Porter’s 5 Forces Essay
Porter’s 5 Forces
The fast food industry is one which affects many lives in Canada. The following is a Porter’s 5 Force’s analysis that will determine how attractive this industry is as a whole. To determine the threat of new entrants, one must first consider the barriers to entry. Firstly, the start-up costs associated with the fast food industry are relatively minute. This acts as a low barrier to entry. In this industry, the top four companies account for 37.4% of the total revenue. Although that is not a percentage of mind-changing significance, a business entering this industry must be able to uniquely establish itself with product differentiation. That being said, it is believed that the industry concentration is relatively low. Accordingly, high barriers to entry arise from government regulations, specifically including health and food service as well as occupational health and safety issues, along with a high amounts of competition within the fast food industry. Overall, the barriers to entry can be determined as low resulting in a high threat of new entrants.
Next is establishing the power of the buyer. The fast food industry has been impacted by the decreasing demand for fried food and subsequently the increase for healthy options. This change in consumer trends along with a high variety of fast food places to choose from assume high power of the buyer. Secondly, it has been determined that the products sold in the fast food industry are luxury goods – goods that are purchased more-so when economic times are “good”. In turn, when economic times are “rough,” consumers will choose to eat less fast food and more home cooking. Overall, the power of the buyer within the fast food industry is high. Thirdly, the threat of substitutes must be determined. Substitutes for the fast food industry include grocery stores (i.e., eating home cooked meals), full-service restaurants (both single and multiple location based businesses), catering companies, food trucks, bars and night clubs. Due to the fact that the fast food industry consumes a large portion of the food market, it can be concluded that there is a medium threat of substitutes.
Examining the bargaining power of suppliers, one can look at two different groups, (1) large companies and (2) small companies. Large companies within the fast food industry include dominant players such as McDonald’s, Subway and Yum! Brands. Due to the large size and demand of these companies, they are relatively dependent on those suppliers who can meet their needs. For these companies, the bargaining power of suppliers is high. However, all other smaller companies are faced with many different suppliers that can meet their demand needs.
The smaller companies are faced with low bargaining power of suppliers. All in all, one finds the total bargaining power of suppliers to be at a medium level. Lastly comes the examination of industry rivalry. The three leading companies that take up 33.1% of the market share include McDonald’s, Subway and Yum! Brands. Furthermore, within the market, the total number of companies is forecast to increase on average 1.5% per year to 17,039 in 2019. Overall, the dominant players along with the size of the industry lead to high industry rivalry.
Based on the previous analysis and using a scale of 0-10 (0 being very unattractive and 10 being very attractive), the following scores can be determined: Threat of New Entrants = 3, Power of the Buyer = 4, Threat of Substitutes = 6, Bargaining Power of Suppliers = 5 and Industry Rivalry = 3. With an average score of 4.2, it is determined that the fast food industry is of medium attractiveness.