What is a PEST analysis?

For those of you, like me, who find strategy fascinating you may want to analyse the macro factors affecting your industry. While industry tools like five forces are static PEST can add a more dynamic element to your analysis. PEST stands for political, economic, social and technological analysis and is a framework to analyse the macro-environmental factors in strategy. A full description is on Wikipedia.

The real skill is knowing how to relate your PEST analysis back to your industry and how it will affect the root causes of profitability.

PEST analysis for Krispy Kreme

As you have probably guessed by now Krispy Kreme is the focus of my strategy coursework so expect more examples from them in the future (mmm I am hungry now!). As ever it is easier to see an example rather than writing endless theory, so below is an analysis I wrote recently for Krispy Kreme.

Political

Political factors on the specialist eateries industry are few and consist mainly of minimum wage changes and employment law changes. As Krispy Kreme train their staff, and require little prior experience or education they pay employees minimum wage or slightly above. As such they are affected by minimum wage increases. Other political factors have been the government action to reduce obesity, however it is very unlikely that government will legislate against high fat and unhealthy foods.

Economic

The continued economic downturn has meant tightened consumer spending and as Krispy Kreme is a non-essential food item this may pressure sales. Inflation is above the Bank of England target and there is upward pressure on long-term interest rates as shown by the UK treasury yield curve. An increase in interest rates will increase the cost of capital and mean more expensive borrowing for Krispy Kreme at a time that they need to expand to compete with their rivals.

Social

Evidence points towards a trend that UK consumers are becoming more aware about the ingredients in their food, e.g. boycotting trans fats foods, battery farmed poultry, mass farmed tuna. In 2008 this motivated Krispy Kreme to remove trans fats from their products. Low carb diet trends (such as the Atkin’s diet) can also have an effect on purchasing.

Going out to eat and drink is a social habit that is unlikely to change in the near future, but consumers can change their habits from eating doughnuts to another sweet-based food such as ice-cream or pastries. A social shift to eating full course meals instead of speciality items such as doughnuts or bagels would have an affect but this is unlikely to happen in the near term.

Culturally people in the UK do not have cult following for food brands like the USA. This can affect the advertising spend for companies as they need to spend more money to convince consumers to stay loyal.
It is questionable that customers in the UK would visit out of town stores to buy doughnuts, as the retail environment in the UK is more pedestrian driven as opposed to the USA which is dominated by cars and drive-through.

Technological

Due to the nature of purchasing and preparing foods, few technological trends influence the industry. However technology can be used to a improve efficiency, production, distribution, and monitor the commodity market changes in real time. Some commentators argued that ecommerce would mean people are less likely to visit physical stores. However the nature of speciality eateries is that they are convenience foods and require strong physical presence in order to capitalise on the impulse food purchase.

Environmental

Fluctuations in commodity prices will affect also affect margins as in 2009 when the price of wheat and soybean oil (key ingredients of doughnuts) reached record highs.