Importance and relevance of the topic
The food and beverage sector is one of the most attractive investment opportunity in Saudi Arabia. The industry is forecasted to be in line to improve the sales growth over the next subsequent years as the country recovers from the past economic slowdown. During the fiscal year 2016/2017 the sector witnessed a low purchasing power which was triggered by the drop in the oil prices. Saudi Arabia majorly relies on the exportation of the petroleum products. For this reason, issues arising in the sector do trickle down to other industries, the situation in the food and beverages being an example. Despite this short term economic crisis, the food and beverages industry have remained resilience and is currently in line for a boom. The fiscal changes for example the wage cuts and increasing unemployment rate are some of the factors which have accompanied the low oil prices to curtail the rapid growth of the sector. As at 2016 the unemployment rate in the country was 12.3% translating into a low household spending. Occasionally some firms were forced to offer high discounts hence cutting their profit margin.
Nadec and Almaria remains two of the biggest players in the food and beverages sector. Due to the economic crisis there is an intense competition which are either price or non-price based.
Just like most of the industries in Saudi Arabia the food and beverages sector is composed of more than one player. Such cases give rise to an intense competition where firms try to outsmart each other in a bid to maximise their profits. The relevance of this topic is to assist understand the formulation of strategies among the firms considering the concept of game theory. Competition is normally regulated as away of optimising the firms’ revenue and minimizing the expenses. Game theory gives an illustration of how firms take actions with consideration to the other firms expected reactions. This makes the topic of strategy and competition to be relevance as it will define the survival of a firm under a competitive market.
In this report will present the application of the game theories to the food and beverages sector taking a case study of two companies that is the NADEC and Al Maria. The presentation will begin by a highlight of the sector, this will be followed by a literature review of the important aspects regarding the topic. Afterwards, will undertake a critical analysis of the firms’ decisions regarding game theory.
Structure of the presentation
Food and beverages is an industry which account for one of the biggest shares of the household expenses in Saudi Arabia. In comparison to the low sales in 2016, the improvement in the oil and gas sector saw 2017 sales improve. As the local economy continues to recover the food and beverages sector’s growth is expected to be more visible. This sub sector is expected to continue availing growth opportunities for the food retailers with the support from the hypermarkets and supermarkets.
The Almaria company was developed in Riyadh in Saudi Arabia in 1977. It was developed as a partnership between Alatair McGuckian, the brother Paddy and Prince Sultan bin Mohammed. Currently the firm is the largest integrated dairy firm in the Middle East (Pendleton, 2013).
NADEC is a large agricultural and food-processing firm which operates in the Middle East and some parts of North Africa. The firm was established in 1981 through a royal decree. The firm is a joint stock public with 20% of its shares held by the Saudi Arabian government.
Both the companies specialise in the food and beverages production bringing them at logger heads as each firm tries to control the market.
The culture of Saudi Arabia is Arabic and Islam, the country is a deeply religious community which gives a lot of values to traditions and family aspects. The cuisine of Saudi Arabia is like that of most countries in the Arabian Peninsula, they are deeply influenced by the culture of Persian, Turkish and African food. Animal foods are tolerated based on the halal Islamic dietary laws. This consider pork impure and alcohol prohibited. The dietary laws regarding pork is strictly adhered to (Rodenbeck, 2004).
In the period 2017-2023 the fast food market is expected to grow at a CAGR of 6.9% in Saudi Arabia. The fast foods can quickly be prepared and are increasingly becoming alternative to the home-cooked meals. The introduction of international food supply chain, expanding tourists’ population, changing food preference and an expatriate population is escalating the food market in Saudi Arabia.
In the upcoming period the food market is expected to register a rapid growth. The increasing spending in food products followed by an expanding urban population is responsible for the projected increase in food demand. The food market is however under threat from the growing health concerns, diabetes and obesity being at the forefront. The companies in the industry will have to invent ways of offering foods which are termed as healthy by the population for them to sustain the market. This way the health issues will be neutralised.
A systematic introduction to the food and beverages sector
The main revenue generating outlets for food products are the take away outlets, full service outlets follow this list curtesy of better services and offering variety. As at 2016 Riyadh was the major revenue generator due to the enormous number of its habitants being involved in employment activities (Wood, 2017).
Market competition stand out to be one of the factors that determine the steps taken by a firm. According to the game theory perspective competition can be treated as a game. In this situation one player will make a move after considering the past and potential future moves of the other players. After making a move the other competitors will respond this respond will also consider the past, current and future possible moves by the other players. In this report will have a review of sources of growth of the Nadec and Al Marai enterprises;
The introduction of NADEC foods and agriculture in 2011 defined a new down for the firm. The company has a vision of propelling long-term growth as an independent firm. This vision has defined the firm’s market and consumer approach for the future, this is necessitated by the highly flexible market dynamics of Saudi Arabia.
The game theory can be broadly classified as co-operative or non-cooperative. For instance, as a strategy by NADEC to facilitate its growth it signed a deal with Al Safi which saw NADEC acquire the ownership of 100% shares of the Al Safi company. This way the share holders of Al Safi were issued shares in NADEC hence converging their interests. This strategy assisted NADEC minimise competition by converging the formerly diverse interests of the two companies. This step neutralised the competition and increased the payoffs of both the two firms involved. Considering that price wars have been stopped the two firm which have now converged in to one have made a cooperation which will see their overall market influence improve hence are in a stronger competitive position. The game has been transformed from competitive to non-competitive (NADEC, 2018).
To minimise price competition nadec have also put in place several strategies that will see the firm improves its market share and be able improve on its growth rate;
Concentring on strengths; NADEC must compete strongly to promote its business operations both in the country and abroad. Inspite of the intense competition the company have shown that it possesses the strength to retain its top statue in such an environment. The company have focused its concentration in the innovations in dairy and juice segments sector This strategic are aimed at strengthening the local as well as foreign market penetration. By focusing on the company strengths, the firm can compete the other firms without having to continuously retaliate to the price competition going on in the market.
The culture of Saudi Arabia
Delivering fresh and quality taste products; from the time of its inception NADEC have continuously worked on building the confidence of its consumers by providing a variety of local as well as regional products. The success of the firm can be attributed to its concentration on freshness and quality taste. The firm boast of being the second largest processor and direct-to store producer. This has been enhanced by locating the company’s facilities strategically at the heart of Saudi Arabia. The company send over 1000 refrigerated trucks daily to assist distribute fresh products to its consumers.
Enhancing the local and foreign market position; to hold on to its consumers against being snatched by several competitors entering the market the company must play in way that will discourage the consumers from looking elsewhere. For instance, the firm offers a full range of products all of which boast of high quality, availability of comprehensive range of services, an innovative culture as well as clear clients focus fills the list of the firms playing steps. Outside of the country the company have identified the Gulf market segment, Levant in addition to North Africa as areas of potentiality. These regions have preference to the company products hence the form have an upper advantage in terms of facing of competition (NADEC, 2012).
Al Marai boast of being the largest integrated dairy processing firm globally. The firm’s reputation of delivering quality across a wide range of products have seen it fend off competition to retain the top spot. As away of avidin price competitions and optimising its profits the firm have invested heavily on quality production facilities. The firms also invest heavily in technical research. This allows the company room to constantly innovate new advance ways of improving the quality and durability of its products. Provision of quality and fresh agricultural products have seen the company retain its consumers despite the strong market competition (ARAB NEWS, 2012).
The firm’s effort to minimise price competition is what have enable the firm to survive the market retaliation to its decisions. New firms entering the market are not able to acquire the capital needed to develop the processing facilities that Al Marai have acquires this way their decisions have minor impact on the firm as it continue to stand as the best quality provider.
The food and beverages sector in Saudi Arabia is the top economy in the entire Arab world. The sector is projected to grow at a compound annual rate of 5.9% between 2016-2020. This growth is driven by chocolate confectionery, chilled processed snacks and foods, as well as frozen food. This is as per the consultants Frost and Sullivan (Kassem, 2017). The main hypermarkets in the sector such as the Danube and Carrefour are initiating promotion of their own brands with a view of spreading the quality perception while retaining affordability.
Fast food market in Saudi Arabia
According to the consultancy several business opportunities exist in the sector. For instance, focusing on specific needs like ease of preparation and convenience. The industry also provides an avenue for firms to improve their profitability by investing in product differentiation via introduction if new flavours, healthy options, formats and cooking designs (Spanos & Lioukas, 2001).
Frost and Sullivan took a note of the tremendous changes that is currently taking place in the food and beverages sector. The use of social media and the internet for instance have shifted the pattern of consumer purchases. In addition, the hectic lifestyle which have accompanied economic hardship have influenced the dietary habits of most habitants of the nation. In 2016the entire Saudi Arabian food industry was responsible for 12% of the nation’s GDP (Kassem, 2017).
The food and beverages sector is however very competitive and several austerity measures that have been taken in the past years to assist cope with the sharp drum in the petroleum product prices have curtailed the industry’ growth. The Nadec and Al Safi are the biggest competitors to the Saudi Arabian Almarai. In July 2917 Almarai which is the middle East largest dairy producer stated that it had to retain its cautiousness for the entire 2017 due to the unfavourable external environment and the projected low seasonality that do arise in the third quarter (Kassem, 2017). Netle (an international food and beverages producer) indicated that the growth of its sales in the Saudi Arabian market have slowed down for the past two years due to the negative impact the low oil prices have in the economy.
The food and beverages industry is largely dependent in provision of quality. For this reason, firms which can invest in technologically advance production facilities are able to supply fresh and quality products throughout the year. This firms hence possess consumer loyalty making it hard fir new firms to enter the market successfully. The intense competition has also seen the bigger firms offer bonuses and discounts hence driving out new firms or restraining their market entry. Based on the game their perspective firms occasionally avoid making steps when they project the payoff to be negative because of the expected retaliation by the competitors. Using this argument, it can be stated that small firms occasionally restrict their market to avoid colliding with the already established companies. This way they can make profits. The situation explains why only a few firms are growing when many others continue to operate in small scales.
Application of theories in explaining sources of corporate growth in the sector
Being a sector with several players the game theory state that the decision of one player will be affected and will also affect the moves of the other players. The potentiality of the Saudi Arabian food and beverages industry have attracted several players both locally and I international into the sector. The entry of several firms in the industry have made the sector very competitive and firms must strategize appropriately to withstand the competitive pressure. For example, Al Marai have invested heavily on quality provision facilities and advance technology to ensure the firm continuously provide quality and tasty products to is customers. NADEC on the other hand is concentrating on spreading the notion of freshness while at the same time availing diverse range of products. In addition, the company has invested a lot in close customer relationship. This way its is able to retain most of its consumers despite the intense competition. On the other hand, the prevailing had sips brought about by the dropping oil prices means the firms must strive to provide affordability to continue retaining their clients who are under financial stress. In conclusion the market competition games is the defining factor among the companies as they strategize to optimise profitability.
Technology is one of the tools of enhancing quality production and efficiency. The volatility of the food and beverages sector have forced the players in the market to consider heavy investments in technologically advance production, transportation and storage facilities to improve the freshness of their products (Kemp & Verhoeven, 2002). Food and beverages are mostly judged by their quality and freshness this means the firms with huge financial power and capacity to put more investments un the technical advancements are having a niche when its comes to market penetration. This are some of the reasons why Al Marai and NADAC have managed to retain big proportions of the industry despite heavy competition.
This analysis was based on the applications of game theory in designing market strategies, the limitations of the analysis are therefore arising from the fact that game theory on itself fails to address several aspects of competition (Ansoff, 1984).
First, the theory assumes that the players possess knowledge of the strategies of other players. This is normally not the case as company strategies are confidential information which are rarely shared to the public. Also, the game theory is of the argument that one player’s advantage is a disadvantage to the other, also this does not hold in all situations. Finally, the analysis was based on secondary information from firms and market analysts. Firms may occasionally withhold vital information regarding their strategies hence rendering the analysis insufficient to address all the arising issues in the industry (ALLSYLLABUS, n.d.).
References
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