Chick-fil-A Inc.’s Entry into Qatari Food Industry

Topic: Food Words: 1990 Pages: 8

Executive Summary

The report presents three elements of PESTEL for Chick-fil-A to use in its decision to expand to Qatar. These include political, economic, and legal. The country is politically stable for investment. Economically, the impacts of low global oil prices have led to a decline in economic growth. Finally, the legal environment could be complex for foreign entities. Chick-fil-A must find a local Qatari agent to invest in the country and insist on 100% ownership.

Introduction

This report provides three components of PESTEL that Chick-fil-A will consider when deciding to expand in the Qatari fast food industry. Components of PESTEL chosen for analysis are political, economic, and legal.

Company Overview

Founded more than 70 years ago, the American fast-food restaurant has become a major player in the restaurant industry in North America. Since 1946, Chick-fil-A has specialised in chicken sandwiches and chicken dishes using promotional techniques that urge the public to eat more chicken (Chick-fil-A, Inc. 2017). The company is known to protect its intellectual property rights aggressively, including the ‘eat more’ phrase. With the head office located in Atlanta, Georgia, today, Chick-fil-A has over 2,000 restaurants, which are mainly concentrated in few states across the US and others in Canada. The company has maintained its corporate culture of closing all restaurants on Sunday, Thanksgiving, and Christmas.

The business model of Chick-fil-A is based on ownership of every restaurant. Specifically, the company selects its preferred locations and constructs restaurants. Franchisees are only required to contribute about $5,000 to operate a Chick-fil-A restaurant. Chick-fil-A has generally performed well based on per restaurant revenues.

The company is equally innovative. Chick-fil-A is the first fast-food company to announce that it would start serving chickens reared without antibiotics. The US Food and Drug Administration has observed that antibiotics used to treat animals have contributed to significance cases of harmful bacteria in human. Consequently, some antibiotics will be eliminated from food production in the fast-food industry. The company hopes to start serving such chicken sandwiches and dishes by 2019.

Chick-fil-A now dominates the fast-food industry because it generates more revenues than its competitors, such as McDonald’s and KFC. For instance, in 2015, it generated about $3.9 million on average per restaurant compared to KFC, which only managed about $1 million in the same period (Peterson 2016).

Political

Since Qatar gained its independence in 1971 from the British, the Al-Thani family has ruled the country ever since. The former Emir, His Highness Sheikh Hamad bin Khalifa Al-Thani, given the title of “The Father Emir”, ruled Qatar from 1995 to June 2013 and passed the leadership to his son, Sheikh Tamim bin Hamad Al-Thani (Heritage Foundation 2016). The current ruler has focused on promoting national issues, such as education, health care, infrastructure, and trade. Unlikely other Middle East countries, Qatar has largely evaded challenges related to the Arab Spring revolution. Nevertheless, the country has been identified as a supporter of some radical Islamist movements.

In the recent past, the government has allowed extensive foreign investment in many sectors, such as energy, information technology, tourism, business consulting, sports, and leisure. Notably, oil and gas are responsible for about 85% of the country’s export revenues and more than 50% of the gross domestic product (GDP) (Heritage Foundation 2016).

Political power is mainly concentrated in the family as the constitution expressly states that a ruler can only be chosen from the Al-Thani family, but some important political appointments have been made outside the family circle. The consultative council is also available to aid the ruler in running the country. Moreover, the country has allowed some forms of election across municipalities to enhance the representation of the public. Public participation has now become common, but foreigners are not allowed to participate in elections. While occasional protests against power concentration in the family and some family wrangles have been reported, the Al-Thani seems to have created a stable country. Meanwhile, the family has amassed massive wealth and implemented policies that sustain the stability of the ruling class. Internationally, Qatar aims to establish major relations with other nations and bodies, including Gulf countries, the United Nations, and OPEC.

Overall, it is observed that Qatar offers a relatively stable political environment for investors because of a centralised political system where no stiff political opposition and competition is expected. Hence, political risks to business establishments are generally low. This stable political factor has led to the growth of many businesses.

Economic

It is imperative to recognise that the economic assessment has been done following a decline in the oil revenues and market volatility, which have resulted in uncertainty across major sectors of the economy.

The GDP

According to information obtained from the Qatar Economic Outlook 2016–2018, economic growth remains stable due to significant contributions from other non-hydrocarbon sectors and other gas projects (Ministry of Development Planning and Statistics 2016). A growth rate of 3.9% was recorded in 2016. The nominal GDP was expected to decline by 2.9 percent, which was mainly attributed to a decline in the global oil prices. Further, it is expected that hydrocarbon production in 2017 to 2018 will mostly like remain flat, but economic activities from non-hydrocarbon sectors are expected to sustain the growth rate. Services and construction are anticipated to make massive contributions to the economy. The government now focuses on completing ongoing projects rather than initiating new ones. It was noted that the real GDP in the year 2015 grew by 3.7%, but it dropped following the decline in oil prices, leading to a decline of 20.6 per cent in the nominal GDP.

Consumer Price Index

Based on Qatar’s consumer price index, the average current inflation is estimated at 3.6% compared to 3.4% noted in the year 2016. It is projected to reach 3.8% in 2018. Since January 2016, the rate of inflation has risen steadily following the elimination of subsidies for water and electricity in 2015. The last quarter of 2016 was characterised by a rapid rate of inflation noted averagely as 3.1%. Furthermore, the government also introduced a wide of range of taxes coupled with the elimination of subsidies. These factors are most likely to drive high prices of commodities soon. The US dollar has generally remained strong, and it continues to do so as global commodity prices remain unstable.

Inflation

Qatar recorded average inflation of 1.8% in 2015 as consumer prices remained stable. There were no foreign inflationary pressures, the US dollar was appreciating, and food and commodity prices were all soft. The country also observed a decline in non-trade sectors, which also led to a low rate of growth.

Fiscal Balance

Qatari fiscal balance is in deficit and expected to stay so beyond 2018. The most recent data show that, for the first time in over a decade, the country will experience fiscal deficit beyond 2018. In 2016, the fiscal deficit was about 7.8% of the GDP, and it is projected to remain nearly unchanged in 2017, but will improve to about 4.8% in 2018 (Ministry of Development Planning and Statistics 2016). The available data for the fiscal year 2015 showed that the country’s overall surplus was QR21.3 billion (about 3.5% of the approximated nominal GDP). Compared to the year 2014, the financial balance was in surplus, notwithstanding a dramatic drop in oil prices because of huge returns from Qatar Petroleum. These returns supported the 2015 budget.

External Balance

While external balance is currently in surplus, it is slowly reducing. In 2016, the deficit was estimated as 0.4% of the GDP. Further declines are expected between 2017 and 2018. The notable factors are reliance on hydrocarbon exports and the subsequent low oil prices in the international market. The forecast demonstrates that global oil prices are most likely to increase in 2017 and 2018, which will support Qatari export. Conversely, import demands will further decline owing to a reduction in capital-equipment requirements. However, the need for materials and growing consumption will sustain import demands.

Trade Surplus

The country’s trade surplus declined by half in the fiscal year 2015 to 29.2% of the nominal GDP (Ministry of Development Planning and Statistics 2016). The current account recorded a small surplus of 8.2% of the nominal GDP. The low trade export earnings, which declined by 39%, were due to reduced hydrocarbon prices.

Risks Associated with the Outlook

Economic risks are generally related to the global oil price fluctuations. If the global oil prices increase faster than projected, there would be favourable economic outcomes for Qatari fiscal growth and other indicators of growth. However, if oil prices stay low for a longer period, economic challenges in the country would be more elaborated, putting more pressure on businesses for funds. The negative impacts of sustained volatility in the world financial markets have spread to Qatar. Low liquidity is noted, which implies higher costs for businesses. For the government, it may not deliver some projects as scheduled, leading cost overruns and slower rates of fiscal recovery and reforms.

In recent years, however, Qatar has recorded a growth in the number of restaurants and fast-food franchises (John 2013). These businesses mainly target expatriates as their primary customers and few locals. Foreign restaurants must recognise that Qatari women do not like to eat in public places, but they prefer drive-through and delivery services offered by fast-food restaurants. Qatari men tend to socialise and use public restaurants and coffee retail outlets to do business.

Legal

Legal factor is extremely important for Chick-fil-A in Qatar, which insists on owning its restaurants while franchisees are expected to provide about $5,000.

Land and Property Ownership

Chick-fil-A always identifies a location and then constructs its restaurants. It is noteworthy that only Qataris have the right to freehold estates while non-Qataris have no such right (Barber 2012). More recently, however, the Qatari government has enacted laws that facilitate land ownership, usufruct, and investment by foreigners in designated investment areas, including West Bay and the Pearl. Hence, Chick-fil-A must assess such arrangements thoroughly before investments.

Business Ownership

The past laws only allowed non-Qataris to own only 49% of the company (PwC & HSBC 2013). However, further adjustment and enactment of these laws have allowed foreign investments to own up to 100% in some sectors of the economy (Toumi n.d). More recently, the government reviewed its law and allowed 100% investment in all sectors of the economy provided a foreign investor has a Qatari agent (Townsend 2016). This law is meant to open up Qatar for enhanced foreign investments.

Foreign investors in Qatar prefer limited liability company (LLC) structure. This structure requires about $54,820 as minimum share capital, which determines the liability of shareholders (Oxford Business Group 2017).

Foreign workers must obtain the necessary documents to work in the country.

The Judicial System

Critics have expressed their frustration due to a lack of transparency and the use of personal connections to influence government tenders. Notwithstanding constitutional provisions, the Qatari judiciary is significantly under the influence of the ruling elite (Heritage Foundation 2016). Additionally, most judges are non-Qataris who are hired and dismissed when required, and corruption is a major issue within the system. Nevertheless, new laws aim to reinforce trust and protect intellectual property.

Conclusion

This report has covered political, economic, and legal aspects PESTEL related to Qatar. Chick-fil-A will, therefore, make the decision to expand into the country based on these findings. Notably, the political condition is generally stable, and the current regime is focused on promoting foreign investments. Thus, new laws have been introduced to open up the country for such opportunities. The Qatari economy is generally dependent on oil and gas, and the current low global oil prices have affected economic growth negatively. While corporate tax is low, consumers now face rising commodity prices and additional expenses following the removal of subsidies, which have affected their spending power. Legally, Chick-fil-A requires a local agent to comply with the law. Additionally, it must understand the myriad potential legal issues associated with property ownership, investments, and residency of foreign workers.