In the last article, I started looking at the food and beverage industry in Canada using some of the traditional strategic planning analyses tools. In that article I began with a PEST Analysis of the macro-environment in which the food and beverage industry operates. Now I want to go on to look at the industry using a 5 Forces Analysis.
So what is a 5 Forces Analysis? Well, it looks at infrastructure of the industry and changes that are affecting that infrastructure or may affect it in the foreseeable future. It is a sort of industry overview. The five forces are:
- Customers/Consumers who buy the products produced by the industry;
- Suppliers to the industry, i.e. the entire supply value chain;
- Existing Competition within the industry;
- The Threat of New Entrants into the industry that may change the dynamics of the industry; and
- The Threat of Substitutes to the products produced by the industry.
As to the Customers/Consumers, there are a number of trends at work that will affect the industry. We have seen, and will likely continue to see, consolidation in the retail grocery and foodservice sectors, leading to increased leverage with food processors on their part. In addition to this, we are seeing more companies that basically originated in the non-food retail sector moving into food retailing, companies like Target for instance, again increasing the leverage on processors.
We are seeing consumer concerns like health awareness that will drive changes to the product offerings of the food industry. This also gets into environmental and corporate social responsibility concerns on the part of both consumers and retailers. This has led and will lead to more demands on processors for ensuring that their supply chains are adhering to sound environmental and CSR practices. This will lead to more audits and registrations for suppliers by processors, and a continuing increase in traceability requirements, adding cost into the system. As to cost of product, with the aging population and more retired people on limited incomes, pressure to reduce cost will emerge.
As to Suppliers to the food and beverage processors, they too will face the effects of the changing needs of Customers and Consumers noted above. This will add to their costs as well. What is very much needed in the entire value chain is a more collaborative approach between suppliers and customers at all levels. This leads to the use of value chain management approaches that have emerged in many areas and industries globally. This type of collaboration leads to better innovation to meet market needs, wants and demands. It also leads to increased productivity of the entire value chain and reduced product costs. And it can lead to greater sustainability (reduced waste, reduced energy use, and so on) throughout the entire value chain.
Suppliers in some commodity sectors are also faced with the decision as to whether it is more profitable for their business to produce commodities for non-food uses. This is happening in several sectors in a big way, for example the oilseed producers where the commodities are being used for many non-food products such as biofuels, plastic auto parts, etc.
As to Existing Competition in the food and beverage processing industry, we are once again seeing more global consolidation among companies, with the large multi-national companies gaining more and more competitive leverage and ability to control costs and improve profits. With these large global companies dominating the market in most sectors, this often provides small to medium-size companies opportunities to enter and focus on niche markets that the large companies may see as too small for them. About 80 per cent of Canadian processors are SMEs largely utilizing commodities grown in Canada and sometimes more focused on the smaller specialty retailers. But let’s just say that competition is very strong in the processing sector no matter if the company is large or an SME.
As to Threat of New Entrants, well with new trade agreements coming into place with the E.U. and parts of Asia and the Pacific trading area generally, we will certainly see competition continue to get stronger in the food and beverage industry. We will see more imports of food products, and we already have a trade deficit, and many of those imports will come from countries with developing economies where their cost of production is likely lower than Canadian processors. And with our ethnically diverse population and number of recent immigrants, we may also see some move towards these imported products that may be more a part of their culinary culture.
Finally, there is the Threat of Substitutes. This is normally not a big issue for the food industry as there is no substitute for foods, at least at this point. But again, as we get down to the sub-sectors of the processing industry, we may see internal substitutes emerging. For example, plant-based protein like soy and others are beginning to replace some meat-based proteins and dairy products in many people’s diets. Why? Well, there can be several reasons. The plant protein may be considered healthier regarding fat content, types of fats, etc. The vegan diet is a growing trend. Look at the growth of almond milk, soy milk, coconut milk, and meat substitutes using plant protein like soy. Also, some of the Greenies among our consumers see plant protein as better for the environment, and they may have concerns about the ethical treatment of animals. That’s just one example. There may be others and more may emerge.
So where does that leave us? Well, the issue of strong competition dominates. I think we must become more innovative in our product offerings to provide the market what it needs, wants and demands, whether that is more diversity in food appealing to the Foodies and Newbies (recent immigrants). We must also focus on providing healthier and more responsible products to appeal to the Healthies and Greenies among consumers. But we also must not forget about the Cheapies or low cost shoppers who need the cost of food reduced. And don’t forget improved productivity to reduce cost and increase margins in the industry, or sustainability issues that are becoming a greater issue on an almost daily basis.
It’s not an easy set of issues, but through increased collaboration on an overall industry vision and strategic approach, I believe the Canadian food and beverage industry can address those issues and be very successful. We can be the best in the world!
In the next article, I will attempt to do a SWOT Analysis of the industry.
Gary Fread is president of Fread & Associates Ltd., consultants to the food industry. He has spent 25 years in management positions in the food processing industry, with a background in sales, logistics, purchasing and technical areas. He has worked with Procter & Gamble, Campbell Soup and Morrison Lamothe, and is the past president and CEO of the Guelph Food Technology Centre. He is active in many food industry associations and organizations, serving on the boards of several. Contact him at [email protected]