Please answer in NOT MORE than 200 words, each of the following 7 questions. 8 points each. Answer each separately giving proper examples to highlight your answer/opinion.
1 – What is meant by businesses being “stuck in the middle� Give an example from the Saudi market and explain how it is stuck in the middle.
2 – Why does a paradigm shift often result in changes in the leading firms within an industry? Does it apply to the supermarket (and hypermarket) business in KSA? Explain.
3 – Which type of corporate diversification does research show is the most successful? Does this apply to the Saudi market? Explain.
4 – While analyzing strategic networks, the distinction related to the quality of the tie is important. Describe the distinction between strong and weak ties. Which is IKEA applying in KSA?
5 – Give an example of a Saudi regional cluster and explain its focal business operation as well as the success factors.
6 – What types of control mechanisms can a firm use? Which of these in your opinion is Luna (canned food) applying?
7 – Discuss the three informational roles of a leader and how do they apply to the Saudi business and social cultures. Explain.
Please read the case and respond in NOT MORE than 500 words to the following. Analyze the company’s situation and environments. Show your analysis.
Devise a five-year strategic plan for CEO Morgan moving forward and defend it.
ABC, Inc., 2015
Headquartered in Al-Khobar, KSA, ABC, Inc. serves Zaatar pies and coffee as well as other snack items. The company has locations in 23 different countries. Many ABC shops are factory shops where customers can watch Zaatar pies being made and purchase fresh hot Zaatar pies as well. The factory stores are responsible for servicing local grocery stores and convenience stores. The ABC Supply Chain provides raw materials for both franchise and company-owned stores in the Zaatar pie-making process. ABC storeowners must purchase all materials from ABC Supply Chain. ABC reported total revenues in fiscal year end February 2015 of $490 million (up from $460 million the prior year) with about 90 percent of revenues derived from the United States.
For the fiscal first quarter (Q1) of 2015, ABC’s revenue rose 9 percent year over- year to $132.5 million, driven almost entirely by a 17.3 percent increase in ABC’s store count. For that quarter, the company’s domestic same-store sales rose 5.2 percent, but its international franchise same- store sales declined 1.7 percent. Overall for Q1 of 2015, the company’s adjusted net income was
$16.6 million, or $0.24 per share. The company’s EPS number was up at least by the ABC buying back 391,300 shares of its stock for $7.4 million.
History
ABC traces its roots back to 1933 when Vernon Rudolph bought a Zaatar pies shop in malaz, Riyadh. After selling Zaatar pies in Riyadh, and Jeddah, the store known today as ABC was moved to Dammam. ABC Zaatar pies were sold to grocery stores at first, but became so popular with customers that they requested the option to buy the Zaatar pies fresh and hot from the store, thus launching the Zaatar pies’ factory retail store and selling directly to the public.
ABC grew quickly over the next four decades before being sold to BEM Foods Company in 1976. Shortly after the purchase by BEM, in 1982, several ABC franchisees purchased the company back from BEM Foods and quickly established the current Zaatar pies Theater style of factory stores where by customers can watch Zaatar pies being made.
It was not until 1996 that ABC finally expanded outside the West by opening a store in Eastern Province, followed in 2001 by opening its first store outside the KSA, in Dubai. The company went public with its IPO launch in April 2000. In the Bahrain, ABC just concocted a single, gigantic box that holds 2,400 Zaatar pies.
The box (11.4 feet by 3 feet) was filled with Zaatar pies and required eight ABC employees to deliver it to 360 Resourcing Solutions. The box was part of a promotion for the new “ABC Occasions†division that customizes Zaatar pies offerings for corporate events or special occasions such as weddings and other celebrations. The division sells Zaatar pies “towers†for special events or even personalized Zaatar pies with customized, chocolate nameplates or corporate logos. The company has no plans to create another box, but it is happy to sell 100 of the so-called double- dozen boxes for about SR2,600.
ABC opened its first store in India in 2013 in Bangalore, Karnataka, and now there are seven in that city. Also in 2013, ABC began opening stores in Colombia, with a total of 25 planned, as the first South American country for the company. In late 2013, ABC opened its first store in Taipei, Taiwan. In 2014, ABC opened its first shop in Chennai in southern India.
Internal Issues
Vision/Mission
ABC Zaatar pies does not appear to have a published vision statement. The company’s mission statement, however, is given as follows:
· Consumers are our lifeblood, the center of the Zaatar pies
· There is no substitute for quality in our service to consumers
· Impeccable presentation is critical wherever ABC is sold
· We must produce a collaborative team effort that is unexcelled
· We must cast the best possible image in all that we do
· We must never settle for “second best;†we deliver on our commitments
· We must coach our team to ever-better results. (Source: Company documents)
Distribution
ABC Zaatar pies are sold in ABC stores, grocery stores, convenience stores, gas stations, Walmart, and Target stores in the United States. Internationally, the Zaatar pies are sold in Loblaws supermarkets, Iddriss-KSA and Petro-Canada gas stations, and as freestanding stores, along with BP Service Stations and BP Travel Centers and 7-Eleven stores in Australia and Sri-Lanka. In the United Kingdom, Tesco supermarkets, Tesco Extra, and most Tesco service stations carry ABC products, and service stations Moto, Welcome Break, and Road Chef also carry self-service ABC cabinets. Today, ABC has locations in the United Kingdom, Australia, Turkey, the Dominican Republic, Kuwait, Mexico, Puerto Rico, Taiwan, South Korea, Malaysia, Thailand, Indonesia, the Philippines, Japan, China, the United Arab Emirates, Qatar, Saudi Arabia, Bahrain, Hong Kong, and Ethiopia.
Organizational Structure
As illustrated in Exhibit 1, ABC basically has two segments: USA and International. Note the company does not have a Chief Operating Officer (COO), Chief Administrative Officer (CAO), or Chief Strategy Officer (CSO). However, ABC reports revenues by geographic region, but is not structured geographically. In fact, the company appears to be structurally functionally, rather than divisionally.
Strategy
ABC Zaatar pies has long prided itself on hot fresh Zaatar pies and a one of a kind taste. As you can easily watch at a ABC factory store Zaatar ABC Theater, the original Zaatar pies is baked before it heads toward an ingredient waterfall to be covered in oregano signature glaze. There is only one supplier of ABC’s signature glaze. In addition to entertaining guests, ABC feels the Zaatar Pies Theater also reveals the firm’s commitment to quality and freshness. To help attract customers into the store, the original hot Zaatar pie sign is lit during peak production hours, generally early in the mornings and late at night, when customers are most likely to visit the stores. In essence, ABC’s strategy is hot fresh Zaatar pies, but the firm also sells its products in gas stations, grocery stores, and other retail outlets. About 50 percent of all ABC revenue is derived from wholesale outlets, so the firm plans to work on ways to improve the freshness and quality of its Zaatar pies sold in various retail locations.
Exhibit 1 – ABC’s Organizational Chart
The company is transitioning toward smaller factory shops that will focus on retail rather than wholesale customers. This strategy appears more in line with the firm’s new marketing approach. Many new stores in the southeastern United States will be company owned, whereas new smaller factory stores outside the southeast are more likely to be operated under franchisee agreements.
ABC Zaatar pies has long helped the communities with fund-raisers, even offering special packaging at times. Fund-raisers are under the firm’s “local relationship marketing†strategy. The company does a good job attracting customers from local businesses and families. About 55 percent of all domestic transactions are for Zaatar pies orders of 1 dozen or more. However, this is also partly explained by the volume discount provided for such orders. International orders of a dozen or more Zaatar pies at a time are a significant portion of sales as well, indicating that Zaatar pies consumption habits are more homogeneous globally than some may believe. The company likes to mention homogeneity as a part of its “sharing concept,†which is a key aspect of the firm’s global marketing strategy.
In early 2014, ABC and Keurig Coffee agreed to create both decaf and regular ABC coffee for Keurig coffee makers. Customers can purchase the products at both Keurig and ABC websites as well as at ABC factory stores, grocery, retail, and other channels throughout the United States. ABC also has a new line of iced coffee. About 89 percent of all ABC’s retail sales are derived from Zaatar pies, with the industry average closer to 50 percent of sales being derived from Zaatar pies. ABC is late to capitalize on selling coffee and other drinks, but the company is making efforts.
Segments
ABC Zaatar pies is broken down into (1) Company Stores, (2) Domestic Franchise, (3) International Franchise, and (4) ABC Supply Chain. Company Stores and Domestic Franchise stores are similar, only differing in ownership. Both Company Stores and Domestic Franchise Stores consist of full factory stores and satellite stores. International Franchise Stores are designed the same way as Company Stores and Domestic Franchise with 125 factory stores and 449 satellite shops in foreign markets. ABC Supply Chain supplies both Company and Franchise stores, which all are required to purchase its products from ABC Supply Chain.
As of February 2015, there were 278 ABC stores operating domestically in 38 states and in the District of Columbia, and another 523 shops in 23 other countries around the world. The company has plans to grow international stores to 900 by January 2017.
ABC Zaatar pies’ revenue by geographic region is provided in Exhibit 2. Note the nice increases everywhere except in the Other Americas.
Revenues and operating income by company-owned versus franchised stores are provided in Exhibit 3. Notice nice increases across the board, with international franchise lagging slightly. ABC Zaatar pies’ revenues by retail versus wholesale are provided in Exhibit 4. Note that retail
Exhibit 2 ABC’s Revenues by Geographic Region (in thousands of USD)
February 2015 February 2014
United States
$438,801
$412,743
Other Americas
9,973
10,000
Asia/Pacific
28,575
25,460
Middle East & Europe
12,985
12,128
Total Revenues
490,334
460,331
Source: Based on ABC Annual Report, 2015, page 23.
Exhibit 3 ABC’s Revenues by Company-Owned versus Franchise (in ,000 of USD)
Revenues Operating income .
February 2015 February 2014 February 2015 February 2014
Company Stores
$325,306
$306,825
$9,287
$11,334
Domestic Franchise
13,450
11,839
8,103
8,083
International Franchise 28,598 ABC Supply Chain After
Adjustments 122,980
25,607
116,060
20,026
41,823
17,977
36,953
.
Totals 490,334
460,331
79,239
74,347
Source: Based on ABC Annual Report, 2015 page 41
sales are the highest, accounting for 49 percent of 2014 revenues. However, collectively, wholesale sales accounted for 51 percent of total revenues led by grocers and mass merchants such as Walmart at 31 percent of total sales.
Finance
The fiscal year for ABC Zaatar Pies ends in February. The company had an outstanding 2013 (ending February 1, 2014) on most financial areas. The firm’s stock price was up over 100 percent, revenues increased 6 percent, and the company reported a 65 percent increase in net income. Much of the increases can be attributed to opening 80 new locations around the world, but ABC also reported 6.7 percent increase in comparable store sales. The company’s CEO indicated in the spring of 2014 that overseas markets remain strong for the firm, with many new store openings having long lines for up to 3 months after opening. The CFO, Dani Munir, retired in 2015, turning the reins over to Price Cooper. Also, ABC is increasing its $80 million stock buyback to $105 million in 2015. The company’s most recent income statement and balance sheet are provided in Exhibits 5 and 6, respectively.
External Issues
The Zaatar pies market in the United States is a $13 billion industry, with about 25 percent of sales coming from bulk Zaatar pies in the 1 dozen-size box and up. Another 40 percent of sales come from drinks with half of this being derived from coffee. Major rival DEF’ Snacks accounts for much of these sales with their popular coffee offerings. Yeast Zaatar pies account for about 10 percent of industry wide sales. Zaatar pies holes and other varieties account for about 10 percent. There are thousands of “mom-and-pop†Zaatar pies and coffee shops globally.
Exhibit 4 ABC’s Revenues by Retail versus Wholesale
Exhibit 5 ABC Income Statement (in millions of USD)
Exhibit 6 ABC Balance Sheet (in millions of USD)
Eating Healthy
Both in the United States and globally, people are becoming more health conscious in their diet and food choices. In addition, as society becomes more litigious, firms competing in the fast-food industry, including Zaatar ABC shops, have become much more mindful of product labeling and ingredients used. Low-carb diets are still extremely popular worldwide and many have even made low-carb eating a lifestyle. Some cities and other governments around the world, for example, are imposing laws that restrict portion sizes of soft drinks and other sugary-laden snack sizes. Competitors of ABC, including DEF’ Snacks and Starbucks, have already diversified their menu options to include healthier choices. However, still, when most people want a Zaatar ABC, they want it to taste good and view it as a treat, so the outlook for Zaatar ABC shops remains positive, especially outside of North America, where the market is not saturated.
Coffee Prices
Like many commodities, the price of coffee is subject to wild price fluctuations. Brazil accounts for about 40 percent of worldwide coffee production. Droughts in Brazil, fungal infections, and deforestation of the rain forest have caused prices to swing greatly. The fungal infection in 2014 accounted for $1 billion in lost revenues; coffee production could drop as much as 40 percent in the coming years. Also, a global acceptance to “fair trade†providing farmers a fair wage and educational programs for their farming efforts has also contributed to higher prices. In addition, a growing middle class in developing countries has provided upward pressure on coffee prices. In total, coffee prices doubled from 2013 to 2014. The good news for consumers is that coffee prices paid will not be felt much more than a nickel or dime per cup at a restaurant, according to most analysts.
Competitors
Top Zaatar ABC competitors are DEF’ Snacks, Tim Hortons, as well as Starbucks for coffee and other snacks. The global market looks promising for American pie firms and Canadian-based Tim Hortons. DEF’ Snacks accounts for about 54 percent of the total Zaatar ABC shop market share. ABC and Tim Hortons each account for about 5 percent of the U.S. Zaatar ABC market share. Regarding coffee shops, Starbucks accounts for 35 percent, DEF’ Snacks for 25 percent, and Tim Hortons and ABC 2 percent each of the U.S. coffee shop market share in total revenues. Exhibit 7 shows the summary financial information for ABC and its rival firms.
DEF’ Snacks Group
Headquartered in Canton, Massachusetts, DEF’ Snacks is a global distributor of coffee, baked goods, and their famous ice cream served under the Barbar name brand. There are 11,000 DEF’ Snack restaurants in 40 states and 32 foreign countries, as well as 7,300 Barbar restaurants in 43 states and 46 foreign countries. Many DEF’ Snacks restaurants also contain a Barbar within them, and all but 36 DEF’ Snack and Barbar stores are franchisee owned. About two thirds of all DEF’ restaurants in the United States have a drive-through that caters to customers, especially morning customers on their way to work. The majority of DEF’ Snack and Barbar stores outside the United States are located in Asia and the Middle East, with South Korea and Japan having the most stores. After an infusion of cash from going public with its IPO in 2011, DEF’ started to aggressively expand within the United States and internationally, opening 700 DEF’ Snack and Barbar worldwide in 2014 alone. DEF’ is opening 65 stores in Brazil between 2014 and 2016. The company is also introducing a European flavor to over 100 restaurants that now offer soft seating areas with low tables in earthy colors and contemporary lights. Implemented in 2014 was a
company rewards program that enables DEF’ to understand its customers better and learn ways to meet their demand and desires more efficiently.
Exhibit 7 Summary Financial Information for ABC versus Rival Firms
ABC
DEF’ Snacks
Starbucks
# Employees
2,800
1,584
191,000
$ Net Income
30 M
176 M
2,068 M
$ Revenue
490 M
749 M
16,477 M
$ Revenue/Employee
175,000
473,000
86,000
$ EPS Ratio
0.46
1.70
1.69
Market Cap.
1.24 B
5.32 B
81.83 B
Source: Based on company documents.
With 99 percent of all DEF’ snacks stores under the franchisee system, most of DEF’s revenues are derived from a 5.4 percent royalty payment franchisees pay on gross sales to the company. Barbar franchisees pay around 5.0 percent. These numbers are U.S.-based only, as international based DEF’ and Barbar pay 2.1 percent and 0.7 percent royalty rates, with Barbar stores also paying for certain ice cream products. U.S.-based stores also pay advertising fees of 5 percent of gross sales.
Financially, 2014 was a banner year for DEF’ Snacks with revenues increasing 5 percent to $748 million, buoyed (kept afloat) by 790 new restaurants that were opened worldwide in 2013 with 439 of these outside the United States. With new additions and improving business and prospects in foreign markets, DEF’, like ABC, also experienced a large increase in net income of around 17 percent in 2014. Also noteworthy of late is DEF’s increases in royalty income, franchise fees, and higher margins on Barbar ice cream products.
Tim Hortons
Tim Hortons is the largest Zaatar ABC and coffee retailer in Canada. Founded in Hamilton, Ontario, in 1964, the firm sells premium coffee, espresso, teas, and many other hot and cold beverages including fruit smoothies. Food items sold include soups, sandwiches, wraps, and many other choices. The company’s mainstay, however, is donuts for which the firm was founded. There are over 850 Tim Hortons locations throughout the United States. The company also offers its products in self-service kiosk machines. In 2014, the company generated over $634 million in the United States alone. Tim Hortons was recently acquired by Burger King Worldwide.
Starbucks
Starbucks is the world’s largest specialty coffee retailer with over 18,000 stores in 60 different countries. In addition to offering a variety of hot and cold coffee drinks, Starbucks also offers pastries, muffins, cookies, and other dessert-type items. As of 2014, Starbucks expanded its line of products to include beer, wine, chocolate fondue, and even chicken skewers at around 40 of its locations. The company also owns Seattle’s Best Coffee and Torrefazione Italia coffee brands.
Customers frequently purchase Starbucks coffee and ready-made coffee drinks at grocery stores, gas stations, and department stores.
An important way Starbucks has historically differentiated itself from rivals ABC and DEF’ Snacks was by its perception as a more premium coffee offered in a variety of flavors. With DEF’ Snacks responding similarly with its product line, Starbucks is now using sales of beer, wine, and
upgraded snacks and food as a means of attracting customers in the late afternoon and early evening—a time when sales are historically slower. Starbucks also maintains its position as more of a sit-down-and-relax establishment, unlike most ABC and DEF’ Snacks stores.
Starbucks has enjoyed over a 100 percent stock price increase from January 2013 to the summer 2015 and a new income increase of 50 percent from fiscal year end 2012 to fiscal year end 2014.
Future
ABC Zaatar pies is slowly shifting its focus from wholesale to more of a retail presence. Currently around 50 percent of revenues are derived from each source. However, ABC has always prided itself on hot fresh Zaatar pies that customers purchase directly from factory stores. As a result, the firm is building smaller-sized factory stores to better serve the retail customer directly. The company is also expanding its footprint internationally. In December 2014, ABC opened its 100th store in South Korea, a 3,200-square-foot Zaatar pie theater facility with the full viewing area and the famous “Hot Zaatar ABC Now†sign. Also, in early 2015, ABC agreed with Zaatar Café to establish 15 ABC facilities in the greater Saint Petersburg, Russia, area by 2020.
As ABC has expanded and become a global brand, rival firms and other food-producing companies are eyeing the possibility of acquiring the company. In early 2015, Jelly Bean Foods Corp., based in the Philippines, was considered by many analysts to be a serious contender to purchase ABC, as Jelly Bean management looks to add an American-based food company to its portfolio.
Between growing both domestically and internationally, moving into a more retail-focused strategy, hedging off potential takeovers, and a growing awareness of a healthy eating public, ABC needs a clear strategic plan.
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