Porter’s Five Forces analysis is useful when trying to understand the competitive environment facing a given industry. It involves looking at internal competition, barriers to entry, the profit-appropriating power of both buyers and sellers, as well as substitutes to the goods produced. Applied to the bakery industry it shows an average net profit that typically does not cover the cost of capital due to low barriers to entry, ease of production and ease of access to ingredients.
There are many players in the bakery industry. The top four companies are estimated to only account for 11.7 percent of the market. The industry is characterized by many small bakeries, but there has been a recent trend towards consolidation and economies of scale. Businesses compete on price, quality, differentiation and relationships with key suppliers.
Barriers to entry in this industry are low. Economies of scale are beneficial, but are not required for industry success. As a result, small businesses can enter the industry with a relatively small amount of capital. The two main determinants of a new company’s success is the leaders' ability to acquire sufficient distribution channels to cover operating costs and their ability to build up brand recognition and loyalty. Distribution channels typically involve retail outlets, such as supermarkets and grocery stores, and they can be more easily acquired if the bakery has an established brand or the marketing resources to create one.
Buyers of the bakery industry’s products, such as supermarkets, grocery stores, hotel chains and convenience stores, are able to appropriate much of the industry’s profit due to the large number of small bakeries that are all vying to find outlets for their products. As a result, buyers are able to command low prices and volume discounts. Only large players, such as Kraft, Kellogg, Yamazaki Baking and Grupo Bimbo, have the power to level the playing field and achieve a more balanced share of the profits.
Suppliers do not have much negotiating power in the bakery business due to the well developed markets for their products and the commoditized nature of what they are selling. Bakeries can be affected by price swings of the raw inputs, but the changes are a result of global supply and demand determinants rather than suppliers’ negotiating power.
Many substitutes exist for bakery products. Breakfast cereals, rice and potatoes are all viable alternatives and individuals can also make all of the baked goods they want at home. Bakeries rely upon price and convenience to keep individuals switching to a substitute or baking what they need at home.