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Porters Five Forces Analysis of the Food and Beverage Industry
Introduction
As many Australian university students spend money on food and drinks on campus, the proposed business idea is the establishment of a food truck where students will be able to buy snacks and desserts that are healthy, vegan-friendly, and gluten-free. The proposed business is related to the food and beverage industry, namely, the food retail sector, which is involved in delivering food directly to customers. Before setting up any business, Porters five forces analysis should be performed to identify the industrys profitability and the likelihood of high returns. This paper will analyze Australias food and beverage industry using Porters five forces model to determine whether the proposed business idea of a food truck on campus is feasible.
Rivalry among Existing Competitors: High
In Australia, the food and beverage industry is highly competitive. The factors explaining high competition include multiple rivals, competitors in balance, rapid industry growth, and low customer commitment. The players in this industry can be categorized into three types of companies: supermarkets, the hotel, restaurant and catering (HORECA) sector, and e-commerce. Among the supermarkets, the key competitors are Coles and Woolworths; the HORECA sector is dominated by such companies as Starbucks, McDonalds, Yum! Brands, and Hungry Jacks. The main competitors in the industry seem to be equally balanced, meaning that they can engage in competitive battles to increase their market share. For example, in Australia, the expansion of ALDI with its low-cost products encouraged other supermarkets to lower their prices to remain competitive. Furthermore, the food and beverage industry is growing rapidly, meaning that it is attractive for new entrants. Finally, the competition is enhanced by low customers commitment to brands.
The threat of New Entrants: Moderate
The threat of new entrants in this industry is moderate since there are factors that both facilitate and impede the establishment of new businesses. The barriers to entry include high economies of scale, government policies, incumbency advantages independent of size, access to distribution channels, and expected retaliation. The existing companies in the industry often use economies of scale by buying products in bulk, which places new entrants in a disadvantageous position. Further, new entrants in the industry should follow government regulations, such as the Food Standards Code and food safety standards. The major incumbency advantage independent of size, which serves as a barrier to entry, is location, which is vital for food companies to reach their customers. Furthermore, existing companies may control access to distribution channels, making it difficult for new entrants to use them. However, this particular barrier can be less applicable to the proposed food truck business as it uses its own distribution channels. Finally, expected retaliation in the food industry may be high because of intense competition, meaning that existing companies may use aggressive tactics to compete with new entrants.
The factors that encourage new businesses to enter the industry include low capital requirements and low customer switching costs. The capital requirements are generally low for food companies, but they can be high if the purchase of real estate is required. Due to low customer switching costs, new entrants may expect to build their customer base quickly by attracting competitors customers. Thus, although the food and beverage industry is highly competitive, some factors may encourage new companies to enter the industry.
Bargaining Power of Suppliers: Low
Suppliers are important for businesses as they provide them with raw materials and other necessities. The food and beverage industry has a low concentration of suppliers; however, the proposed food truck business, focused on delivering gluten-free and vegan-friendly food, is expected to have a higher concentration of suppliers than less specialized competitors. For example, if the suggested business chooses not to sell products unattractive to vegans, it will be unlikely to work with suppliers of meat and dairy products, which will limit the number of available suppliers and increase suppliers power. The switching cost for companies is low, thus decreasing the power of suppliers. Suppliers are moderately dependent on the retail food industry for revenues because they can sell their products to multiple companies, including supermarkets, restaurants, and food processing firms. The threat of forward integration is low, contributing to low suppliers power. Finally, substitutes available can be considered high as companies in the food and beverage industry may change their range of products on sale and shift to other suppliers accordingly. Thus, the bargaining power of suppliers in the Australian food and beverage industry is low.
Bargaining Power of Buyers: High
The buyers have high power in the food and beverage industry mainly because there is intense competition in the sector. The concentration of buyers is low since food and beverage companies do not depend on a few key buyers; instead, they sell to a large number of customers. Although the purchase volume of each particular customer is low, companies use economies of scale and sell products to many customers to gain profits. The customer switching costs are low, meaning buyers can easily shift from one company to another, giving them additional power. Furthermore, buyers in the food and beverage industry have changing preferences, and firms have to adjust their product portfolios and marketing strategies according to these preferences. For example, recent trends in the Australian food industry include multicultural culinary traditions, healthy food (gluten-free, lactose-free, sugar-free, meat-free), ready-meal boxes, and organic food. Furthermore, many customers in the industry are price-sensitive since food costs constitute a large part of their expenditures. Finally, food and beverages are generally perceived as standardized products, which increases buyers power.
The threat of Substitutes: High
Substitutes are highly prevalent in the food and beverage industry. For example, customers can purchase fresh juice to quench their thirst, but they can also substitute milk or bottled water for juice. The same is true for food: customers may snack on burgers or buy sliced fruit or whole-grain bars. Currently, healthy food can be regarded as a substitute for traditional food as customers preferences shift toward healthier choices, including gluten-free and vegan diets. In addition, such food can offer an improved price-performance tradeoff in view of rising prices for meat and dairy. The cost of switching to substitutes for customers is low as they can freely choose to buy products from a variety of companies. Given this evidence, one may conclude that the threat of substitutes in the food and beverage industry is high.
Conclusion
The analysis shows that the Australian food and beverage industry has the following characteristics: high competition, moderate threat of new entrants, low bargaining power of suppliers, high bargaining power of buyers, and high threat of substitutes. Based on these features, the industry is moderately attractive for new businesses, with intense competition, high buyers power, and a high threat of substitutes being the major impediments. In order to succeed in this industry, the proposed business will have to comply with government regulations and invest capital in substantial marketing efforts to attract customers and retain them under the conditions of low brand loyalty and food perceived as a standardized product. Given the narrow specialization of the proposed business, it will also have to avoid high dependence on one supplier to reduce suppliers bargaining power.
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