Snack Foods Industry Analysis: Porter’s Five Forces

Main Forces in a Snack Foods Industry

In the snack foods industry, there are five main forces that affect the operations of various firms. All companies need to use appropriate market strategies to improve their performance in the industry. They need to identify customers’ needs in the market to develop appropriate products that conform to consumer’s lifestyles. This paper will discuss the five main competitive forces in the snack foods industry and how they impact on operations of different firms that manufacture these products.

The threat of new entrants in the industry is low because new firms need large capital requirements to set up their operations. Inadequate cash flow makes it difficult for new entrants to survive in the industry for more than two years. Stringent food and safety regulations, complex distribution channels and the existence of strong brands also make it difficult for new entrants. All these factors serve as barriers of entry that discourage many firms from entering the industry.

The bargaining power of buyers is moderate because they can easily switch to other brands, if their needs are not satisfied. However, the industry has strong brands and many firms have differentiated their products because they target niche markets. As a result, some firms have been able to benefit from strong brand loyalty from consumers. Such firms are not likely to be affected by shifts in consumption and expenditure patterns in different markets.

The bargaining power of suppliers is moderate because during summer, there are many sellers of various raw materials who have good relationships with various firms. However, during winter, the bargaining power of suppliers increases because they import their products from other countries. This increases the cost of doing business because many firms have to transact with few suppliers who increase their prices due to high market demand for their products.

The threat of substitute products in the industry is high. Snacks have to compete with cocoa, chocolates, soft drinks and candy in the same market. There are also other consumers who prefer home prepared meals due to health reasons. Snack manufactures are also forced to use similar retail and distribution channels used by manufacturers of other substitute products to sell their products. This makes it difficult for them to compete effectively. As a result, consumers are easily attracted to such substitutes at various points of sale outlets.

The intensity of rivalry between various competitors is high because the market is approaching maturity stage. In the past three years, the industry has experienced low growth in revenues and this has forced some firms to downsize their operations. High storage, transport, and energy costs have made it difficult for many firms in the industry to register positive performance. Most firms have resorted to price reduction strategies and strong advertising campaigns to attract new buyers.

All these factors have an impact on the performance of all firms in the industry. The barriers of entry in the industry discourage start up firms from joining the industry. Many firms operating in the industry incur a lot of costs which make it difficult for them to sustain positive long term performance. Therefore, all firms are experiencing a reduction in revenues and they have been forced to retrench some of their employees to reduce their operating expenses.

Driving Forces in the Snacks Industry

There are several driving forces in the snacks industry which have an impact on the operations of various firms. These are listed below:

  • High entry and exit barriers make it difficult for new firms to enter the industry.
  • High capital requirements are required before a firm can start operating.
  • Complex distribution channels make it difficult for new firms to sell their products.
  • Stringent health and safety regulations and licensing requirements.
  • Unpredictable product supply cycles make it difficult for firms to plan.
  • Exclusive agreements between some firms and their suppliers.
  • High cost of raw materials.
  • Ease of product substitution by consumers.
  • Many substitute products in the market whose prices are low.
  • Strong brands in the market.
  • Consumers shop for these products from large retail stores in various towns.
  • Low revenue margins in the industry.
  • Price wars between various firms.

High entry and exit barriers make it difficult for new firms to enter the industry. Firms that have operated in the industry for long are able to benefit from this situation because their market shares are protected. However, this stifles innovation in the industry because new firms which have better product concepts face a lot of difficulties. If financing options become widely available, more firms will find it easy to operate in the industry. However, strict health, safety and licensing requirements will compel many firms to improve their manufacturing systems. This will enable them produce high quality products that perform well in the market. Many firms will be forced to build strong relationships with their customers. As a result, they will be able to sell more products which will increase the amount of revenues they obtain from their operations.

Complex distribution channels have an unfavorable impact on firms operating in the industry. Therefore, they have to spend more before their products are delivered to various points of sale outlets. The industry also has a lot of unpredictable supply patterns which are unfavorable to many firms’ operations. Business firms are not able to forecast prices of raw materials because they keep changing constantly. The bargaining power of suppliers during winter increases demand for crucial raw materials and firms are forced to purchase products from few suppliers. However, exclusive agreements between some firms with their suppliers have helped them improve their internal supply chain functions. In future, more firms will look for exclusive agreements with various suppliers to avoid risks caused by inefficient supply chain processes.

The cost of raw materials is getting high because most suppliers source them from abroad. As a result, they transfer their shipping and transportation costs to firms operating in the industry. This situation is not likely to change any time soon and it has made the industry less profitable. Consumers can also easily switch to other substitute products being sold in the market. These substitutes compete for shelf space in various retail outlets with snacks. As a result, products that do not have strong brand attributes are likely to lose to other substitute products that attract more consumers. Many of the substitute products being sold in the market are low priced and they target general market segments. This situation makes the industry less profitable for manufacturers of snack foods in the long run.

The market is becoming mature because it is dominated by a few brands which have strong brand qualities. Some manufacturers need to enter foreign markets with large numbers of consumers to increase their profit revenues. This will help them diversify their investments to improve their performance in the long run. If possible, these firms need to set up new manufacturing divisions in foreign countries to enable them benefit from favorable investment policies in different countries. This will help them increase their profit revenues because their products will benefit from exposure to larger international markets. For instance, market intelligence reports have shown that Mexico, Jamaica, Brazil and other Latin American countries have favorable conditions for foreign investments.

The consumption habits in the market encourage a lot of competition between firms. Since many products are sold in large retail stores, many firms are using personalized advertising campaigns and promotions to attract new consumers. The industry has become very competitive and firms which use healthy ingredients to manufacture their products are likely to perform well in the long run. Many schools and health experts are discouraging young consumers from eating salty and sugary snacks. As a result, many consumers have become more conscious about their eating habits. Therefore, business firms in the industry need to get involved in various corporate social responsibility campaigns to improve their reputations. They also need to develop healthy snack foods that contain a lot of nutrients to attract more customers. This approach will make the industry more profitable in the long run.

In conclusion, snack manufacturers need to streamline their operations to take advantage of various unexploited opportunities in the market. They need to be more innovative to develop new products and marketing processes that serve the needs of all customers effectively.