The bargaining power of suppliers, one of Porter‟s Five Forces, can have a significant effect on an organization. Suppliers hold power over a firm when they increase prices and reduce the quality of their product and the firm cannot use their own pricing to recover these changes in costs. Switching costs is the “negative costs that a consumer incurs as a result of changing suppliers, brands, or products”. Switching costs can represent a variety of things: time and effort, cost in dollars, and any other negative effect associated with switching suppliers.
Companies that remain successful for many years implement a strategy that makes it hard for buyers to switch from their product to competitors. Jamba Juice requires fresh fruits, juices, dairy products, vitamins, and protein ingredients in order to produce their smoothies. Their switching costs are low, because it is easy for them to switch from one company of suppliers to another. The switching costs for their customers are also low, because it is very easy for a customer of Jamba Juice to choose to go to Starbucks or Orange Julius instead.
There is not much of a monetary difference or extra effort required for the customer (Hitt, 52).
Jamba Juice has suppliers of all of the ingredients of their smoothies including the dairy, fruits, juices, vitamins, and proteins. Their basic raw materials are fresh fruits and vegetables, dairy products, and protein (Jamba Juice). Raw materials are defined in Investopedia as “A material or substance used in the primary product or manufacturing of a good” (Investopedia).
Suppliers provide the raw materials to make the finished good. Jamba Juice offers real fruit juices and smoothies, breads, pretzels, and packaged snacks. Jamba Juice says they only offer high quality smoothies, therefore only the finest fruit and supplies are used. They do rely heavily on their suppliers, especially those of fruit. They have a goal to provide high quality fruit that is consistent throughout the year.
When ordering fruit, they order a projected amount for the whole year at the peak of the season for each specific fruit. The price of fruit is determined by supply and demand and can vary greatly. Jamba Juice has a contract with independent distributors who dispense products from the suppliers to the stores. Therefore the supplier power is low. Jamba Juice prides itself in serving healthy foods and only healthy foods. They also pride themselves on using fresh fruit. If the fruit they are currently buying raises in prices all of a sudden then the franchise can just choose to buy its fruit from another supplier. For this reason there isn’t really that much power. Plus the store is franchised so every Jamba Juice buys it’s products from a different supplier, it’s not like they all depend on one.
The concentration of buyers for Jamba Juice can be focused into two categories. The first category is the consumers, which travel to the specific locations to purchase goods such as a smoothie or oatmeal. The second grouping of buyers is the ones who choose to purchase a Jamba Juice franchise (U.S.). The bargaining power of the two separate types of buyers depends on Jamba Juice‟s product differentiation. The buyers looking to own a franchise have the opportunity to purchase any type of company that has the option to franchise their locations. With the assumption that Jamba Juice‟s buyers are looking for a specific franchise of “processed & packaged goods,” then the focus turns to companies like Dairy Queen, Maui Wowi and Smoothie King Franchises (Jamba). Each of these food locations within the United States proposes the choice to franchise.
This availability of franchised companies gives buyers the decision to choose and create a decision based on their list of values needed within a store. The ultimate consumers have noticed their choice among the vast amount of smoothie options throughout their communities. The three major competitors force the buyers to differentiate which company they believe offers the “best” smoothie. Starbucks is currently competing with Jamba Juice‟s buyers within the breakfast food market. Therefore the buyer power is Medium. The public is pretty used to it’s lifestyle of fast food. Chains like this are based mostly on convenience. Also the fact that this store goes off of a healthy lifestyle, they are going to get a niche market who will support them no matter what.
Substitutes are defined as a product or service that is not in the same industry as your product, but can perform the same function as your product. Substitutes possess a threat to Jamba Juice because customers do not have high switching costs; therefore it is easy for a customer to choose a substitute over Jamba Juice‟s smoothies. Many of the substitutes related to Jamba Juice are similar in price and quality; therefore they do not have much differentiation from their substitutes. Differentiation of a product can help reduce the threat of substitutes. This adds value to a product that is important to customers. Jamba Juice has differentiated itself by offering its customers healthy refreshments. This will appeal to the health conscious market that is only interested in putting healthy food and drinks into their bodies. This is a niche that is becoming more popular to people in the US. Consumers value nutritious options to boost their energy as well as give them much-needed vitamins. The smoothie industry has also grown because many Americans skip meals and do not have healthy eating habits and they rely on smoothies to give them a pick me up snack and well needed vitamins. There are many threats that exist to the smoothie industry.
Some substitutes that pose the highest threat are coffee, soft drinks, healthy juices, energy drinks and milkshakes. Each of these substitutes is similar in price and quality of Jamba Juice. Even with market rates decreasing in soft drinks and coffee, they still pose a threat as a substitute for Jamba Juice. Coffee is still a threat to Jamba Juice‟s smoothies, especially with successful companies such as Starbucks and Tully‟s Coffee. These are well-known companies and brand names that people know and trust. There is a Starbucks on every corner and the company is very accessible throughout the United States. Milkshakes and ice cream may be another substitute for Jamba Juice. Ice cream can fulfill the same need of a cold creamy beverage or refreshment. Places such as TCBY, Cold Stone, and Baskin Robins offer customers the option of a creamy milkshake on a hot summer day or scoops of ice cream. In addition, many of these ice cream shops also serve fruit smoothies.
Jamba Juice has differentiated its product line by making natural smoothies with less sugar. This gives them an edge over the substitute of milkshakes or sugary smoothies. Many are beginning to seek healthy beverages such as smoothies and healthy fruit juices such as Naked Juices. This can be another substitute to smoothies. Naked Juices are 100 percent juice with no added sugar or preservatives. They offer a variety of tasty flavors as well as adding antioxidants, protein, and many other nutrients. Naked Juice is also beginning to add smoothies to their products, which make them very competitive to Jamba Juice. Therefore the threat of substitutes is high. There are a lot of substitutes to replace Jamba Juice due to low switching cost for customers and many other products to replace it with.
In the food and beverage industry, Jamba Juice has a lot of competitors. Since the company is now beginning to serve breakfast foods in addition to beverages, they are in direct competition with thousands of new businesses. Some of the main competitors are Starbucks, McDonald‟s, and soon to be bottled beverages at your local grocery stores. However, Jamba Juice is trying to be more aggressive by reaching customers in locations where other businesses haven‟t tried too hard to attract. For example, Jamba Juice has recently announced that they want to start opening kiosks at airports and at universities and colleges throughout the country. There are numerous competitors in the same industry as Jamba Juice, many of which hold a larger part of the industry. However, Jamba Juice is expanding their menu by creating more food type options, such as oatmeal. The problem with this is the fact that this opens up their company for more competitors to take them down. Jamba Juice is entering a whole new market with a large number of competitors by serving food.
By serving food to those customers who already purchase smoothies they are taking that much business away from their competition. They are fulfilling a need that has been overlooked. As mentioned earlier, McDonald‟s is positioning themselves to take over all of the food and beverage market by creating products that are similar and cheaper than their competitors. For example, McDonald’s recently expanded their market by creating the McCafe restaurant chain. Therefore degree of rivalry is very high. There are a lot of restaurants that sell smoothies and also some that sell healthy food. Because of this Jamba Juice has to work hard to stay ahead of the competition. Usually once a customer chooses a place they like they stick with it. It’s just getting the customer to stick with them.
The barriers to entry in an industry are a measure of how easy it is for a new market entrant to enter into a given industry. In order to judge if the industry that Jamba Juice is in has a high or a low barrier to entry it is necessary to examine several key indicators of a high or low barrier to entry. These key factors include economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of scale, government policy, and expected retaliation. The first key factor to determining whether or not an industry has a high barrier to entry is to examine the companies that can operate off of economies of scale. Economies of scale are derived from incremental efficiency improvements through experience as a firm grows larger. So as the quality of a product produced during a given period increases, the cost of manufacturing each unit declines. Economies of scale are not considered to be a barrier to entry for Jamba Juice or its competitors. Jamba Juice is a retailer specializing in selling healthy products such as oatmeal and smoothies.
These products are customizable and customizable products are not produced in enough quantities to achieve economies of scale. Thus new potential competitors to Jamba Juice seeking to sell comparable customizable fruit product would not find economies of scale to be a barrier to entry in this case. The second barrier to entry is product differentiation. This happens when a company can convince consumers that its products are unique and build loyalty to the products. A company can also offer a set of different but related products to increase the barrier to entry. Jamba Juice has established this barrier to entry in the fact that their brand works on highly customizable blended fruit drinks which their advertising stresses as healthy and unique snacks. Once customers are loyal to Jamba Juice and its product line, it would be hard for a new market entrant to convert Jamba Juice customers over to their product line. In order to counteract this, a new market entrant would have to competitively price their products at lower prices. This could result in decreased profits or even a loss and thus is dangerous to do.
The capital requirements for entrance into Jamba Juice’s market are not extensive and don’t represent a serious barrier to entry. Since Jamba Juice is a relatively small operation, the overall costs in opening a location would not be extensive. A new market entrant could easily open up a smoothie stand or small store and compete with Jamba Juice. The only resource that would tax the new market entrant would be the extra marketing needed to gain market share early on. As discussed earlier, switching costs are one-time costs customers incur when they buy from a different supplier. These costs pose little barriers to entry for Jamba Juices market. A customer only has to drive to a different location if they wanted to switch brands. In order to increase switching costs, companies could offer loyalty reward programs designed to increase the customer‟s tendency to return for repeat business. Another effective barrier to entry is access to distribution channels. If Jamba Juice wants to sell its products in grocery stores it would have to compete for new shelf space with all the existing brands. In order to do so they would have to offer price discounts and cooperative advertising, which would cut into their profits.
That aspect of Jamba Juice‟s market has a high barrier but the other aspect of stand alone fruit juice stands do not. Cost disadvantages independent of scale involve cost advantages that a new market entrant cannot copy. The most relevant barrier to entry for the fruit drink market would be the physical locations of the Jamba Juice stores. If Jamba Juice has a prime location that a new market entrant cannot access, then the barrier to entry in that area would be large. For example, Jamba Juice has small kiosks in airports. The barrier to entry of government policy is relatively simple in terms of food and drink regulation. A new market entrant would only need to follow the law and obtain the proper permits to sell food and drinks. This would pose no barrier for a company serious about getting into the market. The last barrier to entry that a new market entrant would need to examine would be the expected retaliation from the established market competitors.
If a new market entrant tries to move into a market that is in direct competition with Jamba Juice, then they can expect a retaliation of increased promotions, price-cutting, or new loyalty programs from Jamba Juice to protect its market share. A way to bypass this barrier is to find a niche that is not yet focused on by the existing market. Overall the barrier to entry for a company that wants to compete with Jamba Juice is fairly low to mid range of difficulty. It is easy to get into the market because one can build stores quickly and it does not require extensive capital to enter the industry.
The only resistances that Jamba Juice and other established competitors have erected are a strong product differentiation and customer loyalty. In order for a new market entrant to succeed, they would need to focus on advertising and finding something to differentiate themselves from the current industry leaders. Therefore the Threat of new entry is Low. Most of these restaurants are pretty established and have a core customer base who are loyal to their products. The only threat of new entry they have is if an establish restaurant who doesn’t sell smoothies decides to add smoothies to their menu.