Executive Summary

Smithfield Foods Inc. is recognized as a meat processing and packaging company whose headquarters are based in Virginia, United States. The meat processing industry has been growing significantly over the years. The paper assesses the feasibility of Smithfield Foods operating in South Africa through use of secondary research. The level of competition in the industry is quite low in South Africa compared to the United States, and this makes it favorable for Smithfield to enable diversification. Using direct exportation has come out as being a favorable entry mode for the company. Currently, South Africa is open to meat exports from the United States. In addition, the strategy has other advantages such eliminating intermediaries and having direct consumer contact among others. The South African market provides both opportunities and challenges for Smithfield Foods. The benefits outweigh the shortcomings and Smithfield should go ahead and invest in this market as they can deal with most of the problems. There is no market that is perfect; every market has its challenges.

Introduction

Smithfield Foods Inc. is established as a meat processing company with headquarters in Virginia, United States. Smithfield is regarded as the largest hog producer and pork processor globally (Xia, 2015). The meat processing and packaging industry has been growing over the years. In 2014, it was estimated that over 315 million tons of meat had been consumed globally. This meant that every individual had consumed around 95 pounds (43.4 kilograms) of meat that year (Lynn, 2017). Despite the success being enjoyed at the moment, the industry is also faced with several problems. Among them, there is the challenge of higher expectations and new regulations. There are increased regulations now and then to help ascertain that the companies involved are fulfilling some requirements to ensure that the health of the consumers is taken care of. There is also the problem of the perceived health risk as a result of consuming meat. As a result, companies involved are necessitated to conduct massive campaigns to help eradicate some of the misconceptions on this issue. The industry is characterised with the challenge of rising costs of raw materials too. It becomes difficult to predict market volatility hence the emergence of price fluctuations (Cummins and Lyng, 2016). Attracting and retaining personnel is also a challenge as this is an issue that has been distorting the entire manufacturing industry.

In light of the issues being experienced in the industry, companies involved are trying to focus on internationalization. Doing business in different countries brings about different dynamics hence one market might have more opportunities than the other. Most businesses that commence from a domestic perspective usually have a long-term plan of operating in the international market. Internationalization has been able to change the landscape associated with most businesses positively. Companies venture into the global market for different reasons. Among them are the inadequacy of the domestic market, viable opportunities in foreign markets, and the need to expand the consumer base among other reasons (Cummins and Lyng, 2016).

When a company is pursuing entry into a foreign market, there are various entry modes to choose from. There is the non-equity and equity mode. Non-equity mode usually entails export and contractual agreements while equity mode includes joint ventures and wholly owned subsidies. A company is expected to choose an entry strategy that is most suitable to the type of business being conducted. The host country involved also determines the entry due to the varying rules and regulations in different countries.

The report aims to include research regarding Smithfield Foods Inc. and their entry into the South African market. The research examines the general business context involved. This is how business is all about in South Africa and the operations of Smithfield Foods Inc. to help assess the compatibility. Assessing these aspects will help in deciding the most appropriate entry mode for these operations. The report also examines cultural and institutional differences likely to be experienced in the process. This helps the organization involved to take the relevant measures to avoid these obstacles once the operations have been commenced.

The report is based on secondary research. Secondary data collection method has been used to help gather the desired information. This is research based on information that had been previously posted by another party. There has been the use of websites, journals, magazines and books to help in assembling the required information.

General Business Context

The meat packing industry includes the slaughtering, processing, packing and distribution of livestock such as pigs, cattle and sheep. The process involves packing both the by-products and the readily consumable products. The industry also has a responsibility of refining and purifying animal fat, meat scraps and bones. These products are sold to food renderers, grocery, manufacturers, and meat wholesalers and retail traders (Cummins and Lyng, 2016).  Some decades ago, the meat industry used to be localized. Nearby farmers were tasked with the responsibility of providing meat to local butchers that would be used to service local markets.

There have been significant changes in this array as the meat processing industry is now operating at an international level. The global market for the meat industry has been growing significantly. This is a sensitive industry given the health issues that can result from meat consumption. Meat is always prone to bacterial diseases, and this is why most governments have strict sanitation regulations when it comes to meat packing facilities. There are mandatory cleaning procedures of equipment, frequent inspection, and disease prevention measures for living livestock. Meat producers should be very careful to keep animals disease free and fast moving equipment clean as the meat’s global demand increases. Governments also have extensive safety regulations to ensure that they have kept the employees involved with this industry safe.

In the United States where Smithfield Foods Inc. has its headquarters, the meat industry is the largest segment of the agricultural sector. In 2013, United States meat companies produced 25.8 billion pounds of beef, 23.2 billion pounds of pork and 286 million pounds of lamb, veal and mutton (North American Meat Institute, 2017). Health regulators in the United States are quite vocal when it comes to nutritional components associated with different food products. As a result, they take the initiative of ensuring that the citizens are aware of the essential nutrients. The 2010 Dietary Guidelines for Americans advocates for the consumption of 5.7 ounces of meat a day to help maintain a healthy balanced diet. Meat is also regarded as a favorable source of magnesium, iron, niacin, zinc, riboflavin, selenium and B-vitamins that aid the body in converting food into energy (North American Meat Institute, 2017). The level of competition in the industry is also very high in the United States. Smithfield Foods Inc. faces competition from other big and reputable companies in the country such as Tyson Foods, Hormel Foods and JBS.

The meat industry in South Africa is also the biggest contributor to the agricultural sector as it contributes over 22% of total agricultural production value (Asefeso, 2013). The country has favorable research facilities and meat infrastructure coupled with description processes and quality control. The health standards when it comes to the pig sector are acknowledged by other pig producing countries globally. Over the decades, income levels in South Africa have been increasing steadily. This has resulted to the skyrocketing of meat consumption levels in the past two decades.  The changes in the consumer base have resulted in the increased trade volumes with regards to meat. In South Africa, rising income has always been a key factor when it comes to changes in consumer trends across different consumer goods industries.

South Africa has now become a favorable market for a variety of meat products coming from the United States. In 2016, the country reopened to U.S meat exports and immediately became a promising market, more so for the beef variety. From January to July 2017, beef variety exports- primarily livers to South Africa from the United States totaled 9,175 metric tons valued above $7 million; up 368% (U.S. Meat Export Federation, 2017). Given the current growth, South Africa is already the fourth largest destination of beef variety meat exports from U.S. Only Egypt, Japan and Mexico are ahead. In 2017, the United States has now become the largest beef supplier to South Africa. United States has now captured 24% of the market share, surpassing Australia and Newzealand that stand at 20% and 12% respectively (U.S. Meat Export Federation, 2017). (See Appendix 1)

Entry Mode

The suitable entry mode for Smithfield Foods into the South Africa’s market would be direct exporting. This strategy will enable the company to sell its products directly in the market of interest. This comes out as a favorable approach given the current meat market in South Africa. The country has now opened doors for meat coming from the United States. Given that Smithfield Foods is a company based in the U.S, this is a great time to grab the opportunity. It is apparent that the South Africa’s meat industry is not super competitive. This is evidenced on how the United States supplies the highest percentage when it comes to beef variety while it only gained entry into the market in 2016. Major players in the meat processing and packaging industry have not yet established their roots in the market. Direct exporting is a favorable strategy since it is the one the United States has been using since it joined the market last year. The superiority of the strategy is evidenced by the market share that has been captured in the process.

Other advantages associated with direct exporting entry mode are that it helps to increase the profits potential due to the elimination of the middlemen. Intermediaries in any supply chain reduce the profit levels due to the profit sharing aspect (Delaney, 2017). Smithfield Foods will also have overall control on varied transactions associated with the business. This is an important element since there is a way that every company wants its businesses to run. There is the opportunity of creating the exact image. Direct exporting also makes it possible to have a direct contact with consumers. Being in touch with consumers helps to understand the issues that they might have with the company’s products and some of the areas that they would want to see changes. The consumers also get to know what the company is all about hence they feel more secure (Delaney, 2017). It is important to note that keeping customers happy is vital for any business as they are the reason why the business is in existence. Direct exportation also ensures slightly better protection for the company’s patents and trademarks. The company also has a better chance of understanding the market of operation hence making the relevant adjustments to become more efficient and effective.

Despite the advantages involved, Smithfield Foods Inc. is likely to encounter some disadvantages as a result of direct exportation. Among the shortcomings likely to be encountered is that there will be the need for more energy, time and money that ought to be invested for the business to become successful. This mode also eliminates the buffer zone since the company is now directly accountable for whatever happens during the operations (González and Vlačić, 2016). There might also be the challenge of hitting the ground running due to lack of sufficient knowledge regarding the market of operation.

Institutional and Cultural Differences, and Challenges and Opportunities

There exist several differences between South Africa and the United States; this is something that might affect Smithfield Foods Inc. operations. When it comes to institutional differences, South Africa is faced by inefficient government bureaucracy compared to the United States (Writer, 2017). This makes it difficult to have some of the issues that an organization would want to be sorted within the shortest time possible. There is also the prevalence of policy instability. This is usually brought about by the promises that politicians make while doing their elections campaign. It is detrimental when a policy change affects a business in a negative way. Institutions in South Africa are also prone to corruption tendencies. The levels of corruption are more prevalent with politicians and relevant government agencies (Writer, 2017). This is where businesses and people have to use some monetary incentive to influence the decisions being made by these institutions. Enforcing of contracts is also an issue in South Africa compared to the United States. A trial and judgment can take an average of 500 days when enforcing a contract (Writer, 2017). Court fees and the cost of an attorney can also make the process somewhat expensive.

These institutional differences should not keep Smithfield Foods away from entering the South African market. It can be easy to deal with these issues. Among the most effective ways is being on the good side of the government. One way of doing this is indulging in corporate social responsibility that focuses on the wellbeing of the relevant community. This would involve establishing projects that are beneficial to the community and indulging in other community activities such as charity. This is something that the government will notice, and will ensure that the responsible experiences a fair environment while conducting business. The government is also likely to go an extra mile in ensuring that policies developed in that industry favor the business in one way or another since they want the business to remain as a going concern in the foreseeable future.

When it comes to culture, South Africa has multiple cultures, and there are also a number of languages being spoken in the country. The business environment also tends to be informal, and the people there tend to use direct approaches. The country might be a transactional culture, but people are rooted in their traditions. Smithfield can overcome the cultural issues by building a rapport coupled with the need to understand what people believe in. The business should be assembled in a manner that is compatible with the cultural trends (Manktelow, 2014). Failure to do this might result in business failure. A company operating at the international level should not use a similar model for all its markets for success to be actualized.

The opportunities that exist for Smithfield Foods is that the level of competition in South Africa is lower compared to that in the United States. South Africa is an emerging market hence firms have not established themselves sufficiently in the industry. Smithfield will become a pioneer for the multinational meat processing companies that will join the market later on. This will give the entity a competitive advantage. Other opportunities that the company is likely to enjoy is low labors costs that will help to reduce overall operations costs, the increasing purchasing power of the consumers and a steady economic growth.

Despite these opportunities, there are also other challenges such as inflation, tax regulations, foreign currency regulations, poor public health, government instability, poor work ethic among the people and insufficient capacity to innovate (See Appendix 2). These are things that would make doing business in the country difficult, but they are issues that can be handled.

Recommendations

There seem to be several aspects involved, but the investment should go ahead. Venturing into the South African market will provide Smithfield Foods with a favorable opportunity to diversify its market portfolio. The South African market has minimal competition compared to the United States market where the business has its headquarters. Superior brands have not yet established themselves in this market, and Smithfield Foods has the opportunity of being a pioneer. South Africa exhibits an emerging market with great potential for the future. The economic growth is stable, and the purchasing ability of the consumers keeps increasing. As the market gains momentum, Smithfield will be there to take advantage. The business environment will be even more favorable for the company given that South Africa opened its doors for meat imports from the United States in 2016. This means that trade in this industry between the two countries is quite straightforward. The United States has already acquired a substantial share with regards to exporting meat in this country within a short period.

It is true that there are some challenges involved, but this is normal for business. Given the Smithfield Foods has operated in other foreign markets, the company must have devised a way of dealing with the problems. An emerging market always presents varied challenges that are both institutional and cultural. However, as the business masters the dos and the don’ts of every market, operations become easier moving forward.

Smithfield Foods should use direct exportation as the entry mode. Despite this entry mode having numerous advantages, there are also prevalent shortcomings as shown above. Smithfield can overcome these shortcomings by hiring a competent export sales manager with sufficient knowledge regarding a market such as South Africa. Establishing a separate export department for this market would also be a viable move since it will be independent of domestic operations, which can also be complemented by the establishment of a foreign sales branch in South Africa.

Conclusion

The meat processing and packaging industry has been growing significantly over the past years. Companies in the industry have been able to move past the prevailing challenges and gained substantial market shares in the process. The need for internationalization has intensified as companies look to make more sales in light of the increased domestic competition. Smithfield Foods has not been left behind as it has been operating well at the multinational level. The company has an opportunity of increasing its international market share by commencing its operations in South Africa. The market seems favorable for the business.

References

Asefeso, A., 2012, CEO guide to doing business in South Africa. Essex: AA Global Sourcing.

Cummins, E. and Lyng, J., 2016, Emerging technologies in meat processing. John Wiley & Sons.

Delaney, L., 2017, Should My Company Export Products Directly to Its Customers?. [online] The Balance. Available at: <https://www.thebalance.com/direct-exporting-advantages-and-disadvantages-1953310>

González-Loureiro, M. and Vlačić, B., 2016, International business decisions and manager’s cognitive style: opening up research avenues from cognitive behavioural strategy. Gestão e Sociedade, 10(27), p.1522.

Lynn, J., 2017, All About the Meat Processing Industry. [online] WorldAtlas. Available at: <http://www.worldatlas.com/articles/all-about-the-meat-processing-industry.html>

Manktelow, A., 2014, The Economist Guide to Emerging Markets. London: Profile Books.

North American Meat Institute, 2017, The United States Meat Industry at a Glance. [online] Meatinstitute.org. Available at:<https://www.meatinstitute.org/index.php?ht=d/sp/i/47465/pid/47465>

U.S. Meat Export Federation, 2017, U.S. welcomes promising South African beef market. [online] Beef Magazine. Available at: <http://www.beefmagazine.com/exports/us-welcomes-promising-south-african-beef-market>

Writer, S., 2017, 16 of the worst things about doing business in South Africa. [online] Businesstech.co.za. Available at: <https://businesstech.co.za/news/business/174507/16-of-the-worst-things-about-doing-business-in-south-africa/>

Xia, T., 2015, U.S. Implications of the Smithfield Acquisition by Shuanghui. Agriculture and Applied Economics Association, 30(1).

 
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