis it looks that South African food retail market is an attractive market owing to its vast multi-cultural population and shifting of market structure from traditional retail stores phenomenon to modern trade practices like hypermarkets. The challenges which any new player will have to face are the competition from the existing players and huge capital investment in setting up the business and associated distribution networks. The profits may not start coming immediately and hence one need to take a long term view in setting up benchmark returns from the business. Meeting customer’s preferences is a key factor to the success of the business and so a thorough market research on consumer behaviour is necessary before making any investment. There can be multiple market entry strategies depending upon the goals of the organization but the above factors will always have to be taken into account.
Management issues to be addressed
Expanding the business in international markets is a big strategic decision that any company takes. It is to be backed up by lot of factors such as financial health of the company, the existing intellectual capital, the operations management structure and the human capital management. Among these, the key management issues that immediately need to be addressed are described as below:
Legal and policies issues
The major cost heads will include legal approvals charges, land charges, construction charges, human resource expenses, and distribution and marketing expenses. A proper budgeting plan must be set in place before the company goes out to start visiting the country for proper due diligence. A lot of these heads will further depend upon the product line which the company wants to expand in South Africa. The revenues will depend upon the product line and the price points set by the company. Based on the benchmark returns the company expects from the business, the pricing points must be decided and corrected as per the prevailing competition in the market (Harmel, 1996).
Since geographical expansion comes with a price tag, the company has to decide on how to raise capital for its expansion plans in South Africa. The company will have to raise funds to build its assets to establish its business and to finance its day to day activities. Company may decide to go for debt raising. Management must decide upon how much liabilities it can take on its balance sheet. The amount of investment will totally depend upon the scale up to which the business is to be expanded. Hence, the decisions on geographies where the company will establish its customer base needs to be take upfront. This will be backed by proper market research.The break-even for the company will finally depend upon the timelines and the investment horizon set by it (Hunger & Wheelen, 2012). If the objectives are long term then the company should expect a longer payback period. Hence the milestones must be set to meet the business expectations and management must be convinced about these decisions. The overall objective must be set in a way that the financial decisions made by the management can support them. Taking short term profitability as an objective when the investment horizon is long term will not be a good idea.
Organization structure
The other major management issue which the company has to address is how to structure its organization in the South African region. Majority of organizations follow the decentralized human management resource system wherein the top management positions are filled by the existing senior managers of the parent company and local subsidiaries are handled by the managers which are hired locally. Such an organization structure will give suitable freedom to the local business entities to take day to day decisions. The parent group management retaining the strategic positions will help in ensuring that overall organizational goals must be met and the focus on expansion along with sustainable profits should remain intact (Bechet & Walker, 1993).
The sales and administrative positions at the low level should be exclusively from the local regions. This will serve dual purpose of utilizing local know-how as well as creating goodwill for the company and hence establishing a strong brand name. Hence a mix of local and international staff will be there for which the cross-cultural sensitivities must also be addressed to enhance the productivity.
The objective of building a decentralized organization structure is simply that the local business subsidiaries should aim to run independently after few years without the help of parent Group Company. It is necessary that the group ideologies must be followed diligently while running the business to suit the local needs.
Entry strategy
There can be several factors that should be considered for market entry such as: establishment of hypermarkets, establishing convenience stores and outlets, partnering with local players etc. The company should consider all these options while making a final entry strategy. The most profitable option is described as below:
Establishment of hypermarkets:
Establishing an own hypermarket chain will involve dealing with the local agents and distributors. The agents will ensure that the customers come and purchase the products from the hypermarkets. They will be the ones who will undertake marketing activities such as brand promotion, advertising as well as booking orders (Hellman, 2005). These agents should be chosen from the existing local markets as they should have the thorough knowledge of the tastes and purchasing behaviours of local consumers. Apart from this, these agents will also help the company in obtaining clearances from legal authorities for export of products as well as other statutory legal approvals.
The distributors will be the ones who ensure that products reach at the selling points. If the company is not partnering with any local food retail chain, then establishing a new distribution network will involve a lot of research (Anderson & Coughlan, 1987). Apart from selecting the right agents and distributors, the company should be ready for heavy capital investment in order to support high quality infrastructure required for a hypermarket (Kerin & Peterson, 2008). The ambience of the place and the service provided by the staff will be crucial for attracting new customers.
The operational issues like warehousing and inventory management are other challenges to be tackled (Lockyer, Muhlemann & Oakland, 1988). It is very important to forecast the demand for particular products and optimize the inventory (Armistead & Clark, 1987). So, company will have to use its forecasting models which it might have built up over the years to accurately determine the market for its products among the competitive products.
The competitors in the hypermarkets space include players like Woolworths, Spar, Pick n Pay and Shoprite-Checkers group etc. They all play on the customers’ experience and cost efficiencies in their value chains. These players in fact dictate their terms on the suppliers. Hence, entering into this segment is a risk but it comes with long term rewards. In order to counter the competition in first place the company has to shell out lots of money in sales promotion activities like discounts and offers to the consumers (Low & Mohr, 2000). The other marketing strategies can include PR events, online shopping portals etc.
Although hypermarkets are not very prevalent in rural areas but still the organized retail outlets are present and hence company can establish small stores on the theme of hypermarkets to tap rural potential under this strategy. Here, the distribution system should ensure that the products reach till the rural pockets.
In order to create a brand name, the company should back up its entry strategy by indulging in Corporate Social Responsibility projects. These projects may include employing local talents or encouraging local manufacturers to tie-up with them to sell their products. Company should also establish quality standards in its products, packaging etc. to create a credibility among the different consumer segments.
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