Topic: Marketing strategy
Pages: 10, Double spaced
Order type: Dissertation
Language: English (U.K.)
Dear, based on the first part of the dissertation, (attached) I want move now to the marketing section of the business plan, please see (attached outline) of course not excluding the target segment which are towards the middle and upper middle income segments and higher,
As for the references, i want only accessible reports, i.e. online articles and accessible reports,
The proposed project is to develop a comprehensive business plan to launch Fever Tree soft drinks in Saudi Arabia. The business would be centred around an Agency model, exploring and contrasting the costs, benefits and drawbacks of various distribution models. From fully outsourcing all elements of the business to actively managing the operations of each element of the business.
SAUDI ARABIA MACROECONOMICS
The macro environment section will examine the macroeconomic environment of Saudi Arabia. The macroeconomic environment therefore looks factors which influence the economic environment of Saudi Arabia, in the context of how they might affect Fever Tree soft drinks in Saudi-Arabia.
Economic growth is operationalised as the extent to which the gross domestic product of the country changes over time. The economic growth rate of Saudi Arabia has been rather volatile in the past decade, as illustrated in figure 1. This trend has been caused by the fluctuations in the prices of oil, the export which is the dominant source of income in the country (Hertog, 2011). However, the GDP of the country has constantly been growing. The growth in the gross domestic product of the country signifies that the aggregate demand of the country will be growing as well as aggregate supply. The gross domestic product of a country should be demystified in order to understand the relationship between its growth and the consumption patterns which might affect the purchase of Fever Tree soft drinks. GDP is composed of four components namely government expenditure, private investment, household consumption, as well as the balance of trade (exports minus imports). If the government expenditure increases, just it is said to be in the case of Saudi Arabia (Euromonitor, 2017), there will be more infrastructure and more money in the economy, which will increase consumption and imports. Moreover, the increase in consumption will increase the attraction towards investment, which will grow and also develop export capacity. Moreover, a growth in investment means that the businesses will be hiring more people, something which will increase the disposable income in the country. This increase in the disposable income will increase the demand for normal goods and services such as the soft drinks which Fever Tree will be selling.
Source: World Bank (2017)
The inflation rate in Saudi Arabia is currently -2.88 (World Bank, 2017) so this is deflation. However, the average inflation rate over the medium term (5 years) was -3.85. Inflation refers to the general increase in the prices of goods and services within the economy. Some optimal inflation rate is encouraged for economic growth, because deflation signifies a decline in the economy as people are consuming less. However, runaway inflation is a different story, because it would entirely scrap the value of the company’s earnings (Mankiw, 2014). The inflation rate in Saudi Arabia is unstable and it has turned into deflation. However, the prices of oil are rising and the OPEC cartel has decided to reduce the output of oil to the extent that the prices of oil will be rising again. Accordingly, if the income from oil rises again, the aggregate demand might rise again as well. Moreover, a rise in aggregate demand will cause the prices of products to rise, so there might be some positive inflation in the future, which the company must be prepared for. By preparation, Fever Tree must be prepared to have a pricing strategy which will meet the increase in input and operational costs which will come with inflation.
The current exchange rate of the Saudi riyal to the US dollar is 3.75, under direct quotation. However, as illustrated in figure 2, the performance of the riyal again the dollar has been relatively stable over the past five years. The exchange rate is very important, because the company will have to procure inputs from the cheapest supplier of the most quality products abroad. Saudi Arabia is a relatively arid country, so the company is unlikely to get the agricultural inputs for the beverages from within. Moreover, the US dollar is the international transaction currency, and this is the reason why it is being quoted. If the Saudi riyal appreciates against the dollar, this will be beneficial to the company because it will reduce the cost of importing the inputs from abroad. Moreover, the lower the cost of the inputs the higher the profit margin which the company can achieve. However, if the riyal depreciates against the dollar, then the company will incur heavy importation costs. These high importation costs can reduce the profit margin of the company while at the same time necessitating it to raise its prices. Moreover, for normal goods such as beverages, the law of demand applies. In other words, increasing the prices will lead to a decline in the demand for these beverages, and the reverse is also true.
The current interest rates in Saudi Arabia are zero (World Bank, 2017), which signifies Islamic banking. The interest rates are a monetary policy tool through which the central bank determines the flow of money in the economy. If the central bank wants to reduce the availability of money in the economy, it raises the interest rates so that the rates of borrowing and investments decline. This, in return reduces the rates of consumption and the flow of money in the economy. However, the reverse is also true in this case. Therefore, one can argue that the monetary policy which Saudi Arabia has been trying to implement if monetary expansion. Noteworthy, the growth of the interest rates would be hinderous to the revenue and growth goals of X rends. The company will inevitably have to use some debt financing during its operations. However, if the interest rates are prohibitively high, then the company will have to use very little debt, and hold off some of its development objectives. Furthermore, higher interest rates will reduce the consumption capacity of the consumers, something which will retard the revenue growth potential of the company.
Trade relations membership
Saudi Arabia does not subscribe to many free trade agreements or even regional integration bodies. With the exception of OPEC, the country is only a signatory to eight other free trade memberships (Mofa, 2010). The narrow trade membership structure of Saudi Arabia will affect Fever Tree in two major ways. First, if the country was part of some body of economic integration, it would enable the Fever Tree to procure the inputs more cheaply. In other words, there would be no tariffs on the products from the members of the free trade agreement membership. However, since this is not the case, import tariffs will be part of the tax structure which the company will be incurring in its production. Alternatively, the fact that Saudi Arabia is not a member of any significant free trade agreements means that the company might not have a strong threshold for regional expansion in the future. If the country was a part of a strong body of regional integration, then the mobility of the factors of production would be relatively easier. In other words, operating in Saudi Arabia under a regional free trade agreement would mean that the company can expand into Qatar of Oman because there are no structural barriers to companies which are registered in Saudi Arabia.
GDP per capita
The income per capita of the country is currently at $55,760 (World Bank, 2017), something which has garnered the country a classification as a high-income country by the World Bank. Moreover, the income per capita of Saudi Arabia has been growing over the past decade (World Bank, 2017), as the country tries to diversify its economy away from its over reliance on petroleum. A high income per capita is synonymous with high disposable income and therefore, a great propensity to consume (Mankiw, 2014). However, this is dependent on external factors such as the income tax rates and the propensity to save. The income tax rates in Saudi Arabia are currently at zero. Accordingly, the actual disposable income of the consumers in the Saudi market stands at full GDP per capita capacity. This is still considerably high, which means that the consumers will have enough funds to consume the products of Fever Tree beverages in very high quantities.
The unemployment rates in Saudi Arabia are 5.5% in 2016 (World Bank, 2017). The employment rate parameter is very important in the macro economic environment because it determines the costs to labour and the consumption capacity of the target market. If the unemployment rates are very high, then the labour is cheap because each one of the people in the population is trying to find work. Accordingly, they might be willing to take any work that comes their way because they need the money. However, fi the unemployment rates are low, the wages are very high as businesses compete for the labour. On the other hand, if the unemployment rates are high, the levels of consumption decline because people cannot afford to purchase most of the products. Considering that beverages are not necessity products, high employment rates would drive the company out of business. Since the unemployment rates in Saudi Arabia are very low, Fever Tree can safely invest in the Saudi market without much concern about the consumption capacity of the consumers.
Related to the above, the minimum wage is SR 5300 for Saudi nationals and SR 2500 for expatriates (Saudi Gazzette, 2014). Accordingly, it appears that labour is rather cheap in the country, and therefore, Fever Tree does not have to worry about the impact of high labour costs on the profitability of the company. However, the wages which are paid by Fever Tree will be contingent on its human resource strategy. Owing to the very low cost of labour, the company has the capacity to pursue the bargain labourer human resource strategy which is shown in figure 3. With this strategy, the company would recruit semi-skilled workers and pay them the basic minimum wage. However, the turnover rates for this strategy would also be rather high. Considering that the beverages industry is rather more knowledge intensive than the fast food industry for which this strategy is most suited, the company will have to choose from any of the other strategies in figure 3. Noteworthy though, there is a campaign for businesses to hire more Saudi nationals instead of foreign immigrants (Euromonitor, 2016), there might be a hike in labour costs because immigrants are typically as expensive to hire.
Current stage in business cycle
Saudi Arabia is currently on the path to recovery, as illustrated in the economic performance of the country in figure 1. The business cycle involves four major periods, two of which are on the extreme end. There is the peak period when the economy is booming, and the path to this cycle is called expansion or recovery. On the other hand, the business cycle will decline back into a trough, and the path to the trough is the decline period. Saudi Arabia’s recovery period means that Fever Tree might generate a considerable amount of revenue if it begins investing now. However, the fact that there might be troughs, is a call for the company to apply a strangest cost structure which will ensure that it does not face considerable challenges when the economy declines again. However, as mentioned prior, the majority of the economic performance of Saudi Arabia is dependent on oil revenues. Accordingly, the volatility in the prices of oil might make the business cycles even shorter. Consequently, it is advisable for Fever Tree to draft a marketing mix which is oriented towards a trough period, so that it remains profitable during this period, while gaining high profit margins during the period of recovery.
There are numerous banks in Saudi Arabia, in addition to the stock market. Accordingly, it is evident that Fever Tree will have access to extensive source of funds immediately. Noteworthy though, credit will be a prerequisite for the company to use either during the period of launch or after when the brand has grown. However, the stock market might be an entirely different case, because the prerequisites to acquire the equity are rather more complex. Moreover, being a new company in the market, Fever Tree will not have proven yet, that it is worth the stockholder’s funds, so it shall not be able to access equity in the short run.
Infrastructural capacity is also a very important microenvironment factor because it influences the movement of products and services in the economy. The relevant infrastructure in this case would involve ports, roads, and railways, in addition to telecommunications infrastructure, to mention a few. There is an index by the world bank, which sums up the national performance of a country on all of the aforementioned infrastructure. It is called the logistical performance index, and it runs on a scale of 0 to 5, with five being the best performance and zero being the worst performance. On the latest score of this index, Saudi Arabia scores 3.16 (World Bank, 2016), which is rather impressive. With such an LPI index, it appears that Fever Tree will be able to pursue an omni-channel strategy. In other words, it will be able to distribute its products physically on land, or possibly online, because their infrastructure to support this, is evidently there. With physical distribution, the company shall use intensive distribution, in which it delivers products to all of the customers who can possibly buy (Hollensen, 2015), rather than using exclusive distribution. Moreover, the company shall use indirect distribution because soft drinks are very high-volume product, and the company cannot justifiably ever all of the regions well enough. Accordingly, the distribution channel will be as follows: first, the company will sell the products to the distributors, and then these distributors will sell to the wholesalers who will in return be selling to the retailers, from where the consumers will get the products.
The company will require some supporting industries to ensure that its operations are supported as illustrated in Porter’s diamond framework (Ozgen, 2011). The supporting industries which will be required for the company include logistics, telecommunications and marketing, to mention a few. The logistics industry will help with the movement of both inbound and outbound logistics for the company. Saudi Arabia has some logistics companies, so Fever Tree will use some of those. On the other hand, the telecommunications industry on the other hand, provides a communication platform which is vital to the performance of the company. For example, Fever Tree cannot operate without supply information systems, management information systems, and accounting information systems so it must be done.
Education also impacts the microeconomic environment because it determines the wage rates, as well as the productivity of the workforce. Typically, a more educated workforce will require higher wages, but it might also be skilled enough to be more productive than the relatively unskilled counterparts. The education rates in Saudi Arabia are 1.6% at the tertiary level (World Bank, 2017), which requires high salaries so the highly skilled labour will cost the company a lot. However, this labour will enable the company to make substantial returns on the labour, better than it would have done if the company was using unskilled labour. The quality will be higher.
POPULATION & DEMOGRAPHICS
Saudi Arabia has a population of approximately 32.2 people according to World Bank (2017). Accordingly, the population of the country is rather small and so is the market volume. However, the small population should not matter very much because this is a very high-income country. However, the country cannot target carbonates at children below the age of 9 years because it would not be very healthy for them. Accordingly, the target market for carbonated soft drinks consists of the customers who are 9 years of age and over. Illustrated below are the demographic groups in Saudi Arabia.
Noteworthy, Fever Tree might want to focus on the cities where there is a more elaborate distribution infrastructure. Moreover, the urban population of Saudi Arabia is 6.5 million (World Bank, 2017) and therefore, targeting the urban areas first, is justified.
Population growth rates
The population growth rates of a market are very important because they determine the future growth rates of the market. Moreover, this figure is especially important if the company intends to operate in the market on a long term basis. A very populous country with very low population growth rates could end up being a very unprofitable market in a decade or so. On the other hand, a less populous country might turn out with a high market volume in the future if the country has a high enough population growth rate. Accordingly, the 2.2% population growth rate of Saudi Arabia (World Bank, 2017) exonerates the country from being a low population market, and therefore, less likely to be unprofitable for the company.
There are no specific social classes in Saudi Arabia, so the only social demarcations which might be relevant to the company include the demarcation between migrants and the natives, as well as the demarcation between the royal’s ad the ordinary people. Obviously, the natives are likely to have a higher income than their migrant counterparts who are not expatriates (Saudi Gazette, 2014). Alternatively, the royals are also more wealthy than the average household, but they are a very small group. Moreover, soft drinks are a low cost purchase, so each of the different social segments can afford them.
Family structure and size
Saudis have a highly collectivist culture, as illustrated in figure 4. Accordingly, the family sizes are large, because the typical Saudi family is an extended family. Accordingly, it is possible that advertising to collective families will be better than targeting individuals with the marketing mix. In fact, the communication mix or promotional mix of the Fever Tree should be family-oriented, in order to increase consumption volume.
Figure 4: Cultural dimensions in Saudi Arabia
Saudi Arabia is a predominantly Muslim country. Accordingly, the social environment is managed on Muslim values, so the company must ensure that it adheres to them. Being a beverages company, Fever Tree will have to ensure that the ingredients adhere to the feeding standards of the country. In other words, the beverages have to be halal. Another area in which the religion of Saudi Arabia might affect the company, is the promotional mix. The business will not be allowed to use sexually explicit material for marketing, because of the intense religious orientation of the country.
Cultural backgrounds according to Hofstede’s model
The cultural mix of a country determines its purchasing habits, so it is important for Fever Tree to study the cultural environment of the Saudi population. However, it makes more sense to analyse the cultural environment through a predetermined model, which in this case is Hofstede’s model.
Hofstede’s dimensions for Saudi Arabia (Geert, n.d.)
The score for individualism in Saudi Arabia is 25%. This means that the country is more collectivist than individualistic. Whereas in an individualistic culture, decisions are base for individual utility, the decisions in the collectivist cultures are made for group utility. This means that the decisions about whether or not to brand Fever Tree soft drinks will be collectively made. This further advances the argument that the marketing mix of the company should be targeted at the entire family, or other social groups, rather than being targeted at individuals.
Alternatively, the power-distance score of Saudi Arabian culture is 95%. This means that there is a strong of reverence for authority in the country. It is therefore important for the company to realise that those in authority should be handled with specific care. This applies to when dealing with the authorities in the daily operations of the company, because they have the authority to either make or break the business. Consequently, the business must ensure that it operates both within the formal and the informal boundaries of the Saudi authorities. Regarding the customers, the high power-distance score means that whoever makes the purchasing decisions at home, should be targeted more accurately and directly, than the entire family. It has been stated severally before that the company should target the family instead of individuals. This is still applying, but there must be someone within the family who makes all the purchasing decision. In this case, the mothers are more likely to make the domestic decisions at home. Consequently, it is them at which the promotional mix such as advertising must be targeted. However, the value proposition should show how the beverages are good for the whole family of the person who is making the purchasing decision. This is so because the high-power distance scores indicate that their authority will be respected on the matters pertaining to domestic purchases.
The rates of uncertainty-avoidance in Saudi Arabia are relatively high, at 80%. This high score means that Saudi Arabians are not very open to the concept of change. This is also exacerbated with an uncertainty avoidance score of 35%, which indicates that the culture hardly ever changes any of its tenets. With such high uncertainty avoidance rate, Fever Tree might find it challenging to gain market adoption in the country, because these people are more likely to stick with what they know. Accordingly, it will take this company a rather long time to build a market following, but when it does, the high rates of long term orientation will ensure that the customers will effortlessly stay loyal to the brand.
The indulgence score of 52% indicates that Saudis are moderately hedonistic. In other words, they occasionally give into their desires as they arise. Consequently, they might display a high demand for the soft drinks because they are a low involvement normal good, rather than a luxury.
Saudi Arabia is perceived as a high-income country by the world bank, so the majority of the residents in Saudi Arabia are within the high income bracket. Moreover, the same world bank statistic syndicate that no one in Saudi Arabia is living below the poverty line. The number of people who is below the poverty line would have been relevant to the demand for the products of the company. As severally mentioned prior, the beverages are low involvement purchases which are also rather cheap. Consequently, anyone above the poverty line would be able to afford these soft drinks.
FOOD & BEVERAGE OVERVIEW
The five-year compound annual growth rate of the industry as is 5.5% in 2016 (Euromonitor, 2017). Such positive growth indicates that the industry has a bright future, and Fever Tree is not entering into a declining industry. The leading brands in the industry are shown in table 2 below. From the distribution of the market share of the companies in the industry, it appears to be monopolistic.
Key success factors in the industry
The key success factors in the industry are as discussed below:
Quality is one of the dominant key success factors in the food industry (Sun, 2010). If handled poorly, food is a contagious element, which can make the consumers seriously ill. Considering the enormity of the health implications of food, the customers are likely to search for food products with undoubted safety records.
Furthermore, distribution is another key success factor in the food and beverages industry. It is important to note that packaged beverages can easily be substituted for the beverages which are made at home. Consequently, the company has to ensure that its products are easily accessible to the consumers. It is for this reason that the company will be pursuing an intensive distribution strategy.
These beverages are distributed through retail outlets to end-consumers and hospitality settings for off-trade purposes. Noteworthy, the retail outlets in the country are consistently growing. An accordant to a report by Euromonitor, the retail industry in Saudi Arabia has grown at a rate of 6% in the year 2016 (Euromonitor, 2016). Accordingly, the company will be able to distribute its soft drinks using the intensive distribution strategy which was prior discussed.
The data for the total production costs for the company is not available, but since these prices are very low, they reflect the status of beverages in the Saudi market. In other words, they are not a necessity and they can even be substituted with homemade juice or boiled water at home. Consequently, it is possible that the companies in the Saudi Arabian beverages industry use mark-up pricing rather than premium pricing.
The growth of the demographic of young people is also driving growth for soft drinks in Saudi Arabia. According to Euromonitor (2017), there is a growing demographic of young people in the country, who try to emulate the western cultures which they are exposed to on social media. Consequently, this is driving up the demand for the soft drinks in the country.
The young people (below 30 years) are the main demographic in the demand for drinks. However, since they spend so much time on social media, the manufacturers are also beginning to target their communication mix towards social media. This enables the manufacturers of the soft drinks to understand this demographic more intimately than they were doing without the aid of social media. With the interactive properties of social media, the manufacturers can work with the customers to produce a more targeted marketing mix.
The country is getting more health-conscious so that they are shifting away from the unhealthy lifestyles (Euromonitor, 2016a). Accordingly, the customers are shifting towards beverages and foods which are deemed healthy. It is therefore the prerogative of the company to ensure that it provides a higher portfolio of healthy soft drinks than it does for carbonated soft drinks. In fact, the government is considering banning carbonated beverages from the school canteens and cafeterias, because they are perceived as dangerous to the health of the students (Arabian Business, 2010). Other than the fact that consumers incrementally prefer healthy drinks, there are hardly any other trends.
SUPPLY & DEMAND
The average consumption of soft beverages in Saudi Arabia is 10.875 million liters beverages in 2016 (Euromonitor, 2017). The demand for off-trade beverages has been growing at a faster rate than on-trade beverages, as illustrated in figure 5. However, in total, there has been consistent growth in the beverages industry from 2011 to 2016 in both on-trade and off-trade markets. However, bottled water seems to have the greatest demand in the country (Euromonitor, 2016) which enforces the stipulation that Saudi Arabians are changing their consumption habits to healthier consumption.
TAX & REGULATIONS
The corporate tax rates of Saudi Arabia are rather low, at 20%. Moreover, such low corporate tax rates cut less into the profitability of the business, because it has to give up a considerable lot of its income. Moreover, the manufacturers must also pay value added tax (VAT). Depending on the amount of turnover, the company will be required to pay a predetermined amount of VAT. However, VAT can be integrated into the price of the product, so the burden of actually paying the VAT falls on the consumer.
The most important regulation which the company will be facing, is the consumer protection law. The consumer protection regulation gives the consumers protection from poor quality products, from exploitation in terms of price, from false information about the product, while at the same time giving the consumers a right to be refunded in case they find a fault with the product. Furthermore, the government of Saudi Arabia has instigated a regulation whereby the carbonated soft drinks are not allowed in the canteens and cafeterias of schools.
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