Porter’s Five Forces Analysis of Kraft Foods Report (Assessment)

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Table of Contents

Bargaining power of suppliers
The bargaining power of buyers
The threat of the entry of new competitors
Rivalry among established competitions
The threat of substitute products or services
Financial analysis
Works cited

Bargaining power of suppliers

The food and beverage industry is truly towering and aggressive when it comes to the pricing part. Manufacturers of such products usually keep the prices of their products very competitive. The suppliers of these kinds of products don’t have much of a say in the pricing matters.

The bargaining power of buyers

The buyers have an inclination to buy good quality products at cheaper prices. As such, they don’t mind changing the suppliers and buying from the one that offers good quality at better prices. In other words, buyers want best value for their money. There is a noteworthy chance for the purchasers to concentrate on the industry and its firm benefits.

The threat of the entry of new competitors

The increasing world population and the consequent increase in demand of various commodities, has led to more and more manufacturing companies joining the fray. The current situation of markets can be put as being saturated where there is no place for any new companies.

Companies that have already been in the market for the past couple of years and have established customer bases have a stronghold of the market and it is very difficult for the new entrants to make a mark.

Unfortunately, Kraft has till late neglected some of its brands and has failed to create a proper brand image for such products.

This might be benefitting to the local or generic brands. “If Kraft is to generate solid long-term growth the company must re-engage with consumers, addressing the issues surrounding its typically under-invested brands” (Askew 15).

Rivalry among established competitions

Likewise other industries, there is severe competition in the food and beverage industry as well. It has become very difficult for companies to survive and maintain their respective market share. Two things that are crucial for survival in the competitive markets are brand loyalty and variegation.

The products of such companies have a flexible marketing policy; quality and prices of the products are of utmost importance. Customers have become very smart and they don’t think twice to switch suppliers based on better quality and better price.

So companies have to be very vigilant and careful while deciding the price structure of their quality products. It has also been observed that companies having branded products in the markets often team up to stop the local suppliers from usurping their market share.

They create such hype about their branded products that people don’t care for the local products. The branded products are portrayed to be far superior to the local products in value and grace.

As far as Kraft Foods is concerned, the company has been in the pursuit of excellence in the food and beverage industry.

Even though the company is experiencing increased costs of production, slow top-line augmentation, and incessant growth in the pension payments, it is trying hard to increase its production and the profit margin.

Like for example, the cost of production of Kraft Foods (North America) for the year 2010 was 12.3% and that of Kraft Foods Group for the year 2012 was 8.7%. It is notable that the best performance shown by industries in this class was ~8% (Kraft Foods Group 2013).

Some of the main competitors of Kraft Foods are J & J Snack Foods, Kellogg Company, Conagra Foods, H. J. Heinz Company, and PepsiCo.

The threat of substitute products or services

It is human tendency to compare products for quality and price before deciding to buy any particular product, be it eatables or consumables. So obviously, it becomes necessary for the consumers to compare the quality and prices of products from different companies.

In such circumstances there are chances of the local brands or the so called ‘generic’ products tend to gain some ground. These substitute products pose a grave threat to the branded products and the profit margins of established companies.

The recent split in Kraft Foods Inc has led both the new companies, namely Mondelez and Kraft, to face new challenges in marketing in their respective areas of operations. Kraft will concentrate its efforts in North America whereas Mondelez plans to concentrate on its markets in India, Brazil and Russia (Euromonitor 6).

North America is considered to be an area where the company can have fast growth. On the contrary, India, Brazil and Russia are considered to be of slow growth (Guy 1).

The motive behind the split: It will be wrong to interpret the split as a problem or differences among the directors. “…separating the companies did not involve a food fight” (Klaassen 2).

On the contrary, it is actually a well thought and part of the company’s strategy to “further enhance performance and increase long-term shareholder value” (“Kraft Foods to split into two companies” par. 5).

A company’s success depends, to a great extent, on the performance of the company in the interests of its stakeholders.

“One of the most significant advantages of the split is that the streamlined portfolios allow both companies to concentrate their resources, in terms of innovation and marketing, on key brands and categories” (Euromonitor 5).

Financial analysis

Even though Kraft Foods was doing well financially but in order to further enhance its profits and create new markets, a split was considered to be a good option. The following were the financial aspects that the company considering in going ahead with the split:

Both the companies will be able to concentrate on their selected markets and formulate policies taking into consideration the area specific conditions.
Both the companies will individually be able to assign resources and invest according to the requirement of their particular areas so that the shareholders can get maximum possible returns.
People generally invest in companies that take care of their shareholders’ interests. So once they are convinced that these companies are performing in the better interests of the shareholders, they will invest happily and freely.

It is expected that, “Kraft Foods’ shares will boast the highest yield, at 4.5 percent, of any major food company, and should trade for more than 17 times projected 2013 profits” (Guy 4).

This should be quite encouraging for the Kraft group. On the other hand, “Mondelez has forecast a $1.50 to $1.55 a share profit for 2013 and expects to become a high growth company by selling its candy, chocolate, cookies and crackers in developing countries” (Guy 5).

Having understood all the aforementioned facts and the circumstances of the split, it is expected that the two companies show the expected results in the current financial year.

But according to Kaumil S. Gajrawala, executive director for UBS Investment Bank, PepsiCo is one of the similar companies that will benefit from the outcome of the split (“Kraft Foods to split in two companies” par. 17). We just have to wait and watch.