Industry Analysis Assignment

Potato Chips and Similar Snacks Business 444 (Section 2) Dr. Meilich 10/2/02 By: Mike Lou, David Quiroz, Tony Constable

1) Industry Definition
a. The salty snack industry, as defined by the article Potato Chips, Corn Chips and Similar Snacks, includes the manufacturers of potato chips, tortilla chips, corn chips, ready to eat popcorn, pork rinds, potato sticks, and extruded snacks 1. b. Industry product value chain
Service providers (electricity, gas, water, telephone, building rent) Chemical and other substances providers (salt, sugar, oil, flavors, and others)

Farmers (corn, potatoes, wheat, and grains)

Packaging, cans and labels.

Employees (Labor)

Salty snack manufacturers (Focal Industry)

Government (regulations on labeling. distribution and shelf fees) Office supplies (pens, pencils, paper, computers, fax, etc)

Transportation (Trucking services)

Distributors

Retailers (supermarkets, grocery stores, large warehouses, convenience, club, mass merchandisers, liquor and drug stores, stadium vending machines, and other)

Final consumer

Potato Chips, Corn Chips, and Similar Snacks. Gale Business Resources. 2002. Gale Group, Oct 1, 2002 <http://library.csusm.edu/oi/all.asp>

c. Multi-scope chart

Snacks

Focal Industry

*Salty Snacks* Vegetables Pastries Granola taken between regular (potato, tortilla Snack: A small quantity of food and Rice and corn chips, meals. based Fruits Candy rte popcorn, Products pork rinds, potato sticks, extruded snacks) Multigrain bar snacks

2. Identified Players
a. Rivals: Rivals include all companies that produce salty snack products. This includes large national firms and smaller private label brands. b. Buyers: Buyers include supermarkets, grocery stores, warehouse club stores, vending machine companies, drug stores, sports stadiums, and other retail outlets such as small restaurants. Suppliers: Suppliers include farmers, oil producers, chemical producers, packaging material suppliers, laborers, and energy providers. Substitutes: Substitutes include all snack items that do not fall into the salty snack food category such as candies, pastries, fruits, vegetables, granola and rice based products, and multi-grain bars.

Strategic Groups Map

National Brand Competitors

National

Distribution Channels Small-Private Label Competitors

Regional

Low

Sales

High

c. Strategic Groups: The groups are private label companies and national brand companies. The national brand segment is comprised of large national firms that have distribution channels throughout the United States and sometimes throughout the world. The top three are Frito Lay, Borden, and Eagle Snacks. Frito Lay controlled nearly of the market with $5.6 billion in sales during 1992. The Borden Snack Group who had $1 billion on sales was the Frito Lays nearest competitor. Trailing Borden was Eagle Snacks with $600 million in sales. National brands are full service snack producers that manufacture a wide range of snacks from potato chips to pork rinds. Private label brands are smaller firms that have a much smaller sales volume when compared to the national brands. Private label brands also tend to only produce specialized products and distribute within a regional area.

3. Macro Environment

a. Social: The social trend of eating healthier foods has had a huge impact on the salty snack industry. After the public learned that they should reduce their salt intake and that low fat diets were linked to the reduction of cancer and heart disease, consumer preference changed. Salty snack manufacturers responded to this threat by producing healthy products such as no salt and low oil potato chips. Healthy snack foods took

a large portion of the market away from traditional snack foods. Low fat and no fat potato chip sales grew 48% in 1995 when compared to sales 1994. Sales of healthy tortilla chips also grew 67% compared to sales of 1994. Popcorn sales also increased significantly during the 1990s. Technological: The use of computer technology increased the efficiency of operations in the industry. During the late 1980s Frito-Lay issued hand held computers to its sales staff. Inventory information was entered into the computers and instantly transmitted to the companys headquarters. This allowed Frito-Lay to see its sales figures quicker and allowed them to be more competitive in pricing. It also reduced the amount of stale chips left on store shelves. Other companies soon took advantage of this opportunity and enlisted the use of computer technology in their operations. Political/Legal: A survey conducted in 1993 listed increased government regulations as one of the biggest threats facing the salty snack industry. This concern was caused by the Labeling and Education Act of 1990. This law required all food manufacturers to list nutrients in greater detail. Under this law, food manufacturers were to list nutritional

components of foods according to the governments serving sizes. This lead to more truthful labeling and nutritional listing. Salty snack manufacturers worried that consumers would shy away from their products due to their contents. Macro Economic: The snack food industry as a whole was not adversely affected by the economic downturn during the early 1990s. The industry even experienced a steady sales growth. Pound sales volume rose faster than dollar sales volume, this was in line with falling retail grocery prices.

4. Attractiveness of Industry According to Porters five forces model National Brands

1. Threat of New Entrants Economies of scale are high: During 1980 the industry standard for commercial cookers was 4,000 pounds of chips produced per hour. This does not increase the threat of new entrants. Product differentiation is high: All products in the salty snack industry come in various shapes, sizes, flavors and compositions. Potato chips can be ruffled or barbecue flavored. Pork rinds can be flavored or non-flavored. Salty snacks can also come in healthy versions such as low fat or low salt. This does not increase the threat of new entrants. Capital requirements are high: To compete with national brands a company must possess manufacturing capabilities to produce a massive amount of chips. This requires an

extensive amount of manufacturing equipment. This does not increase the threat of new entrants. Switching Costs are low: The inputs required to produce salty snacks are basic ingredients such as potatoes and oil that can be acquired from many different sources. This increases the threat of new entrants. Government regulation is moderate: All food products are subject to the FDA. New labeling regulation accentuated the trend towards the consumption of healthy snack foods. This increases the threat of new entrants. Expected retaliation is high: The national brands were highly competitive with aggressive pricing and distribution policies. This does not increase the threat of new entrants. Summary: Overall the threat of new entrants is low. A major barrier to entry for new entrants is the large amount of capital required to compete at a national level. Cost advantages created by economies of scale also create a barrier to entry in terms of pricing. The low prices charged by incumbent firms are hard to compete against by potential new entrants.

2. Intensity of Rivalry Number of competitors is low: The number of national brands is low. This does not increase the intensity of rivalry.

Diversity of competitors is moderate: The types of competitors range from Frito-Lay that makes all types of snacks to Orville Redenbacher who makes only popcorn. This does not increase the intensity of rivalry. Industry growth rate is low: During the mid 90s the snack industry experienced an almost flat growth rate. This increases the intensity of rivalry.

Switching Costs are low: The inputs required to produce salty snacks are basic ingredients such as potatoes and oil that can be acquired from many different sources. This increases the intensity of rivalry. Exit barriers are high: Large manufacturers of salty snacks have little options with what they can do with their manufacturing equipment. They have high sunk costs in their related industry. This increases the intensity of rivalry. Summary: Overall the intensity of rivalry is high. The two most important factors that increase rivalry are the low growth rate and high exit barriers. Due to the low growth rate, firms compete fiercely in the already saturated market. The high exit barriers do not allow firms to leave the industry, forcing them to do whatever is necessary to survive.

3. Power of Buyers Concentration of buyers relative to the industry is low: There are many types of buyers. The buyers can range from large supermarkets to liquor stores. This does not increase the power of buyers.

Product differentiation is high: All products in the salty snack industry come in various shapes, sizes, flavors and compositions. Potato chips can be ruffled or barbecue flavored. Pork rinds can be flavored or non-flavored. Salty snacks can also come in healthy versions such as low fat or low salt. This does not increase the power of buyers. Buyers switching costs are low: Buyers such as supermarkets or warehouse stores can easily switch from one brand to another with minimal costs. This increases the power of buyers. Threat of backwards integration of by buyers is low: The buyers of salty snacks are unlikely to integrate backwards and manufacture their own brand of salty snacks. This does not increase the power of buyers. Summary: Overall the power of buyers is high. Though many of these elements suggest that the power of buyers should be high, one must take into account that the main element is that the buyers switching costs are low. A buyer can switch from one manufacturer to the next with minimal cost.

4. Power of suppliers

Concentration of suppliers relative to the industry is low: Suppliers such as farmers and meat by product producers are numerous and spread out. This does not increase the power of suppliers. Availability of substitute supplies is low: Currently nothing exists besides potatoes that can be used to make potato chips. Though, it is possible for extruded snacks to be made of another ingredient instead of corn.

Switching costs of the industry are low: Manufacturers of salty snacks can switch suppliers at minimal costs. Suppliers provide basic ingredients that are available at numerous suppliers. This does not increase the power of suppliers. Threat of forward integration by the supplier is low: The costs necessary to manufacture salty snacks at a national level are high. This does not increase the power of suppliers. Summary: Overall the power of suppliers is low. The main point is that salty snack manufacturers can easily switch from one supplier to the next with almost no cost.

5. Power of Substitutes Profitability of substitutes industry is high: The candy and pastry industry is highly profitable. Fruit distributors are also profitable. This increases the power of substitutes. Summary: Overall the power of substitutes is high. The social trend of eating healthier provides power to healthy substitutes such as vegetables and fruits.

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**Overall attractiveness of the industry is covered after the analysis of the strategic group of private label brands

Private Label Brands

When analyzing the private label brands strategic groups using Porters five forces model, differences between it and the national brands become apparent. The following lists only the elements that differ from the national brands. Any element that is omitted is the same as the national brands.

1. Threat of New Entrants Economies of scale are moderate: Private label brands produced products on a smaller scale when compared to the national brands. Private label brands could not spread out their fixed costs as well as the national brands or benefit from other such cost advantages associated with the national brands volume of production. This increases the threat of new entrants. Capital requirements are low: It is feasible that a small potato chip or beef jerky company can be operated out of a garage or small warehouse. This would require a low amount of capital. This increases the threat of new entrants.

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Expected retaliation is low: Small private labels are not as competitive as national brands and do not have the ability to react as the national brands do to price changes or product differentiation. This increases the threat of new entrants. Summary: Overall the threat of new entrants is high. Individuals can easily start their own salty snack company with little capital requirement.

2. Intensity of Rivalry Number of competitors is high: The number of private label brands are in the hundreds and are located throughout the United States. This type of fragmentation does not increase the level of rivalry among the private label brands.

Diversity of competitors is high: Private label brands are very diverse. They produce a variety of salty snacks and exist in small and large forms. This increases the level of rivalry.

Industry growth rate is high: During the mid 1990s the sales of private label brands grew at an astounding rate of 15.4%. Low fat and no fat potato chips sales grew 48% in 1995. This does not increase the intensity of rivalry between private label brands.

Exit barriers are low: Since there is a low amount of capital required to enter the industry as a private label, exit barriers are low. This does not increase the intensity of rivalry between private label brands.

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Summary: The overall intensity of rivalry among the private label brands is low. The main elements are low exit barriers. Small manufacturers have low sunk costs and can leave the industry much easier than national competitors.

Overall Attractiveness of The Industry

Overall the industry is attractive to incumbent companies. The companies have been profitable. The national brands more so than the private labels due to economies of scale and to brand recognition. The weak power of suppliers and buyers also contributes to the attractiveness of the industry. A factor that may cause the industry to be considered unattractive would be the fact that it is highly competitive for the national brands due to aggressive pricing and distribution policies. The trend towards eating healthier also threatened the industry. Consumers turned to healthy substitutes such as fruits and vegetables. A trend that threatens the competitiveness and the survivability of private label companies is the consolidation of the industry. Large national companies steadily purchased smaller firms that threatened their profitability.

General Lessons
To compete in an industry that is dominated by large firms, smaller companies must find an appropriate market niche to compete in. The smaller private label brands are able to compete with the national brands due to their specialization. The national brands benefit from economies of scale and have very competitive pricing. The private brands must find a

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market niche where consumers are willing to pay more. An example may be when a private brand sells its healthy potato chip through health food stores.

Social trends can have a major impact on an industry. The trend towards eating healthier reshaped the snack industry during the 1980s and 1990s. Companies must react accordingly to keep up with the change in consumer preference.

Technological innovations continuously improve how companies operate. When FritoLay used computers to monitor inventory during the early 1980s, they vastly improved their operations. Other salty snack manufacturers soon took notice and also incorporated the use of computers in their operations.

It Reminds me of..
The threat to the salty snack industry created by the passage of the Labeling and Education Act of 1990 reminded me of the threat to the cigarette industry caused by the Cigarette Advertising and Labeling Act of 1965. Both of these laws decreased the attractiveness of their respective products through better consumer awareness.

Another parallel between the salty snack industry and the cigarette industry are the medical reports that suggested that the products of the industries were unhealthy. In 1964 the U.S. Surgeon General issued a devastating report linking smoking with heart disease and lung cancer. The salty snack industry was threatened when medical experts reported in

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the 1960s that Americans should decrease their salt intake and when low fat diets were linked to the reduction of heart disease and cancer during the 1980s.

If the consolidation of the salty snack industry continues to a point where there are only two or three competitors, the industry may become very similar to the cola industry. If that trend were to continue, one could expect to see price wars and heavy marketing in the salty snack industry that now exists in the cola industry.

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