Buyers (Bargaining Power of Buyers)The power of the (buyer) customer can do one of two things, make or break your business establishment. With the power that customers have, you (the business) must make the adjustments. These adjustments include the quality of the product, customer service, and lower of prices. One example would be Burger King vs McDonald’s . Burger King has a daily special $2 for $5 on their breakfast sandwich; as does McDonald’s. This strategy is enticing to customers, which leaves the buying power to the customers.
In the case of the food industry, the bargaining power of the buyer is very strong. Consumers demand good quality, a unique experience, complimented with a reasonable price. If prices are set too high, consumers can easily switch to a substitute. Suppliers (Bargaining Power of Suppliers)The bargaining power of suppliers is one of the five factors that control the amount of competition in the restaurant industry. Suppliers can threaten to reduce the quality of products or raise prices, which will make it hard for restaurants to make up for cost increases by raising their own prices. Consumers can easily choose to go to other restaurants if prices are too high at their usual food place. The supplier’s financial stability can affect its bargaining power. If they have many customers, they can afford to lose an account without being affected financially.
If their client base is small, the restaurant has more bargaining power and the supplier would be forced to give into their demands. With the food industry being so vast, restaurants can easily switch to another supplier if there are multiple options for purchasing the same product. Suppliers have to meet more of the restaurants’ demands, because they can put pressure on suppliers to reduce costs. A supplier that offers a product that is cheaper, efficient or high quality compared to other suppliers has more bargaining power. Suppliers can set the industry standard, and the restaurants will be forced to adapt. If a supplier has their own brand that a restaurant is using to attract consumers, the supplier gains more power.
The restaurant benefits from their brand because consumers will frequent their business just for a certain supplier’s product. Therefore, these suppliers have more bargaining power, because if they stop supplying restaurants, the restaurants may lose money. Substitutes (Threat of Substitute Products or Services) This force is relatively high. Consumers will not find it difficult to switch to substitute products because close substitutes are offering the same services.
For consumers, there is an easy shift to substitute products because of the low switching costs. Fine dining restaurants are constantly competing with casual dining establishments because consumers are attracted to their cheaper prices. Consumers can switch to substitutes in response to price increases per meal.
In tough economic times, consumers can chose to eat at home vs. eating out. Today, consumers can also chose Home Meal kits like Blue Apron, Hello Fresh, and Plated. They offer services that deliver fresh ingredients for consumers to create their own meals at home. Like restaurants, they offer convenience and great food.
They receive pre-portioned meals and recipes cards. All the consumer has to do is cook and enjoy their meal in their own home environment. Substitutes in the industry is based on the consumers preferences and economic status. Consumers at any point can chose between casual dining, fine dining, and home cooking.
To differentiate their products, the restaurant industry has to focus on taste, cost, and quality. They must always remain current with consumer preferences and culinary trends and offer different products. Substitutes are highly competitive and consumers can easily switch based on quality, satisfaction, healthiness of the meal, services offered, and environment. New Entrants (Threat of New Entrants) In any business, new entries are always a threat. New entries will become additional competition and may likely change the dynamics of the restaurant industry if they are in the service of the same product. Porter believes that this threat can change the competitive environment and directly influence the productivity of the existing firm. For example, in the fast food chain McDonald’s, Burger King, Wendy’s, Jack-In-The Box they all sell similar items the difference would be based on the consumers who has the choice to choose. Another key point relating to of the Threat of New Entrants is known as Barriers.
Before a new up and coming business even decides to enter a specific industry, they must identify the different “barriers to entry”. There are two levels that exist within new entrant barriers, known as high and or low entry barriers. As a new up and coming business, entering a industry that has a low entry barrier means that the companies that exists within that specific industry face a high level of competition due to the fact that the product or service being offered is not as difficult to embody. Where on the other hand, entering an industry that has a high entry barrier means that the companies that already exist within that specific industry are already well known and have formed brand loyal customer relationships.
This makes it very difficult for a new entrant to survive. Industry Rivalry (Rivalry Among Competing Firms) This force is the strongest of the five forces in the fast food industry. The rivalry that exists among the businesses competing in the fast food industry is significantly strong, as a result of its external market factors. An external factor that has greatly influenced the strength of this force is the high number of firms of various size (global chains to local mom-and-pop fast food restaurants) within this industry.
In 2016, the fast food industry in the United States was projected to have approximately 186,977 franchised quick service restaurants (Statista, 2016). With the high number of firms, the threat of product substitution is extremely significant within the fast food industry. As a result, firms will engage in fierce rivalry with one another, to compete for consumers. In addition, low consumer switching costs is another external factor that has greatly influenced the strength of the rivalry that exists within this industry. To prevent consumers from taking advantage of the ability to engage in product substitution at very low costs, industry rivalry occurs at high levels to retain its current consumer base and to attract/steel new consumers from its competitors. Likewise, the lack of product differentiation is also a contributing external factor that has influenced the strength of this force. The lack of product differentiation within the fast food industry, has resulted in the creation of a hostile marketing environment in which firms are actively striving to rebrand its products stand out or set itself apart from the vast competition.
As by achieving this task, firms gain the edge necessary to effectively retain and attract customers. Ultimately, firm success and survival is determined by its ability to maintain and yield new customers and through engaging in industry rivalry, firms are provided with the ability to achieve just that. Thus, making firm survival and success is the primary driver of the high levels of industry rivalry within the fast food industry, as the inability to retain and attract new customers, will ultimately result in firm failure. FINAL TASK: Based on your analysis, make a decision on whether or not the industry/market is attractive for a new business. The fast-food industry is always an attraction for business.
The catch is that the service and product(s) must accommodate the consumer. From a burger to healthy menu options it is all about the food trend. Listening to your customers may be just one part of winning over consumers.
Consumers of fast food focus on taste, price and quality. For new businesses entering the market, they should differentiate themselves and focus on what’s trending. They can offer healthier options and purchase locally sourced ingredients and products, offer fresher ingredients with less additives and preservatives, and maybe offer an organic option. Menu options need to be creative and offer indulgent and healthy options and unique flavor profiles.
For example, Starbucks Unicorn Frappuccino or Taco Bell’s Taco made out of Doritos. Fast food is desirable because of the low price, and consumers are price sensitive. New businesses should utilize technology and offer self-serve kiosks and mobile apps for ordering and paying to help keep costs down. This is a very important aspect to consider when entering the fast food industry because as a new business comes along this whole idea of “fast” food. If you haven’t noticed by now, technology is taking over the world. Everything and anything can be done through a smartphone, tablet, or computer.
In today’s society consumers rely on three important aspects, quality, affordability and convenience. Where can I go to grab a quick bite, that is not too far out of my way, and can SATISFY my taste buds for a decent price? There is always room for new business in the fast food industry, but whether they will survive with the competing businesses is another story.