A recent survey reveals that 99% of households in UK regularly purchase cheese and indicates that cheese remains a popular fridge staple, with consumers using it in a variety of ways (British Cheese Board, 2011). This report analyses the UK cheese industry based on the UK retail market. The definition Includes all types of cheese sold through the grocery retail usages. The purpose of this report is to determine the attractiveness and competences of the I-J cheese industry.
And since the cheese industry is stable but also stagnant, this report is trying to figure out if there exist any future opportunities to boost the industry. In this report, an industry analysis has been undertaken in the framework of a PEST analysis. The PEST analysis exposes factors in the remote environment that affect the business’s capability to operate effectively and efficiently within the industry. More importantly, the PEST analysis has been used to predict to what extent the significant factors could possibly impact the I-J cheese industry and its operating environment.
In the second part, Porter’s Five Forces analysis has been used to identify forces that drive the industry competition. Four companies have been chosen as examples to analyses how these companies compete with each other in the I-J cheese industry. In addition, the author has addressed the extent to which Hess companies have been affected by the competitive arena and how they have responded to those forces. Finally, this report has been concluded by the discussion about the attractiveness of the industry and the thoughts for future opportunities. , Remote Environment Remote environment is also known as external environment for a business, over which the individual business has little control. However, elements in remote environment may have a major effect on the operating environment and the business (Finial, 2000). 3 2. 1 Industry Introduction As we all know that UK is a nation of cheese lovers, and Hess continues to be popular with consumers as an everyday foodstuff, which is regarded as convenient and healthy to eat.
However, they should be aware of the pitfalls of over dependent on promotion incentives, which will potentially damage brand image, posing a threat for the future prosperity of the industry (Minute, 2011). Overall, the I-J cheese industry plays a strong and experience a stable increase in the next five years, despite the fact that sales promotion is dominate the market. Other factors that would possibly influence the industry will be analyses and discussed in the following report. 4 2.
PEST Analysis The remote environment can perhaps most easily be modeled through using the PEST analysis, which stands for Political/Legal, Economic, Social/ Cultural, Technological factors. PEST analysis is used to assess the external environment for an industry. In addition to reviewing the situation an industry is in, PEST analysis can also be used to predict future changes or trends, based on which one can predict to what extent these changes or trends are likely to impact on companies (Trysts, 1998). The PEST analysis of the UK cheese industry is shown in Figure 2, and the details and their impact will be discussed below.
Political/Legal FSP guidelines for salt and saturated fat AS rules for food advertising Limited government support Social/Cultural Age group trends in the I-J Increase in home cooking Health consideration Economic Economic downturn Unemployment rate in the UK Inflation rate in the I-J Technological Taste innovation and taste credentials Internet and social media Convenient packaging Figure 2: PEST analysis Political/Legal factors The Food Standards Agency (FSP) has set up guidelines for salt and saturated fat.
Although almost all the players in the industry have met the deadlines, the threat is that how to balance the conflict between health regulations and taste credentials. With 44% of buyers thinking that low-fat, reduced-salt cheeses taste bland; the industry is facing with a potential loss of consumers who may purchase less and turn to substitutes (FSP, 2007). The Advertising Standard Authority (AS) has set up rules for food advertising. Government is increasingly concerned about the effect of food advertising on national health, and children in particular.
Cheese is in the products category of high in fat, salt and sugar (HUFFS), therefore advertisements of which will not be able to feature cartoon characters or use free gifts in promotions in TV ads target at children (AS, 2010). Britain owns 700 varieties of cheeses but when compared to Italy and other European 5 countries, the UK cheese industry gets very little support from the government in terms of helping the industry invest in cheese processing (British Cheese Board, 2011). Britain produces milk at highly competitive price, but the gap between the liquid mild and milk for processing is too wide.
Increasing health consideration among consumers, and women in particular will challenge the cheese industry. Cheese manufacturers have reacted by offering low fat cheeses to show their concerns on health issues. Also, British Cheese Board is dedicating to informing consumers about eating cheese as part of a balanced diet (British Cheese Board, 011). Technological factors Technology can have a substantial impact on new product development (NYPD), contributing to taste innovation, convenient packaging and taste credentials.
The taste-buds of a small consumer focus group conducted in 2004 surprised cheese industry by hardly recognizing the difference between the varieties of cheeses offered. The industry seems to overestimate the small incremental changes in NYPD that consumer’s would not even spot (Food navigator, 2005). The research indicated that opportunities could exist for cheese manufactures willing to introduce more “adventurous” cheeses that create clear taste diversity for nonusers, thus, to boost the stable but stagnant cheese industry.
However, a recent survey conducted by 8 British cheese board shows that nearly a third of the interviewees try a new cheese less often than once a year, demonstrating that the majority of consumers tend to purchase cheese they are familiar with the taste, especially among the younger generation (British Cheese Board, 2011). The Internet has implications for the changes of consumers’ buying behavior. Online shopping is becoming more popular among younger people which can be determined as a future growth opportunity for the cheese industry.
Additionally, the widely used social media gives chance for the players in the industry to better position their product and maintain relationship with their customers (Madame Farrago, 2011) Convenient packaging continues to create benefits for price-conscious consumers, with smaller packs selling at lower prices. Reduced/no fat options are gradually accepted by public with less and less taste changing. Cheese industry is and still will take advantage of new product many consumers in the following years because of the difficulty in predicting future upturns and downturns in the I-J economy.
Value of the cheese market is expected to continue to grow, highlighting the role of inflation as a key force of growth in the market. Another major consideration is health related issues, but as discussed above, it would not affect the industry dramatically since producers have launched many low fat, reduced salt options. Companies are dedicating to convincing consumers of taste credentials of low fat cheeses in order to minimize the effect of taste itself on cheese market. Demographic changes are factors that can be easily underestimated.
Recent changes in the I-J demographic structure will bring both opportunities and halogens, thus proper management strategy is essential to companies’ success as well as the industry future growth. Technological forces are fundamental in the context of the cheese industry, and the future opportunity of boosting the industry lies in the “aggressive” new product launches. The influence of the Internet and social media could not be underestimated that they can be the drivers of the future development of the cheese industry.
One thing is worthy of being highlighted is the interaction among the four fundamental factors in PEST analysis. AS rules for food advertising will have impact on companies’ advertising 9 aiming towards 5-9 years old children, the group of which is believed to be a future growth opportunity for the I-J cheese industry. The improvement in technology supports the companies to produce low fat and reduced salt cheeses that meet the FSP guidelines and more importantly, meet customers’ health considerations, with less compromise on taste.
Slow growth economy can leads to changes in lifestyle that is the increasing numbers of people eating at home instead of eating outside during recessionary times, which will encourage the cheese market retail sales and benefit the cheese industry. , Operating Environment The process of a structural analysis of the operating environment is to identify the significant operating factors that shape the nature of competitive interaction within the industry (Porter, 1980). Despite criticisms from other scholars and Porter himself, Porter’s five forces framework is still one of the most applied strategic model used today (See Appendix A). . 1 Industry Structure Porter (2008) argues that “industry structure drives competition and profitability, not whether an industry is emerging or matures, high tech or low tech, regulated or unregulated”. As such, He defines five nominative forces that Jointly determine an industry’s structure and shape strategy, they are as follows. Threat of entry: new entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs and the rate of investment necessary to compete.
Threat of substitutes: A substitute performs the same or a similar function as an industry’s product by a different means. Bargaining power of suppliers: Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants. Bargaining power of buyers: Powerful customers are the flipped side of powerful suppliers, and can capture more value by forcing down prices and compete more aggressively against each other, at the expense of industry profitability.
Rivalry among existing competitors: Rivalry among existing competitors takes many familiar forms, including price discounting, new product introduction, advertising campaigns, and service improvements (Porter 1980). 10 Applying Porter’s model to the I-J cheese industry: Porter (1980) argues that industry definition is crucial in structural analysis. As has been defined earlier, this report analysis the UK cheese industry based on I-J retail market.
The definition includes all types of cheese sold through the grocery retail channel for home use, excluding the consumption for catering or other food service usages. Porter (2008) identifies additional “factors, not forces” such as Industry growth rate, Government, Technology and innovation that also have influences on industry structure. These factors will be discussed alongside with the five forces throughout the analysis. Figure 7 shows the industry structure by adapting Porter’s five forces model, and provides framework for the discussion below.
Potential entrants ‘New launches ;own-labels ‘Taste innovation Suppliers ‘Frigate milk ;other ingredients Industry competitors ‘Bell UK ‘Dairy Crest ‘Lactates McClellan ‘Kraft Foods Buyers ‘Retailers ;specialist grocers ‘End consumers Substitutes ‘Deli meats ;spreads & Yellow fats ;crisps, snacks ‘Leisure catering Figure 7: the UK cheese industry structure viewed through Porter’s five forces framework 1 1 3. 2 Porter’s Five Forces Analysis According to Porter (2008), aspiring entrants, substitute offerings, powerful suppliers, as’. N. Customers and intensive rivalry can hurt industry’s prospective profits. Being awareness of the five forces can help a company understand the structure of its industry, and find a position where it has capabilities of providing the best defense against the competitive forces. Each force will be discussed in-depth below. Threat of entry The threat of entry into an industry depends on the barriers to entry, the higher the barriers, the lower the threats. The I-J cheese industry is a mature and slow growth market; NYPD and boost of own- labels launches continue to drive competition and impact profitability.
In the context of cheese industry, there exists little product differences. Companies have to concentrate their efforts on NYPD to meet consumers changing demands, thus to protect their foothold. Although research reveals that nearly a third of consumers try a new cheese less often than once a year, customers’ willingness to try new types of new launches, which is driven by consumers increasing consideration about health issue. In addition, smaller package, and egg in particular have emerged as a most popular product size among product launches.
Last but not least, no additives and preservatives remain high claims in NYPD, especially among launches target at kids’ segment (Affray, 2004). Additionally, brand identity has little influence on purchasing choices. Customers appear to be more and more price sensitive under tough economic conditions, showing less and less brand loyalty. Moreover, there has been a notable increase in own-labels products in 2011, increasing by 16% from 2010 (Minute, 2011). Furthermore, own-labels also invest highly in innovation and NYPD, which further close the gap between brands and own-label.
As has been discussed in PEST analysis that consumer can hardly spot the small incremental changes in NYPD, unless cheese manufactures introduce more “adventurous” cheeses successfully in the market. In my opinion, the threat of taste innovation will only impact the industry’s profitability and competences to a limited extent. Actually, the market is benefit from new product launches and boost of own-labels innovations, which create a promotional 12 competition among existing competitors and will ultimately, has a positive influence on volume sales as compensation to squeezed profit margins.
Customer switching costs are the fixed costs that they face when they switch from one product to another (Porter 1980). It seems to me that the price setting differences between existing cheese products and new launches are limited. Brand identity and product difference have little influences on choice making. Therefore, customer switching costs are rather low, with no more than 50 pence under the same package. In summary, low product differences, low brand identity, and low customer switching costs determine low barriers for products to enter into the cheese industry.
In my opinion, considering that the UK cheese industry is mature and experiences slow growth rate, the threat of new entrants is determined as low to medium. Threat of Substitutes Porter (1980) acknowledges that when the threat of substitutes is high, industry profitability suffers. With regard to the cheese industry, substitutes can be classified into two main types according to consumers’ usage. Cheeses are most commonly used in sandwiches and on toast along with other fillers like sweet and savory spreads, deli meats, and yellow fats.
Cheese is also viewed as a small indulgence for which health is not a major consideration, competing with crisps, snacks and nuts (Minute, 2011). The cheese industry is benefit from more consumers running to home cooking and packed lunches in recession period, and so as its substitutes. I-J retail sales of cheese and its competitors are shown in figure 8. Deli meats is the main competitor of cheese during the past five years; however the decreased growth rate in this category indicates consumers are turning to other alternatives.
Retail sales of yellow fats witness the highest growth rate, increased by 40% since 2006. Sweet and savory spreads have also experienced a robust growth, although the market value of which is relatively low as compared to other substitutes (Minute, 2011). Combined with data analysis above and other economic and social factors have been discussed in PEST, we can safely predict that in the future yellow spread and other spreads will continue to expansion and grab retail sales from the UK cheese industry. And in my opinion, 13 the switching costs between cheese and its substitutes would not be high.