Porter’s Five Forces Analysis

Michael Eugene Porter, an eminent American economist and academic, was the brain behind the Fiver Forces Analysis. This is essentially a framework that he proposed to analyze the dynamics of an industry. Through this analytical model, Porter proposed to assess the attractiveness and profitability of the market. He considered five factors that act as the key forces to shape competition within an industry. They are –

1. The Threat of New Entrants
2. The Bargaining Power of Suppliers

• The Bargaining Power of Buyers

1. The threat of Substitute Products/Services
2. The Intensity of Competitive Rivals

Irrespective of the industry, these five factors remain constant and act as the major driving forces to reshape the competition. This blog will be a comprehensive Porter Five Forces analysis, helping you understand how it works in the food and beverage industry.

The food and Beverage or F&B industry is a vast umbrella that encompasses everything that deals with edible things. It covers all the companies that are involved in the process of converting raw agricultural goods into food products for the end consumers. This includes the supply chain of the industry, including processing, packaging, and distribution.

So, anything from restaurants and cafes to catering businesses, food manufacturers, and transporters fall under this category.

Porter’s Five Forces can be observed easily in this specific industry, as every entity tries to gain a comprehensive understanding of the prevalent opportunities and threats. Businesses can get a detailed picture of the competition and develop strategies to maximize profit by mitigating threats. So, Porter’s Five Forces model is essential for allocating resources, risk assessment, and strategic decision-making in a highly competitive and dynamic industry like F&B. The following paragraph will give you a holistic idea of how this model is relevant for F&B business –

• Intense Competition

Since the F&B industry is extremely competitive, numerous players compete for the maximum market share all the time. With this model, business owners can analyse the intensity of the competition among the existing players. You can also identify factors like product differentiation, pricing pressure, and marketing strategies that influence the competition.

• Supplier Power

The F&B industry relies on suppliers and vendors for raw materials, ingredients, and packaging. You can use Porter’s five forces model to assess the importance of specific vendors, availability of substitutes, and costs of switching from one supplier to another. These decisions yield long-term results like managing costs, ensuring a stable supply chain, and negotiating favorable terms.

• Buyer Power

There is a wide range of options for consumers in the F&B market. If you want to buy a cake, you can always choose from multiple shops to find where you get the most value. Hence, consumers have significant bargaining power in their hands. By using this model, you can understand buyer concentration and create strategies to boost customer loyalty and retain customers.

• The Threat of New Entrants

The F&B industry offers a high ceiling for growth and profitability. Hence, it is an attractive proposition to many new entrants. However, entering a food business comes with its share of threats. Usually, you need huge capital investment, regulatory compliance, and sound distribution networks. Analyzing all these threats becomes possible through the Five Forces Model, and business owners can adapt to these threats accordingly.

• Threat of Substitutes

This industry continuously faces the threat of substitute products. For example, people who are allergic to dairy milk can easily substitute for almond milk. So, by assessing the threat of substitutes with this model, business owners can identify potential areas from where they can face competition. Accordingly, they can adjust their offerings, prices, and strategies to retain existing customers.

Read along as we discuss each of the individual parameters of the Five Forces Porter Model to understand how it works in the F&B industry.

The Threat of New Entrants

There are several factors that pose a threat to new companies from entering the industry. They are –

• Economies of Scale

Established F&B companies always enjoy economies of scale over new entrants. They can afford a lower average cost per unit of production. They can achieve economies of scale by procuring products in bulk. Thus they can achieve bulk-purchasing discounts and offer products at a competitive price. New businesses cannot afford so much cost initially, making it more challenging to enter the market.

• Capital Requirements

Capital requirements are a major factor in starting anything in this sector. You need a huge financial backup to buy or rent spaces for a café or a factory. With the cost of land and spaces skyrocketing each day, it becomes an uphill task for new entrants to start a business.

• Technological Barriers

Modern technologies needed to run a business is costly. Old business houses can allocate their profits to make necessary changes whenever needed. However, after splurging a fortune on setting up the establishments, it becomes challenging for new businesses to implement all the latest technologies. Thus they fail to match the speed and accuracy of the old players and keep lagging.

• Access to Distribution Channels

Distribution channels are a crucial part of every successful F&B player. Take the example of PepsiCo. and Coca Cola and you can well understand the role of distribution channels in the success of the business. However, building a relationship with distribution partners takes time. Moreover, new companies spend a lot of time assessing the efficiency of the existing partners. All these make their job harder as they try to enter the market.

• Government Regulations

Government regulations are a constant threat to new companies. For example, the green policies were not as strong as today earlier. So, old players already enjoyed their fair share of time exploiting those policies and garnering profits. However, with much stricter rules and regulations, the new businesses find it extremely difficult to sustain.

The threat of new businesses leaves a significant impact on existing companies, making the market extremely competitive. So, even though most of the new businesses face little chance of sustaining in this cutthroat competition, a few of them poses a serious threat to the existing businesses. This business can influence its profitability by threatening to eat its market share.

For example, if one company manages to achieve success in a competitive industry, that acts as the beacon to other people to get into the industry. Several new entrants can make the industry more competitive and force existing businesses to decrease their prices.

The Bargaining Power of Suppliers

The F&B industry relies heavily on suppliers as they are a major factor in deciding the cost of the products. These are the few ways suppliers can influence the industry.

• Supplier Concentration

If there are a few suppliers in the market, they enjoy more leverage to control their terms and prices. Limited suppliers mean that businesses have to depend more on them, and they can easily dictate the prices and put pressure on any new entrants.

• Availability of Substitutes

Many suppliers offer unique or specialized ingredients and raw materials. For example, Almas Caviar which is considered one of the most expensive and rarest ingredients on the planet is only supplied by a handful of suppliers across the world. Similarly, original Parmigiano Reggiano can be found only in the Parma region of Italy and have a very number of suppliers restricted only within Italy. Since these products have limited substitutes, they are critical for elite F&B companies. So, they keep paying a huge amount for these products, making them out of reach from the new entrants.

• Switching Costs

Switching from one supplier to another is a costly affair. High costs of switching can deter many new entrants from seeking alternatives and eventually from entering the market.

• Supplier-Client Relationship

Existing businesses build long-standing relationships with the suppliers, which puts them in an advantageous position over the new players. Long-lasting relationships benefit the old businesses with better discounts, delayed modes of payment, and mutual respect, which the new businesses don’t get.

Consider the potential for suppliers to exert pricing power or control over the quality of inputs.

Understanding the power of suppliers is critical for F&B businesses as it helps them manage their supply chains and control costs. They can also negotiate favorable terms and ensure a sustainable and reliable supply of inputs. So, Porter’s Five Forces Analysis can easily help business owners work on their operational flexibility, profitability, and competitive position.

The Bargaining Power of Buyers

Just like the suppliers, buyers can also exert a lot of influence on the market. Here are a few ways how buyers can influence new entrants –

• Assess the Concentration of Buyers

If the number of buyers isn’t high, new businesses get second thoughts about entering the market. The low of buyers remains loyal to the existing sellers, and the new entities struggle to find buyers for their offerings. Most premium foods or high-grade packaging attract only a limited number of buyers. Hence, this kind of product discourages new businesses from entering the market.

• Price Sensitivity

Depending on the market, the buyers can be quite sensitive to price. Especially when it comes to essential products like milk, wheat, or rice, even small price differences can push buyers away. Most new companies struggle to sell their products at highly discounted rates like the old players. Hence, price sensitivity remains a factor in influencing new businesses.

• Ability to Switch

Contrary to businesses that cannot switch vendors easily, buyers can switch easily. If they don’t find value in a seller, they can simply move to another shop. For example, if you don’t like burgers from McDonald’s anymore, irrespective of the price or quality, you can always choose another brand like Burger King or KFC. This volatility of the market is a major threat to new entrants in the F&B industry.

As the buyers always enjoy the flexibility of substitute products, it gives them more options and bargaining power. With greater bargaining power, buyers can influence the movement of new businesses.

The Threat of Substitute Products or Services

In the F&B industry, the abundant presence of substitute products and services impacts the presence of new businesses vastly. Here is a brief analysis of how this factor works –

• Direct Substitutes

These products serve the same purpose as the other F&B offerings and are easily substituted by the customers. For example, you can easily substitute butter with margarine or tea with coffee. This way, service can also be easily directly substituted. For example, the speed of fast-food restaurants can be substituted by quick-service restaurants and food delivery services. Thus it puts pressure on the new businesses to differentiate their offering.

• Indirect Substitutes

These food and services fulfill similar needs of the customers but don’t necessarily fall in the same category. For example, customers may choose homemade meals instead of restaurant foods. They may start eating healthier snacks like foxnuts instead of potato chips. These types of products alter the demand patterns of consumers, and new businesses may feel the heat to meet these changing trends.

• Convenience Substitutes

Many consumers prefer convenience over price in the F&B industry. People working in an office may prefer to eat meals from a place closer to their chamber with a slightly higher price than traveling an hour to eat at a cheap eatery. This trend led to the emergence of convenient food options like pre-packaged meals, meal delivery kits, etc. With already a bunch of time-saving options readily available, new businesses get little scope to serve new customers.

So, the threat of substitutes is a constant threat to businesses in the F&B industry. Customers can easily substitute one offer with another if they get more value or a lesser price. So, product differentiation is crucial for customer value promotion. By breaking the homogeneity of the products, F&B companies can stand out from their competitors.

The Intensity of Competitive Rivalry

There are several factors that contribute to the fierce competition within the F&B industry. According to Porter’s Five Forces, these are the factors behind the competition –

• Number and Size of Competitors

In certain areas, the market gets saturated with numerous establishments. This makes it challenging for the new players to make a mark and earn market share. Most densely populated urban areas offer too many choices, and new businesses can rarely grow in such a competitive environment.

• Low Entry Barriers

Starting small-scale food businesses doesn’t require huge capital or manpower. Hence, it witnesses a high influx of new entrants. As the number of new players spikes up, it surpasses the existing demand rate, and many businesses eventually get forced to spiral down the competition.

• Changing Consumer Preferences

The taste and preferences of the customers in the F&B industry change rapidly. So, new businesses find it extremely difficult to predict and adapt to evolving demands. For example, veganism is a trend that has shaken the food industry in recent times. However, procuring and preparing vegan foods are costly and not feasible for small and new business owners.

• Pricing Pressure

Price sensitivity is a common thing in the F&B industry, as customers often seek value-for-money options. So, food businesses always remain under pressure to maintain a competitive price tag. This disrupts their efforts to balance costs and profitability. Thus many new entrants sink during the price wars.

• Shifting Loyalties

With an abundance of options available, it is extremely hard for a restaurant or café to hold back their customers. Providing high-quality foods non longer remained the only parameter to maintain customer loyalty. They need to consistently serve delicious food, fast service, a chic ambiance, and a memorable experience to encourage repeat visits. Only a handful of new entrants understand these and remain destined for failure.

• Tie Ups with Online Delivery Platforms

The rise of online food delivery platforms like Deliveroo and Uber Eats has made things even tougher for new businesses. Customers find ordering through these apps more convenient. Hence, businesses are also forced to join the bandwagon and tie up with these delivery service companies. This means fresh investments to improve logistics and technology, which proves to be a challenge for most new players.

• Seasonal Fluctuations

Seasonal fluctuations like tourist seasons and extended holidays affect the F&B industry significantly. While more footfall means good for business, new entrants don’t always have the necessary infrastructure to handle the increased footfall. Moreover, the slump during the off seasons proves to be too harsh for them as they cannot manage to sustain the intense completion. This forces many businesses to draw curtains prematurely.

So a high rate of competitive rivalry impacts the pricing, profitability, and overall industry dynamics in the following ways –

• Pricing
• Intense competition leads to price sensitivity among customers
• Dynamic pricing strategies like “Happy Hours” and seasonal menus attract customers during specific times and events
• High competition often leads to profit erosion because of reduced profit margins
• Profitability
• The intense competition puts pressure on profit margins because of heavy discounts
• Cost management becomes increasingly difficult
• Innovation in cost-saving measures, supply chain, and operations becomes important to offset the impact of completion.  
• Overall Industry Dynamics
• Competition drives continuous product differentiation and innovation
• This influences the consolidation of industries for the survival of the businesses
• Continuous adaptation to changes becomes crucial for maintaining the industry dynamics.

All these factors, together, present an ideal Porter Five Forces Analysis example, thus helping us understand how this model can reshape competition within the F&B industry.

Conclusion:

In this blog, we have covered the various aspects of the Porter Five Forces Analysis, like the threat of new entrants, bargaining power of the buyers, and suppliers, threat of substitute products, and intensity of rivals. The Porter Five Forces is an example of perfect industry analysis, which helps economists and marketers assess the overall attractiveness and profitability of the industry. By using these five forces, any company can understand what drives the competition in their respective industries and make strategic decisions to improve profitability. Both old and new companies can use the data from this model to understand what their competitors are doing, what are the latest trends, and work on cost efficiency to succeed in the industry.