Will Gate Gourmet Remain in the Market - Case Study Example

1 Executive Summary Gate Gourmet is a Swiss based company that has announced that it would be sold out in December 2008. The firm appears to have many positive features; it has a number of prestigious, well paying contracts and is in a position to take advantages of economies of scope and scale which may help to make it attractive to potential buyers. However, there have also been difficulties such as poor publicity and breaches of agreements with creditors which may make the firm less attractive to potential buyers. In order to assess the potential of Gate Gourmet if it is suitable for acquisition, the company’s historical background should be considered in detail and its current operating strategies should also be examined. This includes identifying the sources of competitive advantage as well as its potential for better performance in the future. 2 History Gate Gourmet is the World's largest independent supplier of airline catering and provisioning services and is responsible for more than 200 million meals being served a year. It is supplied by 101 flight kitchens which are located in 26 countries across 5 continents (Gate Gourmet, 2009). The firm was established in 1992 by Swissair Catering to provide their own in-flight meals. It also sought to take advantage of increasing demand for outsourcing which resulted in the firm acquiring the Aero-Chef in 1992(Gate Gourmet, 2009). There were some major changes in the air industry which resulted in some firms seeking to cut costs. The firm capitalized on this development and embarked on an initiative to acquire the organizations that opted out of business. This acquisition strategy saw it acquire SAS Service Partner in 1994 and Varig kitchens in 1995. This strategy resulted in rapid growth and in 1997, British Airways kitchens were also acquired. In 1999 a merger took place between Gate Gourmet and Dobbs (Gate Gourmet, 2009). The company was sold by the administrators to the Texas Pacific Group for £618 million in 2002 (Ebrahimi, 2008; Wagland, 2005). Even after this change of ownership, it continued to grow and in 2003 the firm completed its acquisition initiative by purchasing the remaining 70% of shares from Iber-Swiss catering which were held by Iberian. There was a major financial restructuring that took place in 2005. Cost cutting measures then ensued which led to the industrial dispute at Heathrow Airport which resulted in 670 members of staff being fired as part of a £14 million cost cutting exercise (Wagland, 2005). The company received negative publicity when more than 1,000 members of staff boycotted work in support of those who were fired. Lack of in-flight catering services ended up forcing hundreds of flights to be cancelled with the British Airways alone canceling more than 700 flights due to the wildcat strikes (Wagland, 2005). Following the problems, Texas Pacific Group started selling their interests in the firm mainly through debt for equity swaps with a series of hedge fund owners. It sold its last stake in the company in March 2007 to Merrill Lynch (Ebrahimi, 2008). In 2008 the firm started to change its strategy and introduced the 'Gate Group' brand to support the positioning of the firm in the market. However, with ownership by hedge funds and the failure of the company to be subject of an IPO in 2008 have all added to the pressure which has seen the company being put up for sale in December 2008, with an expected price tag of around £70 million. 3 Current Strategy Gate Gourmet is one of the largest independent airline catering and provisioning service which follows LSG Sky Chefs (Wagland, 2005). Gate Gourmet has more than 270 clients, including major airlines such as British Airways, Quantas, Northwest Airlines, United Airlines, Continental Airlines, Air Berlin, Emirates Airlines, American Airlines and Thai Airways (Gate Gourmet, 2009). Some of the clients have a very long-standing relationship with Gate Gourmet, or its predecessors that have been gained through the acquisition policy. For example, the contract with British Airways resulted from the acquisition of the in-house catering which was sold off by the airline to Gate Gourmet. Gate Gourmet provides a range of integrated services for their clients in terms of aircraft provisioning. The first of these is the packing of flight carts, delivery and loading of supplies into galleys in preparation for flights. This can be a complex task, for example, a typical long-haul flight between Asia and United States will need roughly 200,000 items to be loaded including food and equipment. The company provides a personalized service to each client, for instance, meals are prepared to meet the specific client requirements. The company also invested in special equipment to service especially the new A380 aircraft manufactured by Airbus. In order to reach the catering door, specially designed trucks that have the ability to move sideways even across the aircraft wing were acquired (Gate Gourmet, 2009). This places the firm in a strong position to service more airlines that use the A380 aircraft as many smaller catering firms may not have the ability to service this particular style aircraft. The eGate solution or the InFlight Exchange 4 (IFX4) has also greatly improved the management systems of in-flight servicing. This is an application suite which is designed to manage all aspects of the in-flight services. The system has a number of elements and processes which are utilized in order to define the in-flight needs of each airline, starting with outlining the services needed for any particular flight, building up menus, determining the schedules for placing orders, preparing the food and arranging a supply chain to the aircraft in order to achieve an optimal performance (Gate Gourmet, 2008). The system is designed to provide transparency at all supply chain levels and its benefits to the airlines include a low level of costs including the reduction of labour for certain tasks. This system has streamlined all the operations into a single entity such that there are minimum loses since this system is accurate (Gate Gourmet, 2008). In order to achieve this kind of integration the IFX4 suite comprises all five modules which all run on a single database. The five modules are electronic service scheduling, galley planning, menu manager, electronic service ordering and electronic service validation (Gate Gourmet, 2008). Strengths and Weaknesses of Gate Gourmet’s strategies Strengths Weaknesses It has contracts with the prestigious BA and enjoys a turnover of GBP1billion a year (Workers Power 2005/08/19) The negative publicity it receive as a result of the industrial action has taken a toll on its capability (Workers Power 2005/08/19) They have a competitive advantage of being a renowned catering service that knows how to run an efficient high quality and safe service (Workers power 2005) One major weakness confronting Gate Gourmet is the apparent leadership crisis reported to have squandered the fortunes of the company at the expense of the workers who are getting a raw deal while they bring the wealth to the company (Workers Power 2005) Gate Gourmet provides a range of integrated services for their clients in terms of aircraft provisioning (Gate Gourmet, 2008). Low cost carriers have entered the market resulting in it taking long haul segments only (Gourmet 2008) The eGate solution or the InFlight Exchange 4 (IFX4) has also greatly improved the management systems of in-flight servicing. This is an application suite which is designed to manage all aspects of the in-flight services. The company provides a personalized service to each client, for instance, meals are prepared to meet the specific client requirements. (Gate Gourmet, 2008). The in-flight meals are seen as a core competency for the firm and are determined by the airline, the budget as well as the style and type of food the airline wishes to serve (Gate Gourmet, 2008). Provisions can be anything from restaurant quality, fine dining menus for premium services, through to sandwiches and snack items for sale to budget airline passengers. Gate Gourmet also provides the airline with the ability to have the items branded with the airlines branding and logos to align with their image (Gate Gourmet, 2008). The other service is that of unloading and dealing with the in-flight services after the aircraft has landed following the flight. This includes stripping, washing equipment and sterilizing it as well as rubbish disposal from the aircraft. Carts are removed from the aircraft, in many locations there will be a sorting of the rubbish for recycling, and waste is sterilized from international flights before it is disposed. The firm also undertakes the management and storage of the airline's stock which include the use of bonded warehouses. This includes the storage and management of the retail items, such as duty free items. Gate Gourmet can make use of the airlines own software systems and solutions in order to gather the data needed in order to manage the stock for the airline, alternatively the company can offer a software tool through another Gate Group company; Pourshins, which can be used to integrate supply chain and provide an airline with an efficient way of managing its inventory. The company’s mission is customer oriented which states that: “To keep your flights on time, fully serviced and your passengers satisfied" (Gate Gourmet, 2009). The company prides itself on high standards and reliability, and the ability to ensure the aircraft is ready on time for the airline, stating that they have an average reliability in excess of 99% (Gate Gourmet, 2009). The current harsh economic conditions did not spare the company either. In 2005 the firm was making a £20 million loss on their Heathrow operations alone which led to cutting costs. The poor publicity also impacted negatively on the company. A credit crunch and poor performance also delayed any potential IPO. Thus, according to Gourmet, the company is undergoing tough economic conditions worse than the 7/11 effects. Ansoff (See Appendix 2) has suggested that there are four main ways in which a company can expand. This depends on two variables, whether it is the desire to develop new products or new customers. Therefore, it is whether new sales are going to be made by penetration, product expansion, market expansion, or diversification (Kotler, 2003). Penetration is the strategy of using the same products and the same market and just increasing sales to that market. This may be a hard strategy (Kotler, 2003). Product expansion seeks to keep the same market of customers but to increase sales to them by offering more products. Market development looks to increase market share with the same products but to get more new customer to buy them, and diversification, which is often referred to as the suicide strategy in this matrix, looks to the development of a new product in a new market (Kotler, 2003). (See appendix 2) Gate Gourmet can be seen as following the penetration strategy which they have added to their range of services and supported by the IT solution they have developed with their sister Gate Group Company. It is offered to airlines as part of an integrated supply chain solution seeking to increase sales with existing customers as well as product expansion as more services are offered. There is also the market development strategy being used, with the firm seeking to gain more customers. The firm is having mixed results, recent announcements include a 5 year contract, with a two year extension clause, with SAS for services leaving from Copenhagen, Stockholm Arlanda, Malmo, Gothenburg, Oslo and Bergen (Air Transport World (a), 2008). The contract starts in the third quarter of 2009 (Air Transport World (a), 2008). The firm has also gained the contract to deal with the in-flight retail services for the budget airline EasyJet (PR Newswire, 2007). This includes items such as alcohol for the duty free sales and for consumption on board as well as snack and sandwiches for sale on the flight as the airline does not provide in flight meals. This was a significant contract as it moves away from the core of the in-flight catering which is diversification illustrated in appendix 2. It also has a sizable contract, supplying 147 aircraft flying on more then 300 routes between 88 airports (PR Newswire, 2007). There is also expansion taking place with the purchase of catering units from Air Berlin and SCK Sky Catering Kitchen (Gate Gourmet (b), 2008). There have been some difficulties especially with BA after the 2005 industrial action. The contracts for the short haul flights have gone to Northern Foods and DHL (Airline Industry Information, 2008). It may be argued that this is a very negative outcome, as Gate Gourmet are the largest supplier at Heathrow and are the only supplier that was large enough to supply all of BA's needs. Therefore, the firm is competing and seeking to overcome past difficulties (See appendix 4). It is expanding and gaining contracts but there are also some losses. The firm appears to have a great deal of potential, especially with the recent strategy that is seeking to create the Gate Group brand but this potential has not yet been realized. In order to consider the potential future of the firm, it is necessary to identify and examine potential competitive advantages. 4 Competitive Advantage Gate Gourmet has survived despite difficult trading conditions that prevailed. In order to survive in the long term, Porter (1985) has argued that a firm needs to have sustainable competitive advantages. There are two sources of competitive advantage; cost advantage and differentiation as illustrated in appendix 3. 4.1 Porter’s generic matrix In trying to undertake a cost advantage, the company may seek to be the cost leader in either the industry or the relevant segment of the industry. In each industry or segment, only one company may occupy the cost leadership position. This means a company will “find and exploit all sources of cost advantage… [and] … sell a standards no frills product” (Porter, 1985; 13). This means that the cost to the firm of producing the good is lower than that of its competitors. This may be due to economies of scale as well as the way in which costs can be reduced, such as leveraging the power held over suppliers and contracting out labor. The cost advantage is seen as a strategy that brings goods of an acceptable quality to the market with comparatively lower production costs than its competitors. If it is able to maintain that cost gap, then the benefits are more often in form of higher than average profits. This is achieved through careful and effective management of the cost drivers for the business (Thompson, 2007). There is potential to benefit from the economies of scale not on the entire operations in some cases but on the scale of particular contracts, such as the Singapore Airlines contract supplying the A380's. However, there are several issues that are holding the firm back. Current investments will have a lag period and acquiring value from acquisitions will usually take several years (Mintzberg et al, 2003). There are also ongoing problems with the employee relations in the firm which are likely to have associated costs while the employee relations remain poor. Cost advantage may be a potential future advantage but it is not currently achievable. Therefore, the competitive advantages are likely to be differentiation (see appendix 3). Differentiation is described by Porter as, “when the company provides something unique that is valuable to buyers beyond simply offering a low price” (Porter, 1985; 120). This means that the products different in some way may have real value through features and extras, perceived value, such as brand value (Grant, 2004). It may also be an advantage that is added though the value chain rather than directly in the product (Thompson, 2007). The differentiation strategy usually involves choosing either one or preferably a few key features or characteristics which have a broad perceived value in the market or segment that the company operates within. Then the company can selectively add costs where those features are added which customers will see as worth the additional cost (Thompson, 2007). To undertake such a strategy, the opportunities need to be sought where differentiation may be developed, that is in areas not already covered by another competitor. There is also need to have the cost charge to the customer greater than the additional cost to the company. There is also the need to keep costs down in the areas where customer perception of value is lower. This means that cost controls still remain important, otherwise the superior or above average profits will not be achieved by the company following the strategy. The sources of differentiation have been seen under the section of the company's current strategy. This includes the way that the firm offers services and enables effective, efficient and transparent supply chain management for all the in-flight services above the wing. The service quality in terms of the range of services offered and the reliability are also key to success as airlines need to ensure that flights are on time. The way the service is offered, the ability to offer this across a large number of airports and reputation for reliability are all sources of differentiation. 5 Conclusion Gate Gourmet has a strong position and also has a high level of resources with several contracts and facilities. Though they have undergone some harsh cost cutting measures in their past, they have still defied the odds and managed to remain in business. However, part of the current problems is that of ownership. The firm is owned by hedge funds that are under pressure to increase liquid as the markets suffer. It may also be noted that the owners being hedge funds have limited potential to add value to the firm. Part of the problem is that of image and the association with the 2005 difficulties, so a re-branding exercise may be advisable, in order to escape this negative image. However with this incident being nearly five years ago undertaking this strategy now may be somewhat extraneous. The differentiation strategy should be pursued, and increased attention paid to HR issues, as employees can also be the source of value, as well as incurring costs. Increasing attention here may help the firm to move towards gaining a cost advantage as well as differentiation, placing the firm in an even stronger position, Overall, this is a firm that has a great deal of potential, as long ads it is given further support and the time needed for investments to create a return making this a potentially good investment. References Airline Industry Information, (no author cited), (2008, Dec 5), British Airways announces new contracts with catering service suppliers, Airline Industry Information. Air Transport World (no author cited), (a) (2008, Nov), Gate Gourmet Switzerland, Air Transport World 45.11, p.18(1). Air Transport World (no author cited), (b) (2008, June), Gate gourmet, Air Transport World 45.6, p.14(1). Ansoffs Marketing Retrieved on 23 February 2009: From http://www.learnmarketing.net/ansoffs.htm Ebrahimi Helia, (2008, Dec 7), Hedge funds put pounds 700m Gate Gourmet in departure lounge, Sunday Telegraph. Gate Gourmet (2009), Homepage, retrieved 9th Feb 2009 from http://gategourmet.gategroupmember.com/ Gate Gourmet, (2008, Fall), eGate Solutions’ InFlight Exchange 4™, Gateway, p4 retrieved 9th Fe 2009 from http://gategourmet.gategroupmember.com/images/stories/downloads/web_gateway_2008_fall.pdf Grant, R.M, (2004) Contemporary Strategy Analysis, Massachusetts, Blackwell Publishers Inc. Mintzberg H, Quinn J, Goshal S (2003) The Strategy Process (Revised European Edition), London, Prentice Hall Porter M.E. (1985), Competitive Advantage; Creating and Sustaining Superior Performance. New York: The Free Press. PR Newswire, (no author cited), (2007, Oct 16), Gate Gourmet to Manage Onboard Retail for easyJet, PR Newswire Thompson J L, (2007), Strategic Management; Awareness and Change, London, Thompson Business Press. Wagland Maria, (2005, Sept), Counting catering costs: British Airways aimed to cut costs by outsourcing its catering requirements, but the price has been much higher, Airfinance Journal 283, p.26(2). Workers Power 2005/08/19 Retrieved on 23 February 2009 from: http://www.workerspower.com/index.php?id=47,763,0,0,1,0 Appendix 1 PESTEL ANALYSIS OF COURMET PESTEL stands for factors which may affect the operations of business such as political, economic, social, technological, environmental as well as legal factors. The table below illustrates these factors. Political factors -The threat of international terrorism is one major political factor which negatively affects business especially with reference to air traffic operations such as the 9/11 attacks which resulted in a slump of business as security measures were being tightened. -Global oil price increases which may trigger an increase in many services Economic Factors -Increase or decrease in disposable income affects the welfare of the people -Global economic recession has negatively impacted on various facets of the economy -High operating costs -competition. Social factors Fair treatment at work Reduction of business can lead to downsizing Motivated workers likely to be productive Threat from diseases Technological factors Advanced information and communication technology improves the chances of better performance of business (Use of the internet) Centralised management systems aided by the use of computers Environmental factors -pollution. Each company ought to strive to protect the environment is operating in to safeguard the interests of the community. Legal factors -Statutory regulations that promote competition among different organizations in the market affect the operations of an organization to a certain extent. No one company can enjoy the monopoly of dominance in the market. -Labour laws which allow the grievances of the workers to be heard such as industrial actions against poor working conditions that may affect the operations of an organization such as the 2005 job action. Appendix 2 Ansoff’s Matrix Present Products New Markets New Source: www.learnmarkerting.net 1) Market penetration seeks to increase the sales of the present product through reduction of price or embarking on a high promotional drive. 2) Product development aims at developing new products in the market which can go hand in hand with the existing product to increase the market share. 3) Market development is concerned with selling the existing product to new market segments. 4) Diversification entails innovation of something new. Appendix 3 Porter’s Generic Competitive Advantage Source: http://www.ifm.eng.cam.ac.uk/dstools/paradigm/genstrat.html University of Cambridge- Institute of Manufacturing Retrieved 23 February 2009. 1. A firm chooses to become the low cost producer in the industry in cost leadership. 2. In differentiation strategy a firm chooses to be unique from others. 3. In cost focus, a firm seeks a cost advantage in its target segment. 4. In differentiation target, a firm seeks to be different in its target segment. Appendix 4 Five forces Model According to an online article, ‘Five competitive forces -Porter,’ the five forces model of Porter is, “an outside in business strategy tool that is used to make an analysis of how attractive an industry is.” The table below shows the five competitive factors that are likely to affect a business. Entry of competitors As noted above, the entrance of other low cost catering services has led to some growing competition resulting in Gate Gourmet specialising in international long haul air traffic. All the same, this is quite an established business entity which can waiver competition if properly managed. Threat of substitute This depends on the probability of a substitute overtaking the product already in the market in terms of cost. Can the service be easily replaced? Bargaining Powers Of Buyers This depends on the spending capacities of buyers on certain products. In this case focus is on Gate Gourmet’s ability to capture the market. Bargaining powers of Depends on how strong the sellers are. Whilst Rivalry among the existing players - Does a strong competition among the players exist? Gate Gourmet is also regarded as the largest provider of catering services, there are also competitors in the industry than cannot be ignored. Source http://www.12manage.com/methods_porter_five_forces.html Read More