Danone Porter Five Forces Analysis
Five Forces analysis of Danone covering threat of new entrants & substitutes, bargaining power of buyers & suppliers and competitive rivalry.
Threat of New Entrants:
Threat of new entrants is moderately low in the food industry. It requires huge capital investments in supply chain networks as well as R&D to innovate and come up with diversified products. This discourages new entrants to enter and compete with already existing players in the saturated market. Existing players like Danone have supply side economies of scale and demand side benefits of scale which new entrants find difficult to imitate. Although the switching cost of customers is low, customers stick to the existing ones because of brand credibility. Danone also has loyal customers and offers innovative differentiated products that give it a competitive edge over the new entrants. To deal with the threat of new entrants like Oatly, Vitasoy, Blue diamond etc., Danone focuses on product development capabilities to tap into consumer desire. It offers a unique portfolio of strong brands, solid execution capabilities in terms of brand activation and new distribution channels to attract and retain its customers.
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This concludes the threat of new entrants in the Danone Porter Five Forces Analysis.
Threat of Substitutes:
Below are the threats of substitute products of Porter’s Five Forces analysis of Danone:
Threat of substitutes is moderate for Danone. Danone operates in four businesses one of which is Dairy and plant based products.
Danone’s own dairy products are facing substitution risk from its plant based substitutes like plant based beverages, yogurt and ice cream. Apart from that, Danone’s water business is also facing the threat of substitutes from environmentally-aware consumers who think that packaged water is creating pollution and are looking for other alternatives. Switching cost for customers is also low, which accentuates the threat. To deal with the threat of substitutes, Danone is working on incorporating sustainable efficiency into the company's business model and focusing on new organic and non-GMO product lines to compete with its substitutes. It is also working on brand loyalty, improving the quality and maximizing value for money to compete with its substitute products.
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Bargaining Power of Customers:
In the Danone Porter Five Forces Analysis the bargaining power of the customers can be explained as:
Bargaining power of direct customers is low. Customers like large retailers enjoy moderate bargaining power. Danone offers low differentiated products and there are other alternatives available to retail giants as well as customers, thus Danone has low negotiating power. Further the switching cost is also low, thus retail giants like Walmart or local retailers can easily switch to other alternatives that offer better quality products at affordable prices. Direct customers do not have a say in the price but the intense competition makes it up for it. Although the customer's threat of backward integration is low, customers like large retailers have some bargaining power due to high concentration of other players in the complex supply chain network and since these retailers need continuous supply of products in bulk, they have some say in the cost of the products.
Danone can increase its bargaining power by offering highly differentiated products and by launching diversified products to increase its customer base, thereby increasing its bargaining power.
Bargaining Power of Suppliers:
Following is the bargaining power of suppliers in the Porter’s Five Forces analysis of Danone:
Bargaining power of suppliers is low. There’s high concentration of suppliers that offer very low differentiated raw materials, thus Danone has more bargaining power. Switching costs are also low for companies, giving them more leverage in negotiations and increasing profits by lowering supply costs. Because suppliers in a dominating position can diminish a company's margins, Danone maintains close ties with its suppliers to counteract this threat. It generates interdependence, making it difficult for suppliers to switch. It also maintains a Supplier portal and partners with a diverse supplier base like small farmers, startups and multinational enterprises. With its extensive supply chain network across the globe and strategic management of its raw- materials, Danone gets a competitive edge over its suppliers. In addition, there’s less threat of supplier’s forward integration due to capital requirements in R&D.
Competitive Rivalry:
The impact of key competitors in the Danone Porter Five Forces Analysis is as follows:
Danone is in a food industry which is very competitive. Concentration of players is high and major competitors of Danone are Kraft Heinz, J M Smucker company, PepsiCo, Unilever, Mondelez International, Ingredion, Nestle etc. The industry projects positive growth with a CAGR of 5.17% and estimated valuation of USD 15 billion during 2021-2025, which makes this food processing industry lucrative for the players and hence there’s cutthroat competition among the competitors to attain greater market share. Exit barriers are also high due to intense capital investments in R&D and supply chain that pulling out of the industry can be extremely loss making, thus players who find it hard to survive continue to compete. By transforming the upstream of its business with its focus on manufacturing processes, raw materials supply, logistics etc., Danone is leveraging this business strategy to optimize cost, increase the lifecycle of strategic resources and compete with its competitors by offering differentiated products.
It’s global presence also helps in attaining greater market share and gives it the competitive edge over other competitors.
To conclude, the above Danone 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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