Porter's Five Forces
Porter's Five Forces investigates the attractiveness of an industry by focusing on the threat level of various factors influencing the industry. These forces include: bargaining power of buyers, bargaining power of suppliers, threat of new entrants, threat from substitutes and rivalry among existing players.
Bargaining Power of Buyers
Referring to the chart above, there is a relatively low level of threat from the bargaining power of buyers. This is due to the fact that there are a large number of buyers with relatively small purchases. The coffee industry is based around individual customers buying a cup or two of coffee and a snack, but usually not much more than that. It is important to note, however, that customers do not face any significant switching costs when moving between coffee shops. This gives some power to the buyers. Furthermore, coffee drinkers could make the product in their own house rather than buying it, which also gives them more power.
Bargaining Power of Suppliers
In reference to the chart above, the bargaining power of suppliers poses a very low threat. This is due in large part to the fact that the inputs for the industry are standard as opposed to differentiated. This allows companies to switch quickly and easily between suppliers. For these reasons, suppliers are not necessarily locked in to a specific firm in the industry.
Threat of New Entrants
As depicted in the chart above, there is a relatively low threat of new entrants into the U.S. coffee and snack shop industry. One reason for this low threat level is that existing firms have a cost and performance advantage. They are well- established and have already learned how to continually lower costs and improve performance. Furthermore, these well-established companies with large market shares have strong brand identities within the industry. A new entrant to the industry can expect retaliation from existing companies due to the strong competition for market share. The rivalry among existing companies will be discussed in more depth later. Although, somewhat difficult, it is still possible for new entrants to thrive in this market. For example, licenses, insurance, or other qualifications that may be required are not hard to obtain In addition, since customers incur minimal switching costs when switching suppliers, they are able to buy from multiple stores.
Threat from Substitutes
As shown in the chart above, there is a very high threat from substitutes in the coffee and snack shop industry. Many coffee drinkers consider tea, hot chocolate, and energy drinks to be reasonable substitutes for coffee. In addition to these coffee substitutes, customers can choose to brew their own coffee rather than buy it from a shop. Since these substitutes do the same job as store-bought coffee, customers will not incur costs in switching products.
Rivalry Among Existing Players
As the chart above demonstrates, there is a high rivalry among existing players in the coffee and snack shop industry. One reason for this is that the industry is no longer growing at a rapid pace; it is considered to be in a mature market. Since there are not any significant product differences among competitors customers do not incur high costs if they switch from one player to another. This is, in part, due to the fact that the products are not highly complex, nor do they require significant customer-producer interaction. Brand identity within the industry is also a huge factor for the rivalry, as two major brands have captured the majority of the market. It is important to note, however, that the industry does not have over capacity at the moment.