Market Entry Into Kenya for a Food Franchise
BNU5013 – International Management Strategies Post-Module Assignment for Prof. Minyuan Zhao The topic for our team presentation was the expansion of Global Franchise Architects (GFA) into Kenya. The group selected this company as we had just completed a communication strategy for them on how to expand in India, and one of our colleagues who is from Kenya thought that it might be a viable option for GFA to expand into Kenya. This paper will attempt not to repeat any facts stated already in the presentation, unless required to highlight a specific point.
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At a high level the group agreed, by a democratic process, to the consensus that GFA should not expand into Kenya, but I would like to disagree with that assessment after further research and analysis on my own. The key strengths of GFA are: 1) Operational excellence: This helps the investor to get a high Return on Investment (ROI) 2) Portfolio of 9 brands: Having multiple brands provides the investor to open combined stores with different brands or pick and choose the brands that they want to focus on.
The main highlights that make Kenya an attractive market are: • Positive GDP growth • Lower interest rates- cheaper credit access • Inflation down (< 5%) • Market: 4 major cities opportunity – Nairobi (4M), Mombasa (1. 5M), Nakuru (1M), Eldoret (. 8M) – Majority Western style taste, entrenched “eating out” culture – High proportion of young and out-going population. • Competition – 2 international (South African) food franchisers + local brands. – All have limited menus, not well managed and expensive. While risks entering Kenya are: • High oil prices Exchange rate fluctuation • Political stability The first thing that one needs to look at while deciding to enter a market is whether there is a demand for the product being sold and the spending capacity of the consumers. In the last year the Kenyan economy has been recovered from a slump and is currently booming. At the same time the fast food business has been growing with increased consumer spending (1). A new entrant can take advantage of the vacuum created by the closure of fast food stores due to the post-election violence and global economic slowdown.
The second thing is how a company can differentiate itself from its competitors. GFA relies on its operational capabilities along with locally sourced produce to provide a high ROI. There are a few ingredients that are flown in from the central kitchen in Thailand like cheese to maintain a consistent standard of quality but the rest all are procured locally. With the recent explosion of high quality local produce (2) the franchisee would not have to rely on exported goods alone which result in higher cost of goods sold and lower profits. CAGE Analysis:
While performing CAGE analysis to determine if GFA should enter Kenya or not the first thing compared to was the current operation in Sudan. Some things that stood out during this analysis were the similarities between how Starbucks launched and operated in China, a tea drinking country with low copyright protection. Cultural: • International food tastes in major cities like Nairobi and Mombasa and the willingness to pay a premium for Western products • Presence in Sudan cannot be leveraged due to differences in culture and local food preferences
ADMINISTRATIVE: • Lack of TM protection e. g. Brand Pizza Inn operated by a different owners of Pizza Inn U. S GEOGRAPHIC: • Local Procurement of 65% of COGs, Rest would need to be shipped from Thailand • Easily accessible from India and Bangkok by sea and air. • Eastern and Central Africa’s financial and communication hub ECONOMIC: • $838 GDP per capita, very low $ but users in city willing to pay a premium for western products • Agricultural based economy, ensuring good supply of raw material required for the food business
If GFA can create an image of an international provider and carve a niche the fast food market it can definitely succeed. Referring to the FDI decision tree along with the cage analysis one can deduce that it would be viable to enter Kenya but only if GFA can find the right contact to franchise with. GFA should not go in for the sake of going but conduct a thorough search for the right to local partner, one who understands the rules and regulations on the country and has operated other retail business in the country. AAA Strategy Implications:
Once a decision has been made to enter the country, GFA would need to decide which of the Adaptation, Aggregation & Arbitrage (AAA) strategy to excel at. It is very hard for any company to excel at all three at the same time but focus on different aspects or hybrid of two approaches as its strategy evolves. Below is a quick look at each of the three strategies: Adaptation: GFA will have to modify its menus to suit the local taste. It cannot try and replicate the menu that it serves in Sudan due to the various culture and eating habit differences.
It’ll also do well to adjust its procurement strategy of raw material to adjust to the local supply chain management model. GFA would also have to adapt on how the product is marketed and the structure of the store i. e. independent Pizza stores versus joint Pizza and Ice cream store as highlighted by how the other franchisees operate in Kenya. Most are run as joint stores and in conjunction with other retailing outlets or petrol pumps. Having said that GFA might also differentiate itself from competition by providing high end Pizza stores like Pizza Hut does in asia.
Aggregation GFA has been in operation for over a decade and there are definitely things it can aggregate amongst its distributed operations, things like Kitchen design knowhow, supply chain setup, marketing collateral, basics of the menu etc. It can also further aggregate the shipments to its two African country franchisees to lower cost of shipping and distribution. Even though the two might have different menus, they would still need the same basic products that are imported like cheese, kitchen equipment etc. Arbitrage
Though GFA cannot arbitrage to lower labor costs or take advantage of costs in India or Thailand as the costs in Kenya are pretty cheap, what it can do is arbitrage on the quality of the products to charge a premium. It can get high quality cheese and sauces that its competitors cannot easily replicate and charge a premium for it while at the same time keeping its core recipes a secret. ADDING Value To confirm the entry into a new market one can perform a quick ADDING analysis and see if the entry adds any economic value or not. The image below is a quick snapshot of my analysis: pic] Adding Volume: GFA will definitely be able to add volume to its overall numbers by adding more stores Decreasing Cost: GFA might be able to lower the cost for franchisees a bit in its Sudan operations by sharing some transportation and logistics cost with Kenya especially on items that have to be shipped from India or Thailand. Differentiating: GFA will definitely be able to differentiate itself in the local Kenyan market as well in other markets by having international operations in multiple countries and continents. Improving Industry Attractiveness:
GFA won’t be able to make too much of a difference on this front, though it will have some initial mover advantage especially since a lot of the other fast food stores shutdown during the last economic downturn. Neutralizing Risk: In theory GFA will be able to neutralize risk by diversifying across multiple countries but in reality it might be running the risk of spreading itself too thin. Also by moving into a country like Kenya which does not have stable political environment it might run into the risk of its stores being shut, which should not impact GFA as much as its franchisor. Generating Knowledge:
GFA will be able to learn on how to operate in developing economies in Africa and if successful can utilize this knowledge to further expand on the continent. Having done the basic analysis the last thing GFA can look at how its potential competitors are performing in Kenya. Innscor Kenya, a part of Inscor Africa (a Zimbabwe based company with multiple brands) moved to Kenya3 moved to Kenya using the franchise model. It also operates like GFA with Multiple brands under one umbrella. Inscor found the Kenyan market to be the most promising on the continent4, where it soon further expanded its operations.
Keeping such reference points in mind I think GFA should definitely look at expanding in Kenya through franchising with a suitable partner. References: 1:http://www. businessdailyafrica. com/Corporate+News/Food+businesses+record+growth+on+improved+buying+power/-/539550/1039392/-/item/0/-/rjqcn9z/-/index. html 2:http://www. tegemeo. org/documents/other/Regoverning_Kenya2007_information_sheet. pdf 3:http://dialadeliverykenya. co. ke/about_us. html 4:http://allafrica. com/stories/200402100125. html Class material and group presentation