Nestle Porter Five Forces Analysis
Five Forces analysis of Nestle covering threat of new entrants & substitutes, bargaining power of buyers & suppliers and competitive rivalry.
Threat of New Entrants:
As consumers tastes constantly evolve, new brands that cater to specific requirements are continually being launched, making product differentiation easier to attain. The regulatory landscape is also relatively easy to navigate.
The relatively high capital investments required to manufacture, package and distribute products on a large scale make entry into this industry difficult. The high economies of scale make strong unit economics challenging to attain in the initial stages.
The existing market leaders have consolidated market share and honed customer loyalty. Nestle's annual average marketing spend of CHF 20 billion ensures customer awareness and continued sales. This won't be easy to outshine.
Gaining knowledge of region-wise food preferences will be a steep learning curve.
Nestle's rural distribution networks are efficient and have deep penetration. The low level of attrition of sales personnel even during the MAGGI crisis of 2015 indicates high satisfaction. Establishing access to similar channels will require effort.
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This concludes the threat of new entrants in the Nestle Porter Five Forces Analysis.
Threat of Substitutes:
Below are the threats of substitute products of Porter’s Five Forces analysis of Nestle:
Raising obesity levels and an acute need to look good led to consumers' increased focus on food. Food trends that prefer whole natural foods over processed food and climate activism against plastic packaging have made consumers reconsider their choices.
Snacking and consuming sweet food is frowned upon.
More people staying at home due to lockdowns reduced the need for convenience foods.
Nestle's focus on healthy eating with offerings like "lean cuisine" and "MarketPlace", "Yes Snack Bars" and adopting recycled plastic in Nestle Waters brand Buxton have helped combat these trends. These helped change the narrative from "convenience vs healthy" to "convenient and healthy".
The availability of cheaper brands owned locally offering flavors closer to local cuisines poses a high threat of substitution for Nestle.
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Bargaining Power of Customers:
In the Nestle Porter Five Forces Analysis the bargaining power of the customers can be explained as:
Nestle supplies products through various retail and online channels.
Carriage and Forward agencies, distributors, wholesalers, retailers and salesforce are involved.
Individual consumers have little power when the volume of goods consumed per consumer is considered. However, the availability of numerous comparable options with no switching costs gives customers bargaining power.
Retail chains that deal with larger volumes can shift to competitors' products if they are unsatisfied with their margins. However, when Nestle's products are very sought after, not carrying them on their shelves will directly hurt the chains' revenues.
Several of these chains sell their own products as well like Milk, yoghurt etc.
These backward integration opportunities further increase their power.
Bargaining Power of Suppliers:
Following is the bargaining power of suppliers in the Porter’s Five Forces analysis of Nestle:
Nestle depends on almost 16000 suppliers worldwide, and each one is mandated to be compliant with Nestle's responsible sourcing standards.
Being a large buyer, Nestle is an ideal customer for these firms and has the power to negotiate favorable terms.
If there is any misalignment of interests or disputes with one supplier, goods can be procured from another easily while incurring a negligible cost. This prevents anyone supplier from wielding excess power.
However, with the increased popularity of food trends that demand transparency and accountability at every step of the supply chain, finding compliant suppliers and validating them periodically raises costs.
Established suppliers that offer niche products (ex: 100% organic ingredients) might have the upper hand.
For ex: Nestle's palm oil suppliers included Sinar Mas an organization accused of turning protected forests into palm oil plantations. Following a scandal in 2010, Nestle committed to using 100% RSPO certified palm oil by 2023. Authenticating the oil and tracing it back to the plantation turned out to be challenging, and the "Earthworm Foundation", a non-profit, was roped in to help.
The raised expectations for organizations to source responsibly give compliant suppliers more power.
Competitive Rivalry:
The impact of key competitors in the Nestle Porter Five Forces Analysis is as follows:
With $93,610 million in sales worldwide, Nestle ranks 1 among FMCG companies. P&G, PepsiCo, Unilever and JBS make up the rest of the top 5.
They have a significant market share in beverages, petcare and nutrition, the top product categories of Nestle by sales. Competition is high and there is no clear market leader in these segments. The margins per unit are also low due to aggressive pricing strategies adopted. Also, consumers can switch between the brands at no additional cost.
The FMCG industry is fast-growing, with multiplying product lines that try to meet the ever-evolving needs of consumers. Nestle has constantly innovated to keep up to these trends. Celltrient, the anti-ageing range and LiveClear, the first anti-allergy cat food, are examples.
This opportunity to explore new categories reduces competition.
To conclude, the above Nestle Porter Five Forces Analysis highlights the various elements which impact its competitive environment. This understanding helps to evaluate the various external business factors for any company.
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