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Running head: SNACK FOOD ANALYSIS

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Snack Food Industry: Five Forces Analysis and Market Research Louie Musa Coleman University

Snack Food Analysis ABSTRACT Snack food industry has a very diverse and open market. This paper researches the current US market, discusses the five forces affecting this industry, shows the Porter Five-Forces diagram and examine the strengths and weaknesses for these forces in general. Finally, it examines some potential driving forces operating in the snack food industry.

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Snack Food Analysis An Industry is a group of competitors that produce similar products and services, Parnell

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stated. Moreover, a strategically diverse industry includes products that share the same source of competitive advantage. According to Lakshmi, there are two basic factors control this competitive strategy, the industry structure and the position of the company within this industry, which can be shaped by the firm and its performance (Lakshmi, n.d.). The other competitive forces in the industry determine the profitability and the market share for the firms competing, as they shape the prices and the costs incurred. Snacks are a convenient nutritious light-portion food that is eaten between meals. According to Chatman, the snack food industry is a recession-proof since people have to eat. Moreover, Chatman emphasized on branding, capital, and technology expenditures and resources (Chatman, 2009, p.1), as they know people have choice whether to consume their products or not. In addition, Chatman believes that profit and sales will grow more if manufacturers use a substantial amount of branding, capital, and technology expenditures and resources (Chatman, 2009). Chatman believes that consumers are becoming more sensitive about snack food prices, and they are more likely to try new private brands, limit their purchases on promotion, and/or decrease their purchases during this economic recession. Moreover, he says that fluctuated prices are a real threat to snack food manufacturers. Nevertheless, good marketing campaigns and innovation of new snack food products that focuses on brand allegiance should help to decrease the negative effects of the current global crisis (Chatman, 2009). Rivalry in the snack food market in the US is quite a bit high, for the fact that this market is mature and saturated, Chatman said. Thus, he listed key drivers manufacturers can utilize to help

Snack Food Analysis them grow or at least maintain their market shares (Chatman, 2009). First key explains the [a]bility to lock-in key supply contracts to reduce procurement costs and help production planning (Chatman, 2009, p.1). According to Chatman, manufacturers need a reliable chain of suppliers to guarantee supplies at secured prices. This will not only assure a good establishment of a strong manufacturing infrastructure, but also will also improve and increase customer-tobrand loyalty (Chatman, 2009). The second key according to Chatman- discusses the ability to transfer price increases. He encourages manufacturers to continuously pass on unexpected cost increases for supplies without fixed prices to preserve profitability (Chatman, 2009, p.1). Therefore, they can still compete with supermarket private label brands, which usually are less in price and similar in

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quality. Chatman believes that supermarkets and grocery stores are consolidated-branch business minded with a great deal of buying powers; therefore they feature their brands more than other brands to increase their own gains and profits. Thirdly, Chatman believes that snack food manufacturers should pay attention to the display shelves where their products will be merchandized. He states about the ability to secure the coveted shelf space, manufacturers must continue to compete to acquire the most attractive shelf space for their products to maximize retail sales. They should also expand (or continue expansion) into other distribution channels which include drug and discount stores, convenience stores, and other locations with high foot traffic (Chatman, 2009, p.2). The fourth key focuses on the importance of being innovative and unique. Chatman believes that in order to maintain or grow share, manufacturers must differentiate, anticipate, and respond to changes in both consumer preferences and dietary trends (Chatman, 2009, p.2).

Snack Food Analysis Moreover, he stated that some important factors, like Population ethnicity and demographic

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changes have created new preferences and taste trends, which require manufacturers to alter their products to cover these needs. Finally, Chatman suggests that manufacturers should use healthier ingredients, better packaging and marketing, besides investing more on other innovations. The fifth key emphasizes on the consumer price endurability, consumer price sensitivity varies between product segments. Brand loyal consumers are not as sensitive to price changes due to the associated high image, reputation, and product quality perceptions, Chatman stated (Chatman, 2009, p.3). For example, Oreo and Doritos have higher prices than other similar products, however these substitute products are cheaper and less in quality. Finally, Chatman focuses on the ability to thrive internationally. The sixth key emphasizes about the saturation in the US market could eventually result in undesirable profit margins (Chatman, 2009, p.4). Chatman believes that manufacturers should continue to expand their markets to include more countries such as Canada, Mexico, Korea, Japan, and other countries. Chatman concludes that the global recession will not affect the snack food industry. On the other hand, manufacturers rule of thumbs should be focusing on more innovations, differentiation, and build a strong relationship with suppliers. Further more, they should grow their international markets shares and secure attractive distribution placement so they can obtain a larger market share on the long run (Chatman, 2009). Five Forces Rivalry among competing sellers shows a big deal of competitive pressure created by the jockeying or rival sellers for a better market position and competitive advantage. Moreover, there is a pressure coming from the threat of entry of new rivals. According to a market research

Snack Food Analysis conducted by the IBIS -World, there are 359 businesses competing in the snack food business reporting revenue of $28 billion in 2011, showing a 4.2% annual growth between 2006-2011. IBIS-World identifies this as a healthy growth and expects the industry to keep growing, since

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they believe that innovation is growing. Another study shows that consumers are becoming more concerned about healthy products and seeking healthier snacks, as a result, there is a very big competition about innovating new products low in fat and calories. Obviously, the market for snack is relatively large and is expanding, thus, rivalry is strong. The variety of consumers and buyers can create another pressure on this industrys businesses. For example, the different preferences of the buyers create a sub competition in the chain or industry. PepsiCo and Coca Cola are competing in the carbonized drinks sector; they both produce the same drinks but adopt a different ideology in marketing and approaching their customers. Yet, both of them left the healthy-snack competition to other companies such as General Mills and Kraft foods. Although there are several options for consumers, strength is considered moderate here. Suppliers to the industry businesses can create pressure upon the snack food manufacturers, especially if there was bargaining and supplier-seller collaboration. For instance, if providers of raw materials including key ingredients such as oil, sugar and wheat increase prices along. Therefore, the prices of the products will be affected. Accordingly, the affect of this force is strong on the industry. Other businesses in different industries might be a risk for snack food producers such as delis, sandwiches, and fruits; these products are not considered snacks production lines. Additionally local businesses and supermarkets might have special offers for their deli items, which might

Snack Food Analysis compete the on-shelf snacks. The impact of such threat is quite a bit strong, for instance, Vons

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has a $5 sub and drink combo, while a sneakers protein bar on their shelves is sold for almost $4.

Potential New Entrants Moderate

Buyers Moderate

Rivalry

Suppliers of Raw Materials Strong

Substitutes offered by competitors Strong

Snack Food Analysis Snack Food Industry Changing Factors

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There are several driving forces operating in the snack food industry. Rice encourages people to find healthier alternatives to snack foods, she states, Many popular snack foods such as chips, candy and snack mixes are high in calories, fat and excess sugar. Healthy alternatives are those foods that are convenient to grab on the go, but are also nutrient dense, providing vitamins, minerals and energy that fuels the body (Rice, 2011). Rice believes there is always a healthier substitute for sack, for example, popcorn, fruits and vegetables, and protein packed snacks. Therefore, such studies and articles are affecting the marketing of snack foods in the market. The second factor that would concern the snack food manufacturers is the increasing sales of private label snacks. According to Riell, there is nearly 76% of consumers are actively looking for the best value when buying snacks. On the other hand, he stated, [d]espite a prolonged down economy, consumers do, in fact, show an affinity for their favorite brands (Riell, 2011, p.1). Riell interviewed a 7-eleven owner in Gibsonia, PA, who assured that private label snacks are competing other brand snacks, Monroe