The Quick Service Restaurant Industry in South Africa: Market Structure, Competitive Strategies, and Research Directions

 
The Quick Service Restaurant Industry in South Africa: Market
      Structure, Competitive Strategies, and Research Directions

                             Blessing Mukabeta Maumbe
                   Assistant Professor in Agribusiness Management
                               West Virginia University
            Davies College of Agriculture, Forestry and Consumer Sciences
      Division of Resource Management, P.O. Box 6108, Morgantown, WV 26506
                              Telephone: 304-293-4832

                                  1.0 Introduction

In South Africa, the Quick Service Restaurant (QSR) industry is undergoing major
restructuring which is transforming the food and agricultural supply chain, consumption
patterns of the population, and food industry competition. The transformations in South
Africa‟s QSR industry can be attributed to the forces of globalization, urbanization,
growing segment of black middle-class, and increased labor force participation by
women. The QSR managers are using a combination of vertical and horizontal market
coordination, branding, and product differentiation strategies to facilitate the efficient
production, marketing, distribution, and consumption of fast food products in the country.
The upcoming International Football Federation (FIFA) World Cup Soccer (WCS), 2010
games have exerted additional pressures on the QSR industry to improve their meal
solutions, service offerings, customer responsiveness, and global competitiveness.

Fast food consumption patterns in South Africa (SA) indicate that the tradition of eating
home cooked meals is decreasing. As both household incomes and standards of living
rise, more people are eating fast foods. Globalization and westernization of diets is also
driving food consumption patterns (Pingali, 2007). The increased demand for fast food by
South Africans, has led to significant changes in the alignment of the QSR industry
structure. Previously, the industry was dominated by oligopolistic market structure but
now a new form of configuration comprising multinational and regional franchises,
independent food caterers, and informal traders has evolved. Most of the firms in SA-
QSR industry are operated as franchises while others are owned by independent newly
emerging entrepreneurs that have mushroomed under the Broad-Based Black Economic
Empowerment (BBBEE) policy.

As South Africa prepares to host more than half a million visitors from 32 countries
during the FIFA WCS, 2010, questions are being raised about the competitiveness and
relative preparedness of its QSR industry in meeting the food needs of such a large
segment of ethnically diverse consumers. The extent to which the QSR industry will cope
with the surge in demand for a wide range of meal preferences remains unclear.
Nonetheless, it is important to note that on the African continent, SA is one of the most
culturally diverse countries with nine official languages; hence its name, the “Rainbow
Nation.” Therefore, the diversity of SA-QSR meal choices may be attractive to those
soccer fans willing to try something exotic.

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Given the expected rise in consumer‟s demand for fast food, changing consumption
patterns and competition in the QSR industry, identifying strategies being crafted to
respond to the diverse consumer preferences and industry rivalry is essential. These
strategies are not only designed to win the competition, but are also shaping the
organizational structure of one of South Africa‟s key industries. It is also essential to
examine the potential strategies that QSR managers could deploy to prepare for the short-
term challenge of hosting thousands of new customers over a 6 week period during
summer of 2010. The expected surge in demand for all kinds of meals by thousands of
soccer fans and their teams in South Africa during the period from mid-June to end of
July highlight the need to adopt strategies that will improve existing meal solutions,
speed-up the pace of order taking and processing, and promote customer care and
friendliness. To the visiting soccer fans and local consumers, the success of the FIFA
WCS 2010 games will be measured by, among other dimensions, the ability of the QSR
industry to deliver on customer needs and exceed their expectations. This implies
superior speed when serving long lines of customers, increased convenience, food safety,
and a wide choice of the flavors that customers seek. The paper argues that the
effectiveness of using of Information and Communication Technologies (ICT) in meeting
customer‟s diverse needs could prove to be a valuable competitive tool for the QSR
industry in the short to medium term.

The objectives of this paper are to; (i) examine the restructuring in SA-QSR industry, (ii)
identify and describe competitive strategies being used by the QSR managers to respond
to a growing demand in fast food, industry rivalry, and globalization and (iii) discuss
challenges, future prospects, and research directions facing the industry. The remainder
of the paper is organized as follows: The next section describes the conceptual
framework. The research methodology is presented in section 3. Section 4 describes the
evolving structural organization of SA-QSR industry and its competitive strategies. This
is followed in section 5 by a description of challenges, future prospects, and research
directions in the QSR industry. Concluding remarks are presented in section 6.

This paper is important in several ways; first, it provides useful insights into SA-QSR
industry consolidation, competitive strategies and relative preparedness in hosting the
FIFA WCS 2010 games. Second, the paper provides market intelligence for dealing with
rising competition and diverse consumer expectations relevant for government policy
making. Third, a better understanding of competitive strategies and restructuring of the
QSR industry will assist fast food managers to shift from a purely reactive to proactive
mode. Fourth, the interdependence between various competitive strategies helps QSR
managers to craft multi-pronged integrated strategies that enhance overall competitive
advantage. Attributes such as food safety, nutrition, taste appeal, menu diversification,
freshness, portion sizes, convenience, and friendly atmosphere require an integrated
strategy. The implementation of integrated and innovative strategies is necessary given
that the QSR industry is constantly evolving. Further, the observed industry trends are
expected to intensify in South Africa and globally. In this paper, the terms “QSR”, “fast
food industry” and “take-away‟ are used interchangeably.

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2.0 Conceptual Framework

The complexity of today‟s competitive and rapidly evolving food and agribusiness
environment presents a myriad of challenges for managers (Shertz & Daft, 1997; Shay
and Rothaermel, 2002). Understanding the competitive environment in which the QSR
industry operates requires an appreciation of multiple perspectives to help craft long-term
competitive strategy. Strategies are usually crafted in advance of the actions to which
they apply, designed to outwit the competitor, and can be revolutionary (Hamel, 1996).
Further, crafting revolutionary response strategies involves redefinition of products,
services, market segments, and the harnessing of creative potential in the industry.

This paper draws upon the industrial organization, Michael Porter‟s 5 forces, and
information asymmetry literature as a basis to understand the restructuring of SA-QSR
industry and the competitive strategies deployed. The Structure Conduct Performance
(SCP) model describes an industry structure that influences firm conduct which in turn
affects its performance. Structure deals with the number and size distribution of firms in
the food industry. Conduct describes a firm‟s pricing, advertising, product differentiation,
procurement and other strategic behavior. Performance is associated with fairness and
efficiency of industry participants and is reflected in average production costs and
relative profit levels. For instance, the use of “buyer power” by large supermarkets to
demand more services and lower prices for fruits and vegetables has led to a declining
proportion of the produce outsourced from small producers (Gibbons, 2004). Michael
Porter‟s model describes five competitive forces outside the firm; buyer bargaining
power, supplier power, new entrance, product differentiation, and rivals, as key drivers
affecting industry competitiveness. The utility of Porter‟s model is that it provides an
analytical framework to determine how to gain competitive advantages by strategically
positioning a firm within an attractive industry environment and then leveraging these
advantages over rival competitors (Shay and Rothaermel, 2002). Information asymmetry
deals with problems of moral hazards and market failure. The paucity of information,
inability to share or exchange available market information, and the ability to extract
rents from missing markets plus the hoarding information provides a basis for crafting
strategies that not only enhance the flow of market information, but also creates
competitive advantage from information exchange efficiencies. A study of a group of
certified organic crop farmers in KwaZulu Natal (KZN) province of South Africa
revealed that free riding behavior was a major obstacle to their collective marketing
efforts. First, the problem of information asymmetry is highlighted by the lack of trust
for the “buyer” by poorly educated males. Second, information asymmetry arose from
exploitation of loopholes or the free riding behavior attributed to a flawed grading
process that failed to trace the origins of low quality produce (Gahadzikwa et. al., 2007).
Therefore, market failure and moral hazard problems can lead to opportunistic behavior
by poor famers, powerful buyers, and other market participants. Smallholder access to
markets is limited by high production, health, and safety standards, and lack of capital
(Page and Slater, 2003).

Overtime the past two decades, the QSR industry has become increasingly global and
highly competitive (Parsa, 1993; Shertz & Daft, 1997). The key factors that promote

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competition in the QSR industry are speed of service, quality of food, and a good price to
         value relationship (Shay and Rothaermel, 2002). Crafting strategies that elevate
         competitive advantage is a key ingredient for success in the QSR industry. Competitive
         advantage in the global QSR industry is driven by various strategies such as franchising,
         maximization of brand equity, product and service differentiation, and corporate social
         responsibility (Maloni and Brown, 2006). Franchising is a well-tested marketing strategy
         that started in 1935, accelerated in 1950s, and was popularized by McDonalds
         Corporations (Hackett, 1976). The benefits of the franchising business model are well
         understood; and these are improved market access, risk sharing, and managerial support.
         A study on branding strategies in the QSR industry revealed a strong correlation between
         brand equity and revenues (Kim & Kim, 2004. Strategies for meal innovations in the
         United States have led to the integration of genetically modified meats and vegetable
         products to meet nutritional needs of aging baby boomers. Despite these advances, GM
         foods are still associated with consumer health risks, as well as environmental, ethical,
         and religious concerns (Krishna and Qaim, 2008). Further, global consumer concerns
         about pesticide residue and their human health risks are becoming more evident.

                                                              Potential Entry
                                                    Relatively high initial capital outlay
                                                    Growing industry consolidation
                                                    Economies of scale
                                                    Logistics learning curve
                                                    Mandatory BBBEE regulations

   Buyer Bargaining Power of Buyers                                                            Bargaining Power of Customers
Regional franchises exhibit market power                  Industry Rivalry                   Fragmented customer base
Many substitute suppliers                               High CR5= 36%                        Relatively low average purchase
Low operator brand loyalty                              Low pricing power                    Rising segment of discerning consumers
Low switching costs (e.g. distribution channels)        Low margins                          Consumer Council of South Africa
                                                        Market consolidation                 Promotion of Access to Information Act, 2000

                                                           Threats of substitutes
                                          High product differentiation (e.g. meal solutions)
                                          Many local industry players (e.g., independent caterers)
                                          Few global industry players (e.g., KFC, McDonalds etc.).
                                          Low switching costs for customers

         Figure 1: Porter‟s 5 Forces for the Quick Service Restaurant Industry in South Africa

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As a result the Europeans have recently focused their attention on communication
strategies for food safety and quality (Verbeke, 2005; Fritz & Fischer, 2007).

In South Africa, QSR firms are using a combination of strategies to gain competitive
advantage. These range from using a mix of global and domestic franchises, co-branding,
employee empowerment, to deploying information and communication technologies
(ICT) as competitive tools and for reducing information asymmetry problems. The
Franchising Association of South Africa (FASA) is the mother body for franchisees in
the country that oversees competition and welfare issues for the small medium and
micro-enterprises (SMME) in the QSR industry. Gas stations and fast food firms are
making joint investments that allow them to operate under one roof in order to increase
consumer awareness of their food services and expand sales. The implementation of
BBBEE Charter for the fast food industry is a key strategy affecting the competiveness
and future success of any QSR in South Africa. All food products display search,
experience, and credence characteristics (Fritz & Fischer, 2007). Consequently, ICT
could play a pivotal role in facilitating the search characteristics of food products, the
making and processing of food orders, and the expansion of communication channels
with industry suppliers and other key stakeholders. In addition, ICT enhance the flow of
market information thereby lowering transactions cost in the QSR food supply chain. As
a result, the paper assumes that SA-QSR managers aim to lower transaction costs and
maximize long-term profitability and survival of their agribusinesses.

               3.0 Research Methodology and Data Collection

The data and information used in writing this paper was obtained from a variety of
sources and websites. The study is divided into two parts. The first part of this study is
based on secondary sources such as the Statistics South Africa (STATSA), Franchise
Association of South Africa (FASA), websites of key fast food restaurant operations, and
a general review of the fast food industry literature including government publications
(e.g. Department of Trade and Industry (DTI)). The second phase will involve an online
survey of competitive strategies by managers of various fast food firms in all the 9
provinces of South Africa to complement the secondary data, and confirm some of the
information obtained from key websites and literature survey. The respondents will be
randomly chosen to accomplish the need to; (i) represent all the geographic regions of
South Africa, (ii) include all the various kinds of fast food outlets or take-away
establishments, and (iii) capture diverse competitive strategies being utilized or deployed
by managers across the various parts of the country. Personal experiences as a consumer
in South Africa coupled with observations and face-to-face communications with workers
in the fast food industry provided some useful insights in writing this paper. This paper
reports theoretical findings and observations from the first phase only.

There are three basic weaknesses to this study. First, a key limitation of the preliminary
data is that it does not provide trends overtime yet the QSR industry is very dynamic and
constantly evolving. Second, fast food industry uses procurement contracts with
producers, and the latter‟s perspective on these procurement strategies could enrich this

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type of study. Third, South Africa is hosting about half a million soccer fans who will be
attending the FIFA WCS Cup 2010, and most of these people will be ordering and
consuming fast food daily for three months. Understanding the food preferences and
experiences of this niche market could have helped to provide key insights into global
consumer perspectives of the effectiveness of competitive strategies being deployed SA-
QSR industry.

                              4.0 Preliminary Results

  4.1 Economic Significance of the Fast Food Industry in South Africa
The food and beverage industry in South Africa comprises restaurants and coffee shops,
fast food outlets, and other catering services providers. In 2007, the total income for the
food and beverages industry was R26 604 million (Statistics South Africa, 2007) (see
Table 1). The largest percentage share (47%) of the total income in the food and
beverages industry was contributed by “Restaurants and Coffee Shops”, followed by
“Fast Food Outlets” (R7, 619 million or 29%) and “Caterers and other Catering Services”
(25%). The latter category supplies ready to eat food for parties and banquets. Of the
181,373 people employed in food and beverage industry, in South Africa, “Restaurants
and Coffee Shops” employed the largest proportion (51%) followed by “Caterers and
Other Catering Services” (30%) and Fast Food Outlets (19%). The estimated
concentration ratios (i.e., CR5, CR10 and CR20) for the Fast Food Industry were 36%, 28%
and 18% respectively. Compared to similar concentration ratios of only 7%, 9%, and
12% for “Restaurants and Coffee Shops”, the results indicate a relatively high level of
concentration and consolidation in the fast food industry in South Africa although
concentration ratios are below that of “Caterers and other Catering Services.” The
strategic importance of ICT in the South African Fast Food Industry is demonstrated by
aggregate expenditure of R382 million per annum (30% of total) on computers
technology and software, second to plant and heavy equipment R679 million in 2007.
The trend on national ICT investment indicates rising importance of ICT as a source of
competitive advantage in the South African business sector and fast food industry in
particular.
South Africa is one of the richest countries in Sub-Saharan Africa and has a population of
44 million and a GDP of US$126 billion (STATSSA, 2007). South Africa is ranked 25th
by the Global Competitiveness Report out of 75 countries, and had a sound economic
growth rate estimated at 4% per annum prior to the global recession. South Africa has
stable political situation and its business environment is quite competitive and
sophisticated. Global multi-national food service chains such as McDonalds and KFC
invested in South Africa after independence attracted by the sound economic growth rate
under a stable African National Congress (ANC)-led government that has brought about
general optimism about the country around the world. The rising consumerism provides
major investment incentives to global QSR firms.

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4.2 Market Structure of South Africa’s QSR Industry
South Africa has a well developed QSR industry. The SA-QSR industry is evolving and
it comprises franchised fast food restaurants, large supermarket chains, independent food
caterers and informal traders. The structure of the QSR industry is illustrated in Figure 1,
and the various market participants are described below.

4.2.1 “Global Multinational Corporation Franchises” and “Regional Franchises”
The franchise fast-food chains comprise Regional Franchises (RF) and Global
Multinational Corporation Franchises (GMNCFs). The RFs occupy a dominant market
share in SA-QSR industry. The four major RFs in South Africa are namely Steers Group,
King Consolidated Holdings or King Pies, Nandos, and Chicken Licken. The Steers
Group operates over 500 outlets in South Africa and 14 other African countries (e.g.,
Botswana, Zimbabwe, Sudan, Kenya and Cote d‟Ivoire). The second and third largest
RFs are King Pies (188) and Nandos Group (185) with outlets located in all the major
cities in South Africa. King Pie operates in different regions within South Africa, but has
not yet ventured into outside regional markets. The main products for the Steers Group,
the leading South African RF fast food chain are flame grilled beef, chicken, and veggie
burgers, hot and cold beverages, and ice creams. The Nando‟s Groups specializes in
chicken burgers, chicken, beverages, and desserts. The GMNCFs are the main
challengers in South Africa‟s evolving QSR market. The two leading GMNCFs are
Tricon Global Restaurants (i.e., KFC and Pizza Hut) and McDonalds. Tricon Global
Restaurant (TGR) is the second largest fast food chain and it operates an estimated 450
outlets in South Africa. The TGR chain offers its traditional chicken meals and pizzas. A
more detailed list of South Africa‟s fast food franchises is presented in Table 1. Although
McDonalds is a major global fast food chain, it does not occupy a dominant market share
in South Africa‟s highly competitive QSR industry. The Franchise Association of
Southern Africa (FASA) is the national umbrella body that coordinates franchise
operations in South Africa. The GMNCF faces stiff competition from the RFs that have
captured the domestic market and expanded operations into regional markets.

4.2.2 Supermarket Food Chains
South Africa has three main supermarket food chains, Pick‟ n Pay, Shop Rite and
Checkers. These supermarkets chains have penetrated the traditional market for
franchised fast food operations and are aggressively selling hot meals to urban
consumers. Woolworth has carved a growing organic food market niche. Over the past
two decades, South Africa has seen an emergence of new supermarket chains and
independent restaurants that sale take-away foods, a trend that has been fueled by rapid
economic growth, preference for American-style cuisine, urbanization, and rising
consumerism. A recent study in China indicates that rapid economic growth leads to
structural changes in food demand and shifts consumer preferences away from grains
towards meat and dairy as incomes rise (Yu and Abler, 2009).

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4.2.3 Institutional Contract Food Caterers
Soon after Independence in 1994, the QSR industry witnessed the entry of Institutional
Contract Food Caterers on the market. The BBBEE policy facilitated the entry of
thousands of previously disadvantaged groups into the QSR business in South Africa.
The Institutional Contract Food Services sector is fairly concentrated and is dominated by
a relatively few large catering companies. The leading caterers based on the number of
contracts are Kagiso Khulani Supervision, Fedics, and Royal Food Services. These food
caterers are owned by Compass Southern Africa, Reserve Holdings, ICS Holdings
respectively. In South Africa, both the private and public sectors out-source their catering
services to these contract caterers. Contract caterers are vertically linked into the QSR
food supply chain and they purchase the bulk of their supplies directly from local
manufacturers, catering wholesalers, and distributors on a contract basis.

4.2.4 Informal Sole Traders
This category comprises all the informal traders that sell prepared food directly to
consumers. These are in the form of individual street vendors that operate on roadside
markets, major regional bus terminuses, and other designated or non-designated places
for selling food. In some cities, such informal traders rent space from local municipality
and sell hot burgers, sandwiches, and pies to passers-by. This food service segment is
major part of the so called “second economy” in local townships. “Mr. Delivery” is an
initiative of individuals who collaborate with local fast food stores to deliver meals to
customers. “Mr. Delivery” plays a cost-effective intermediary role in meal deliveries.
Informal sole traders and “Mr. Delivery” are appreciated by both local consumers and
professionals who might be time stressed or find themselves working extended hours in
board rooms. Some tourists not familiar with local towns and cities find services of Mr.
Deliveries equally important. In the city of Mumbai in India, a similar trust-based
network of “dabbawalas” delivers hot meals cooked at homes, restaurants, or by local
catering service providers to offices using bicycles, trains, and rudimentary tins or lunch-
boxes. The system has been in operation for over a century and operates with clock
precision thereby adding new dimension to the modern fast food industry structure.

The restructuring of SA-QSR industry is being influenced by the global and domestic
forces of change. At the global level, major trends driving QSR are demand for efficient
marketing, product consistency (i.e. variety, quality, distribution etc.), price stability,
safety and nutrition, and predictable product availability (Nagengast and Appleton, 1997;
Jekanowski, et al, 2001). In South Africa, similar trends are affecting the QSR industry
including many new entrants, co-branding, ICT deployment, customization, health
consciousness, multi-franchising, service differentiation, and employee empowerment.
Irrespective of QSR industry location, success belongs to those firms that can prepare
food better, faster and safer than competitors. The QSRs as the name imply, are generally
quick to adapt to constantly changing taste and preferences of their customers. In the US,
the QSR caters to a growing consumer demand for healthy diets by offering salads and
vegetarian options. Global trends indicate that QSR competitive strategies depend on a
combination of factors such as culinary experiences, strategic industry alliances, and
global food market developments.

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4.3 Competitive Strategies in South Africa’s QSR Industry
4.3.1 Franchising Strategy
The SA-QSR industry is dominated by the regional and global franchises. South Africa
has an extensive franchise restaurant chain that serve wide variety of meals (e.g. fried
chicken, hamburgers, steaks, sandwiches, pizza, seafood, desserts etc.). About 90 percent
of franchises in South Africa have been locally developed while 10 percent were
developed internationally. Franchising industry contributes about 12 percent to Gross
Domestic Product (GDP) in South Africa. Generally, the turnover for the franchise sector
in South Africa is estimated at R134.7 billion. Turnover excluding fuel is estimated at
R78.4 billion. Approximately 165 franchisers and affiliates are registered with the
Franchise Association of South Africa (FASA) and over 6000 franchisees. The
franchising strategy aims to overcome stiff competition between regional and global
franchises.

4.3.2 Market Coordination Strategies
The fore-going discussion focuses on the dominance of regional and global franchises in
SA-QSR industry, but the complete picture cannot emerge without considering the
backward and forward linkages into agriculture and retailing. Linkages have been forged
between QSR managers and other strategic industry partners such farmers, specialist
retailers (e.g. bakeries, butcheries, and green groceries) and wholesalers. Specialist
retailers are the main suppliers to restaurants. Dry groceries are often purchased through
catering wholesalers, while perishables and frozen products are purchased directly from
the manufacturers or designated distributors. The effective coordination of each link in
the QSR food supply chain is critical as it affects key strategic issues such as food
security, food safety, nutrition, health, corporate social responsibility and environmental
sustainability. The QSR market coordination is essential given that food supply chain
needs to be aligned to the consumer demands and their changing taste and preferences.

The SA-QSR industry is characterized by use of production contracts, tight supply
chains, and ICT to enhance coordination of product and information flows up and down
the supply chain. The QSR managers use both production specification contracts and
market specification contracts. In production specification contracts, the producers and
QSR managers sign product specification contracts whereby producers promise to deliver
certain quantities and quality of their products. On the other hand the QSR managers
pledge to buy the delivered amount at the stipulated price-quality relationship. Rigid
supply schedules are usually maintained to minimize marketing risks associated with the
perishability nature of food products. In market specification contracts, the QSR industry
provides both managerial and financial support to farmers. In addition, the buyer
specifies the varieties of the food products to be grown and the inputs to be utilized.
These types of contracts are commonly used by global multi-national franchises such as
McDonalds and KFC‟s and Tricon Global International. Madevu et al, (2007) found that
supermarkets in Gauteng province of South Africa use dual procurement strategies
involving direct purchase from farmers and sourcing from Fruit and Produce Markets.

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South African consumers are becoming more discerning, require their food in the same
packaging, taste, freshness and are not willing to compromise on these attributes. The
development of centralized distribution centers in South Africa ensures that standard food
or meal solutions are delivered to numerous outlets around the country. Although QSR
chains have different operator owners, the basic expectation for the franchisor is to
market a uniform product across the chains at all times. The use of the Internet is
facilitating the tactical and strategic decision making process along the food supply
chains. The relationship between farmers, wholesalers, and QSR outlets across the county
is typical of vertical market coordination while the collaboration among franchised
outlets is characteristic of horizontal market coordination. Both forms of market
coordination mechanisms are widely used in SA-QSR industry in the supply chains for
dairy products, meats (chicken, beef, pork, and lamb), and fresh produce (i.e., fruit and
vegetables) (Gibbons, 2004). The potatoes supply chain is the „mainstay‟ of the QSR
industry globally (Nagengast and Appleton, 1998). Most of the popular fast food
franchises in South Africa (e.g., Steers, King Pies, Nandos, Chicken Licken etc.) are
vertically linked with producers through centralized wholesalers. Vertical and horizontal
coordination strategies yield several benefits to the QSR industry such as assured supply,
building trust-based supply chains, the ability to market quality products, and reduction in
procurement costs in the long term.

4.3.3 Co-branding Strategies
This is where two brands join forces to create a strong grouping where it is expected that
the alliance will generate profits for both parties. In many cases this can cut down on
expenses, especially advertising costs. There are number of co-branding efforts in QSR in
South Africa. For instance, (i) Engen and Wimpy co-branding on national highways, they
are advertised together and both benefit from each other. Secondly, Steers, Fish Aways
and Blockbuster video co-brand their products. By providing convenience and variety
this grouping is bound to become a lazy night destination point. McDonalds co-brands its
products with McCain which supplies the potatoes that are used to make the McFries.
The National Parks also co-brands with specific fast food outlets in South Africa. Such
arrangements allow National Resorts to buy independently from specialist retailers or
catering wholesalers. The foregoing discussion illustrated that co-branding strategies are
widely used in South Africa and are becoming a standard way of conducting business in
QSR industry. In the US, McDonalds has forged similar strategic alliances with Wal Mart
and several gas stations. According to Friddle et al, 2001, competitors are joining forces
as it is easy to find Taco Bell, KFC, and Pizza Hut operating in the same building. Such
trends have eliminated the concept of “my space” while allowing customers to shop and
eat under one roof.

4.3.4 Product Differentiation Strategies
The South African QSR industry is faced with stiff competition from the major
supermarkets (e.g. Spar, Shoprite, Checkers and Pick‟n Pay), other retail chains,
convenience stores, independent food caterers and informal traders. The QSR industry
competes with supermarkets which offer ready meals daily to urban consumers. Given
the growing challenge posed the increasingly popular meals in the deli sections of leading
supermarket chains, meaningful product differentiation has become imperative. Product

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differentiation is necessary from three key perspectives; (i) increasingly discerning
consumer population, (ii) stiff competition from me-too brands and (iii) desire to
penetration new market segments. Product differentiation has become critical in the SA-
QSR industry, given the sale of similar products within the same price ranges and threat
posed by large supermarkets and new players in the supply of fast food services.

The marketing of well-known brands is a key driver of product differentiation in South
Africa. Most consumers perceive branded products and their product extensions as
superior quality products. In South Africa, KFC is considered a top-brand with a huge
following of loyal customers. KFC attracts a large customer following and is perceived as
the most popular fast food restaurant chain in South Africa (Brand and Branding Award).
The top three takeaways are KFC, Chicken Licken and Nando‟s Restaurants. Although
McDonalds is popular QSR around the world, South Africans prefer KFC which occupies
leadership positions among global fast food brands (www.biz-community).

The second driver of product differentiation in SA-QSR industry is diversification of
menus to cater for different socioeconomic, religious, and cultural groups. The practice of
upsizing meals, adding extensions to meals and bundling meal solutions (e.g. providing
toys at a cost on children happy meals) are common at South African McDonald outlets.
Pingali (2007) argues that globalization and growing urban middle class has led to rise in
fast food consumption and convergence toward Western Diets. As already mentioned,
supermarkets are entering the arena offering stiff competition by widening meal solutions
and expanding diet choices. As South African households with both parents working rise,
demand for meals for school going kids has increased thereby creating opportunities to
expand meal solutions and diet offerings.

A third driver of product differentiation is the sale of healthy products. There is a
growing awareness among South Africans about the benefits of healthy eating. As health
conscious consumers increase, the QSR industry is being forced to adapt. Global trends
towards lighter meals, low salt, fat-free, no sugar, and low-carbohydrates have filtered
among South African consumers. Although healthy conscious consumers prefer low
calories, they are usually unwilling to compromise on flavor. In response to the above
changes in consumer attitudes and lifestyle, the SA-QSR industry has devised strategies
for healthy food products. For instance, McDonalds South Africa has shifted towards
healthy options such as salads, fruit and low-carbohydrate options. Nando‟s promotional
strategies are aimed at raising awareness of its wide range of healthy options. KFC has
introduced a lower-fat wraps. In addition to the leaner diet trend, South African
consumers are demanding more natural foods. Customers are seeking products that are
organic, wholesome, and unprocessed. In response, Woolworths adopted a new strategy
to promote its organic product range. The demand for its Kauai brand has increased as
consumer preferences for fresh produce without chemicals or preservatives has increased.
Chicken and fish consumption has also increased while red meat consumption has
declined. A new breed of discerning consumers has emerged in South Africa, and the
QSR industry has responded to the shift toward healthy consciousness. A number of SA-
QSR firms have adopted healthy product strategies to penetrate market segment of health
conscious consumers. Healthy product strategies are transforming eating habits, and are

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likely to help combat obesity, enhance the reputation of SA –QSR industry, and boost
their market share.

4.3.5 Service Differentiation Strategies
The SA-QSR industry competes on a number of fronts regarding service offering. The
service differentiation strategy revolves around meal variety (e.g. kids meals, grilled,
fried, salads, etc), drive through facilities, home delivery of meal orders, family
friendliness, operating hours, convenient locations, and customer care. Most restaurants
are smoke-free zones following legislation to ban smoking in public in South Africa. The
rise in black middleclass, stable market conditions, and rise in demand for recreation and
eating out offers huge opportunities for QSR industry. In South Africa, local products are
being marketed using the “Proudly South African” label highlighting the popularity of
buy local campaigns as global communities strive to protect local food economies and
local jobs. Consequently, consumers and other advocates of locally integrated food
economies tend to associate such national campaign with products and services made in
South Africa. It is estimated that the recognition of the Proudly South African label is
about 70 percent. Related to health product differentiation, McDonalds South Africa runs
a toll-free number service to respond to customer questions on how to make better food
consumption choices and maintain healthy lifestyle. Some fast food restaurants provide
consumer advice on healthy living on their website as part of service differentiation.

4.3.6 Customer Relationship Management (CRM) Strategies
The QSR industry is using various customer retention strategies. Examples of customer
loyalty programs are free drinks for children and special meals to attract consumers to
restaurants. Some QSR firms recognize birthdays and offer free desserts. Making
restaurants family oriented is a key strategy used for customer retention and market share
expansion. Some new QSR outlets such as Scooters Pizza have launched coupons
whereby after purchasing a certain number of pizzas, of given size, customer qualifies for
a free pizza of the same size. Such deals are attractive for large families who would
normally buy more than one pizza for their meals. Some pricing special deals tend to
target students who consume food in large numbers or in a group setting.

4.3.7 Corporate Social Responsibility (CSR) Strategies
As part of CSR, SA-QSR industry is expected to implement a BBBEE strategy. The
strategy comprises three main areas, management control, skills development,
preferential procurement, socio-economic development, and employment equity (DTI,
2010). As shown in Table 4, SA-QSR managers have to meet certain targets on the
BBBEE score cards. The QSR industry‟s BBBEE charter specifies the targets and
milestones that have to be met depending on the size of the firm. For instance, the
appointment of females as Board of Directors is one of the key strategies used by QSR
firms to meet their BBBEE requirements. Training and professional advancement of the
QSR crew is also a vital strategy for meeting targets on BBBEE score cards (Maumbe
and Van Wyk, 2008). In South Africa, QSR managers have the responsibility to craft
unique strategies needed to meet BBBEE requirements as detected by the BBEE Charter.
The ability to meet BBBEE targets is key to operating a successful QSR outlet in South

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Africa. The following section discusses some challenges, future prospects, and research
directions facing the QSR industry in South Africa.

    5.0 QSR Industry Challenges, Prospects and Research Directions

5.1 South Africa QSR Industry Challenges
5.1.1 The Growing Problem of Obesity
The SA-QSR industry faces a number challenges. First, the QSR industry is blamed for
selling unhealthy cheap food that induces people to overeat. Fast food restaurants are
known to create a false sense of abundance by providing a ready supply of condiments or
items that cost the restaurant almost nothing. Second, the QSR industries are also
characterized by overworked and over-managed young workers who work low wage jobs
(Schlosser, 2004) and lured by free lunches. With the problem of obesity rising, the QSR
industry is under attack for negligence despite the fact that it remains unclear that fast
food cause obesity (Collins and Baker, 2009). Nonetheless, the obesity problem persists
and remains a huge challenge for QSR industry in South Africa and globally.

5.1.2 The Problem of Social Inequality
According to South Africa‟s Tourism Charter (see Table 3), the sector challenges are
two-fold; the need to become more inclusive and globally competitive. Promoting
inclusiveness requires greater participation in economic activities and decision making by
disadvantaged groups such as blacks, coloreds and Indians in the sector. The challenge
for QSR managers is to achieve certain targets on the score card identify by 4 of the 7
focal areas of empowerment and transformation namely ownership, management control,
employment equity, skills development, enterprise development, preferential
procurement, and socio-economic development that are designed to address historical
imbalances in access to opportunities and benefits.

5.1. 3 Food Safety Legislation Affecting the QSR industry
South Africa has had its fair share of food scares. There are numerous press reports on
incidents of contaminated food ranging from chickens to beef to unhygienic kitchen
conditions. Such reports have evoked widespread concern about food safety. Supermarket
chain, Woolworths, has established a cold chain of organic or hormone and antibiotic-
free products to promote safety. In South Africa, food safety regulations and legislation
are weakly enforced and this is fairly common in other African countries. Food safety
administration is devolved to provincial and local government authorities in South Africa.
Food safety lapses have been associated with outbreaks of food and mouth, E-coli, river
valley fever, among others. In South Arica and other developing countries, beef, dairy,
poultry, and fruit and vegetable supply chains are major sources of food risks. Food
safety concerns from disease outbreaks and traceability continue to afflict global food
markets (FAFPRI, 2010; Mergenthale et. al, 2009). The challenge is not the lack food
safety legislation, but its enforcement.

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5.1.4 Production and Marketing Risks: Energy and Water Problems
South Africa is facing serious electricity shortages that have resulted in load shedding
and blackouts. The rapid pace of economic development has outstripped the country‟s
capacity to provide reliable energy supplies. Intermittent energy shortages started in 2005
and have worsened overtime. Policy makers have blamed South Africa‟s economic boom
as the major cause for the energy crisis. Short-term solutions have led to cuts in supplies
to neighboring countries such as Zimbabwe, Botswana, and Mozambique. The QSR
industry is one of the sectors severely threaten by the electricity shortages. Food and
agricultural products are unique in that there are perishable, rapidly loose quality, and
spoil easily resulting in loss of freshness and safety hazards to the QSR food supply
chain. Irrigated crops face the risk of yield losses while food marketing firms faces
uncertainty due to product grading and quality variations. The lack of dependable energy
supplies is compounded by concerns about QSR supply chain exposure to contaminated
water supplies. Marketing contaminated vegetables and meat products from livestock that
graze on pastures located on contaminated water sheds are a source of anxiety for the
food industry. The problems of electricity and water, both key inputs in the QSR supply
chain are a cause for concern and require long term solution from policy makers.

5.1.5 Fast Food Waste Disposal and Environmental Degradation
The QSR industry presents some threats to sustainable environment management. Waste
packaging materials used for drive-thru customers cause environmental degradation via
urban land-fills. In-store recycling is not a major phenomenon although McDonalds has
initiated its own in-store recycling programs in South Africa. These initiatives are likely
to have a major impact if extended to other QSR. Promoting the campaign to reuse,
recycle and compost minimizes land pollution. All QSR need to step up action on
handling and disposal of behind the counter waste, promote reusable items, and minimize
solid waste. Although agriculture biotechnology is a major global challenge, it seems
there is no robust demand for ethical products from South African consumers.

5.1.6 Lack of Hygiene, Slow Customer Response, and Small Portion Sizes
The SA-QSR industry still faces serious problems of hygiene, slow response time, and
small portion sizes. Regarding hygiene, some fast food outlets serve food that is prepared
by workers without gloves or by people who operate tills and handle bank notes at the
same time. It is common for consumers to stand in long queues and be served their food
after prolonged waiting period defeating the meaning of the term “fast food”. In contrast,
some QSR outlets pre-prepare food in advance to cut down order processing time but that
compromises product freshness. South African consumers complain about small portion
sizes forcing and not getting value for their money. Some discerning consumers are also
concerned about the use of biotechnology products in the QSR food chain, which raises
ethical and moral questions about the environmental, medical, and human welfare
impacts. The moral hazard problem arises in the case of majority poor who have no sense
of the genetic composition and health effects of the fast food they consume daily. A
recent survey of South African consumer attitudes towards Genetically Modified (GM)
foods indicate that majority of adults demonstrate little or no knowledge of biotechnology

                                            14
(Wolson, 2007). Majority of the consumers had never heard of GM foods thus making it
hard any ethical consumption preferences to filter through SA-QSR industry.

5.2 Future Prospects of the QSR Industry in South Africa
5.2.1 Crafting Marketing Strategies in a Dualistic Economy
South Africa has a dualistic economy and consumers in the “second economy” are poorly
served by the QSR industry. The marketing strategy of door to door coupon delivery
works well for affluent members of the society with fixed addresses but not for millions
of people who live in townships. Also, the practice of distributing coupons and menu
specials to motorists at major traffic junctions favors motorists but misses the poor urban
consumers who use trains and buses as means of transport. Such problems of market
failure and information asymmetry affect millions of poor consumers in South Africa‟s
informal urban settlements. Improved QSR market penetration and location strategies can
lower consumer transportation costs and enhance the quantity of meals demanded
(Jekanowski, 2001). Given that some of the shack dwellers in South Africa have access to
assets such as radio, television and mobile phones, these could serve as future advertising
media. South Africa has mobile phone penetration rate of over 100 percent and these
gadgets can be used to advertise specials, although e-content limitations on mobile
phones could be a major drawback. Further, QSR market penetration strategies should
target cultural, racial and religious food preferences of the consumers. The pursuit of
customized menus is vital to the future success of the QSR industry in South Africa.

5.2.2 Potential for Ethnic Marketing Strategies for FIFA World Cup Soccer 2010
Part of the trends in global trends is the “internationalization” of food consumption
around the world fueled by globalization (Pingali, 2007). The strategy to provide locally-
based national food tastes is not a feasible solution for QSR industries. While it is
impossible for the SA-QSR to offer all the meal types, flavors, and various packaged
sizes as demanded by global consumers, it is fair to anticipate demands for various ethnic
foods by FIFA WCS 2010 soccer fans. Given this major event, it is worthwhile for QSR
mangers to device strategies to offer new ethic foods as an extension to the standard
menus that are traditionally offered to the locals. The expected arrival of approximately
half a million soccer fans and their teams (i.e. players, coaches, medical personnel etc.)
from all major continents (i.e., Asia, North & South America, Eastern Europe including
Russia etc.) which are not major tourist origin markets for South Africa could result in
frustrations when visitors discover that the SA-QSR menu are less diversified than
expected. Those fast food outlets that diversify their menus will benefit financially
compared to those that do not adjust their menus. A recent study from Asia reveals that
menu price, brand awareness, food service and hygiene factors are key attributes sought
by QSR consumers globally (Baek et al, 2006). It is a fact that some fans will be willing
to try exotic meals, so QSR strategies should strike a balance between traditional South
African foods (and flavors) and new ethnic foods. The QSR managers should make
tactical and strategic decisions targeting diverse preferences for “walk in”, “phone in,”
and “drive through” customers. Such information is useful in market segmentation and
meeting the unique customer needs.

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5.2.3 Role of Information and Communication Technologies (ICT) in the QSR Industry
ICT have the potential to add tangible value to the SA-QSR industry. ICT brings value-
addition in the agribusiness decision making process (i.e., input acquisition, production,
processing, marketing etc). ICT facilitate the interaction between suppliers, the QSR
industry, and consumers. The widespread use of ATMs affords consumers the ability to
access their funds anywhere and allow them to purchase food at anytime. The use of
credit cards adds flexibility in making food purchases without moving around with large
amount of cash in some South African neighborhoods infested with crime. In the United
States, ICT innovations that use global positioning technology to route phone-in orders
from customers to the nearest restaurant for pick up or delivery have been in use over the
past two decades and the mobile revolution is expected to further transform service
delivery (Cummings, 1987). First, such innovations save labor costs, enhance customer
satisfaction in terms of time saved between taking and receiving the order and eliminates
unnecessary waiting or driving time. Second, ICT innovations increase QSR credibility
and competitive advantages. The advent of the mobile Internet has provided opportunities
for more customized orders. More recently, McDonalds introduced an “electronic
wallet” that basically allows customer to swipe the card at the drive through and have the
cost of their meal deducted from the balance on the card, avoiding the use of cash and
cutting on time spent counting back change to customers (Friddle et.al., 2001). The use of
mobile wireless technology in QSR offers managers new tools to obtain market
information and competitive advantages. Given that Internet and mobile phone access in
South Africa is estimated at 6% and over 100% respectively, such ICT penetration can
facilitate meal order taking, deliveries, and payment transactions via cell-phone banking.
Therefore, ICT offers an opportunity to lower transactions which have been widely cited
as major obstacles in developing nations (Page and Slater, 2003).

5.3 Future Research Directions

The foregoing discussion raises a few important research questions. Given the evolving
market structure, competitive strategies, and emerging challenges, a number of research
opportunities can be identified. Future studies on SA-QSR industry should consider
addressing the following four major questions:

   (i) The first key question that needs attention is to determine which competitive
         strategies are driving SA-QSR industry profitability? First, individual
         managers might value domestic competitive strategies and thus invest time
         and effort in local strategies leading to more specialization. Second, some
         managers might be less open toward local strategies and emphasize global
         competitiveness. Location strategies have been shown to affect consumer
         perceptions and willingness to pay for food safety and convenience
         (Mergenthaler, et al, 2009). Third, instead of pursuing strategies in “silos”
         some managers might decide to diversify their QSR competitive strategies and
         pursue a unique mix of local, regional and global strategies to reap higher
         benefits from such an integrated strategy. Understanding the extent to which

                                           16
the core competitive strategies providing solutions to the production and
           marketing risks that threaten the long-term survival of the industry is
           paramount.
   (ii) The second research question should address the degree to which the QSR
           industry strategies match consumer taste and preferences. Related to
           understanding the precision in market positioning is the need to estimate
           South Africa consumer‟s willingness to pay for attributes such as food safety,
           healthy products, and convenience factors. Quantifying consumer preferences
           is vital to both QSR industry managers and government policy makers.
   (iii)The third question should determine the factors affecting the current status and
           future prospects of implementing food safety, identity preservation, and
           traceability in SA-QSR industry? Global consumers are demanding more
           traceability.
   (iv) The fourth question should examine the use of ICT in SA-QSR supply chain
           coordination, governance, and market integration is necessary. Measuring
           benefits and costs associated with using ICT in the QSR industry requires
           future investigation. For instance, the effective use of e-inventory
           management and web marketing strategies during FIFA WCS 2010 games
           will be critical during such a high volume and high turnover food
           consumption period. Short message service (SMS) and email could prove vital
           in processing orders for thousands of fans before, during, and after a match.

Future studies that improve our understanding of major transformations in the QSR
industry, competitive strategies, customer preferences, and customer responsiveness are
required. The growth in demand for fast food in South Africa has major implications on
the restructuring of the QSR industry, transformations in agriculture, and poverty
alleviation in the country. The significance of SA-QSR industry in providing food to a
growing urban population makes it an important and interesting case study. Further, SA-
QSR industry will come under immense pressure from global consumers during FIFA
WCS 2010 games. The ability to respond effectively to a major surge in food demand by
crafting and implementing innovative strategies will define the success of the games, the
hospitality of South Africans, and QSR industry‟s image and future success.

                                   6.0 Conclusions
The QSR industry in South Africa has transformed food production, marketing and
consumption patterns. The industry has added tremendous diversity to the available fast
food products thereby changing the traditional consumption patterns of ordinary South
Africans. South Africa‟s QSR industry is highly concentrated with a CR5 ratio of 36
percent. The QSR industry is undergoing restructuring that is characterized by a
proliferation of regional and global franchises, and the entry of challengers such as
independent food caterers and informal traders that are competing with well-established

                                           17
brand names (i.e., Steers, King Pies, Nandos, McDonalds and Kentucky Fried Chicken
etc). The diversity of the fast food outlets has provided a wide choice of foods and flavors
for South Africans and global consumers.

The end of apartheid in 1994, and the subsequent rapid economic growth estimated at
about 4 percent per annum have led to an increasing number of South Africans affording
to eat out more often than cook at home. The major factors driving fast food demand in
South Africa are growth in two incomes households, changing life-style patterns,
urbanization, and a rising preference for prep-prepared foods. The empowerment of
women in South Africa has made it possible for more adult women to join the labor
force, implying less time is available for preparing meals at home after work. A by-
product of this demographic change has been the emergence of a growing niche market
for meals for children of school going age. With more than 40 percent of South Africans
under the poverty datum line, the numbers of those who cannot afford to eat out still
remains relatively high. Tapping into this market segment or so called “second economy”
requires QSR strategies that promote innovative and affordable meal solutions.

Given these changes, crafting strategies to achieve sustainable competitive advantage in
the QSR industry has become a central issue for business survival. This paper describes
various competitive strategies that are being deployed by SA-QSR industry. These
strategies include market coordination, franchising, product differentiation, customer
relationship management, and corporate social responsibility. The growing demand for
fast food has led to tighter vertical integration by established fast food restaurants via
production and market specification contracts with farmers. Large centralized
wholesalers were established to ensure product consistency and smooth product flows
through the supply chain from producers to numerous QSR outlets. The CSR strategy in
SA-QSR industry deals with community-based product procurement, environment, health
and safety, and labor and human rights. Deficiencies in CSR can be detrimental to
profitability and market share (Maloni and Brown, 2006). Although regional and global
franchises are found throughout the country, low market penetration in the townships
suggests the need to re-examine SA-QSR location and distributional strategies. Also, the
FIFA WCS 2010 and ICT use offers a unique opportunity for crafting new competitive
strategies and requires further assessment of its potential benefits. The lesson from
hosting major world events implies that SA-QSR industry should constantly craft
strategies that increase its competitiveness in both the domestic and global marketplace.

There are numerous challenges that face SA-QSR industry in the areas of obesity, social
inequality, food safety, energy and water problems, environmental waste management,
slow customer responsiveness, and small portion sizes among others. Some observers
fear that the SA-QSR might perpetuate social divide given high levels of poverty in the
country and exploitative tendencies of large agribusinesses. Underlying fears of
exploitation of poor farmers are linked to their inexperience in dealing with large-scale
regional and global food franchises, and moral hazard problems in contracting. The
absence of fair remuneration for both farmers and fast food workers creates inequality.
As South African customers become more discerning, they present challenges by
demanding improved safe, healthy, nutritious, and ethical foods. Similarly, growing

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