Strategic Risks Evaluation of Global Food and Beverages Industry

Executive Summary

This report discusses the changing nature of the global business environment in relation to the food and beverage industry. Different types of risks such as cultural, economic, political and marketing risks are discussed while including the examples of Starbucks, Coca Cola and McDonald’s. Cultural barriers have arisen as a result of differences in culture amongst the host and home countries. Economic instability is also a prominent challenge faced by businesses who wish to expand. For instance, the food businesses operating in Europe and the United Kingdom have been severely affected post Brexit. In addition to that, political risks such as severe entry restrictions imposed by the host country can also affect the international food businesses in multiple ways. Some food companies such as McDonald’s have partnered up with Carlyle Group and CITIC Ltd to reduce the entry restrictions in the Chinese food and service industry. Marketing risks are another set of threats associated with global expansion which is discussed in this report. Standardization strategy, adaptation strategy, glocalization strategy, hedging strategy and rebalancing strategy are discussed in detail. McDonald’s and Starbucks adopt glocalization strategy to think global but act local. In addition to that, Coca-Cola has used international marketing segmentation to avoid many marketing risks by creating customer segments based on universal customer needs and wants.

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Introduction

Globalization is one of the preeminent factors that have transformed the world economies profoundly. When a business expands internationally, the purpose is to seek new partnerships, resources and technologies. With this pursuit, global companies are faced with various strategic challenges (Lechner & Boli, 2020). Correspondingly, this is because, upon expansion, an international business comes in contact with the political system, economic state, the legal system, culture, language and several other such factors of a foreign country (Vennet, Jonghe & Baele, 2004). Some of these factors become challenges if the international business is unable to understand them accurately. These challenges include commercial risks, cross-cultural risks, country risks and commercial risks (Avin, Wintle, Weitzdorfer, Sutherland, Rees & Eigeartaigh, 2018). The purpose of this report is to discuss the strategic risks faced by businesses as they expand their operations to international markets while considering the food and services industry as a practical example.

Major strategic risks faced by businesses

Various types of risks are associated with businesses expanding in the food and service industries of the world. Cross-cultural risks come with differences in culture, negotiation patterns, ethical practices and decision-making styles (Quagliariello, 2019). Country risks include unstable or harmful political policies and systems, adverse laws and regulations for foreign countries, ineffective legal systems, excessive red tape and bureaucracy, government’s intervention and extreme barriers to investment and trade, merger and acquisition risks and failure of the national economy (Adekola & Sergi, 2016). Similarly, commercial hazards include poor timing of business entry, competitive intensity, inefficient execution of strategy and competitive intensity, whereas currency risks include foreign taxation risks, asset valuation risks, inflation risks and many more (Peng, 2016). Some of these risks are discussed below:

Cultural Risks

Cultural differences have significant effects on various aspects of international business. Inability to understand the cultural barriers and respond effectively to them can severely impact the marketing, business message communication and product/service design. These risks arise because there is a notable difference in norms, customs, languages and customer preferences across various countries (Ferraro & Briody, 2017). Hence, when a food business expands globally, it must keep the cultural differences in mind. For instance, while Muslim and Jewish customers do not eat pork, this type of white meat is liked by many other countries of the world. Therefore, a restaurant that offers pork in Muslim states, for example, Saudi Arabia and Pakistan etc., is likely to lose numerous sales to its competitors that respect their cultural values (Anggadwita, Luturlean, Ramadani & Ratten, 2017). McDonald’s does not offer beef or pork in India. However, the fast-food company claimed to use Halal meat in its food products which anguished Indian consumers. As 80 per cent of the country’s population comprises of Hindus, they got infuriated by McDonald’s inclination towards Muslim Indians (Kuchay, 2019). Therefore, global businesses must adequately understand the cultural preferences of the market they wish to expand in.

Economic Risks

Economic risks are linked with unpredictable economic circumstances caused by conditions such as currency rates, inflation rates, inflation rates and government’s economic policies. Brexit is a well-known example of an economic disaster faced by many countries operating in Europe and the United Kingdom. Brexit can hurt global food companies in two ways, as explained by Maze (2016). Firstly, currency exchange rates can impact international profits as the value of British pounds has hit a historic low. The pound has lost 20 per cent of its value post-Brexit (Inman & Davies, 2019). In addition, recession in Europe, the United Kingdom or both can also harshly impact the global businesses operating there such as McDonald’s (Laborde, Martin & Vos, 2020). The international companies will have to deal with even more political and economic instability once the United Kingdom decides to exit the EU.

Political Risks

The political instability of the host country impacts international business to a huge extent. This is because factors like diplomatic arguments, labour strikes, policy regulations, strict red tape, ownership restrictions and election outcomes all impact political stability immensely (Mawanza, 2015). The government of the host country may introduce many regulations that make it hard for global businesses to expand there. The Chinese market is a prominent example. Ownership restrictions, limitations explaining the percentage of profit that goes to the host country and rules regarding employing local workers are some examples of the constraints faced by international businesses (Lehkonen and Heimonen, 2015). The Chinese market, which is now the second-largest market worldwide, imposes such restrictions as well (Ncube, Nkhonjera, Paremoer & Zengeni, 2016).

Marketing Risks

Segmentation is one of the most crucial concepts in marketing. Segmentation demonstrates that people differ in their needs and preferences, and therefore, one particular marketing strategy and product will not be favourable for all the people. Before globalization, market segmentation was easier as it was only done at the national level (Doole and Lowe, 2008). However, as companies now engage in international marketing, they need to consider macro-environmental factors like economic affluence, cultural differences, political stability and infrastructure before segmenting. Majority of the companies fail in conducting proper international market segmentation. The failure leads to the development of ineffective marketing strategies and eventually, poor customer response and loss (Ryans, Griffiths & White, 2003).

Potential risk responses by businesses

Strategies to avoid all the above-mentioned risks include standardization, adaptive, glocalization, hedging, rebalancing and strategic partnership strategies. Standardization and adaptive systems are adopted by numerous international businesses operating in the food and service industry worldwide. For instance, McDonald’s is an example of a fast-food restaurant that has adopted these two strategies to understand better the cultural differences across nations (McDermott & O’ dell, 2001).

Standardization strategy

According to the standardisation strategy, the company offers identical food products anywhere it operates. For example, McDonald’s provides the same McFlurry, Filet-O-Fish or Happy Meal, McChicken, McNuggets to all its customers around the globe (Vries, 2013). Similarly, Starbucks is another example of a multinational beverage company using this strategy. The company has developed a ‘lean team’ which helps in standardising the behind-the-counter processes (Clemons, 2020). This strategy can help companies establish a standardised and robust brand image while establishing economies of scale. In addition, many cultural risks, including language and religion, are avoided by using such a strategy (Lee and Griffith, 2019).

Adaptation Strategy

Adaptation strategy, on the other hand, allows food businesses going global to adapt according to the cultural needs and preferences of the customers. This strategy can be compared to localization as well, and McDonald’s is a renowned example of a company that has adopted this strategy. In India, the beef is replaced by chicken. Moreover, the standard Big Mac is named Maharaja Mac (Jha, Gupta, Chattopadhyay and Sreeraman, 2018). Similarly, the fast-food company also offers McAloo and McVeggie to its vegetarian Indian customers. In Morocco, the company offers pita bread sandwiches and uses traditional spices, for example, cumin and coriander. Special Ramadan menu consisting of Big Mac, dates, Moroccan soup and milk is also being offered. This strategy allows McDonald’s to introduce products that are well adapted to various customers, local cultural needs and regulatory requirements of new markets (Gao, Wenzel and Engell, 2016).

Glocalization strategy

Companies can take help from The Bartlett & Ghoshal Matrix while expanding in international food and service industries. The four strategies described as per the model include export strategy, global strategy, transnational strategy and multi-domestic strategy (Young and Ghoshal, 2016). Bartlett and Ghoshal claimed that there is no best fit strategy for all organizations. A company must adopt a strategy as per the culture, strategic position and localization pressures etc. Fast food companies can adopt the glocalization strategy upon internationalization. Glocalization is an integration of globalization and localization. It means ‘To Think Globally and Act Locally’ (Gali, Durovic, Hanscom & Knezevic, 2018). According to this strategy, a company produces and distributes a product or service developed globally but adjusts it according to the needs and preferences of local customers. Glocalization allows global companies to enhance their customer base and establish customer loyalty in their local markets. Such a strategy is not just used by McDonald’s but also by Starbucks as the beverage company offers coffee in the traditional tea-drinking Chinese market. It has adopted ‘glocalization strategy’ by making food options, store layout and artwork friendlier to the Chinese customers’ eyes (Kim, Luk, Xia, Xu & Yin, 2020).

Adapting corporate strategy

Adapting the corporate strategy in the face of political instability requires global companies to evaluate the nature and scope of uncertainty first. After this, a rebalancing or hedging strategy can be adopted in accordance with the political situation of the host country. The hedging strategy allows international business to rebalance the portfolio of activities (Stutz, 2013). This means that global food businesses can continue to operate in the UK post-Brexit but move their transversal functions or productive activities elsewhere. The strategy is also reversible, which means that after the host country’s political environment becomes stable, the key activities can again be transferred there from the safe position (Laker & Roulet, 2019).

Similarly, another strategic option to deal with the adverse political climate of the host country is the rebalancing strategy. While hedging strategy is defensive and is mainly associated with survival, the rebalancing strategy focuses on declining the exposure to the uncertain markets (Jitmaneeroj, 2018). Rebalancing strategy allows global companies to take advantage of the growth opportunities elsewhere. While this strategy is costlier than the hedging strategy, it is more strategic (Harjoto & Jones, 2006).

Merger and partnerships

Without a local partnership, many international businesses find it extremely hard and sometimes impossible to enter the host countries. Chinese food & services industry is a prime example of an industry with strict entry regulations. Therefore, mergers and partnerships can pose to be a favourable solution for many international food businesses. McDonald’s has done so by partnering with Carlyle Group and Chinese government associated CITIC Ltd (Carlyle, 2017). McDonald’s, upon completion of this strategic partnership, claimed that Carlyle Group would operate and control McDonald’s business in Hong Kong and mainland China. This expansion through the partnership is a part of the fast-food company’s ‘Vision 2022’ strategy (Flannery, 2017).

Global market segmentation

This type of segmentation identifies specific customer segments which can either be individual customer segments across countries or country groups (Budeva and Mullen, 2014). The groups contain potential customers who demonstrate homogeneous preferences and buying behaviours. In addition, the global market segmentation also allows international business to develop relevant positioning across borders and to target potential customers at the global segment level (McDonald and Dundar, 2013). This segmentation, if conducted properly, allows global businesses to take advantage of economies of scale (Pomarici, Lerro, Chrysochou, Vecchio & Krystallis, 2017).

Furthermore, consistency in positioning can also be maintained by effective global market segmentation as it addresses the expectations and wants of a particular target group. For instance, consider the international market segment based on demographics, called ‘global teenagers’. Using this strategy, it becomes easier for a global business to address the universal wants and needs of ‘global teenagers’ by providing them with image-oriented, entertaining, branded and trendy products. Global market segmentation (GSM) helps to disseminate a unified marketing program (Hernani-Merino, Lazo, Lopez, Mazzon & Lopez-Tafur, 2020). For instance, Coca-Cola has created an entire segment called ‘Coke No Sugar (CNS)’ or ‘ZERO’ in some markets. In this way, the beverage company caters to a high number of health-conscious customers dispersed worldwide (Villiers, Tipgomut and Franklin, 2020).

Conclusion

Globalization is referred to as the extensive economic integration and continuous interdependence of nations. It has resulted in international trade with the flow of goods, services, information and technology amongst consumers present in various countries. While globalization has had unlimited benefits on international businesses around the globe, it has also posed many disadvantages. Food and service industry has been considered for this report, and examples of McDonald’s, Starbucks and CocaCola global food and beverage companies have also been included. Cultural, economic, political and marketing-related risks concerning the food and beverage industry are discussed in the report. The Barlett and Ghoshal Matrix is discussed in the recommendations section, and the expansion strategies suggested include glocalization, standardization, adaptation, hedging and rebalancing to reduce the challenges associated with international expansion. Glocalization strategy has been used by numerous global food & beverage companies around the globe, including McDonald’s and Starbucks. This strategy means to think globally and act locally. All these challenges are seen to impact the marketing, product/service design, business message communication, profitability and the company’s brand image.

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