FIVE FORCES ANALYSIS

FIVE FORCES ANALYSIS

The baby food market will be analyzed taking manufacturers of baby food as players. The key buyers will
be taken as distributors and retailers of baby food, and producers of ingredients and other raw materials
as the key suppliers.
Summary

Figure 6: Forces driving competition in the baby food market in Germany, 2010

Source: Datamonitor DATAMONITOR

The German baby food market is highly concentrated, with the top three players holding 86.6% of the
total market value.

The market has the presence of leading players such as HiPP & Co., Nestle and Groupe Danone.
Pharmacies and drugstores form the most significant distribution channel in the German baby food
market. The market players can sell their products to a large number of buyers, including
supermarkets/hypermarkets, pharmacies/drugstores and independent retailers. These buyers occupy a
strong position in the supply chain, which allows them to negotiate favorable contracts with
manufacturers, thereby enhancing buyer power. However, buyers must take into account brand loyalty,
and therefore, in an effort to meet consumer demands, will stock certain branded items. This drives down
buyer power slightly. There is a high degree of product differentiation in the market, due to the variety of
products offered within the five defined segments, which include: bottled baby food, baby cereals, baby
snacks, canned baby food, and other baby foods. The wide range of brands available, with accompanying
variations in quality and price, means that buyer power is prevented from becoming disproportionately

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 FIVE FORCES ANALYSIS

strong in this market. Industry players are reliant on suppliers for raw materials which must be of a certain
quality to ensure consistency in products and therefore brand loyalty.

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 FIVE FORCES ANALYSIS

Buyer power

Figure 7: Drivers of buyer power in the baby food market in Germany, 2010

Source: Datamonitor DATAMONITOR

In Germany, pharmacies and drugstores are the most significant distribution channel for baby food
market, sharing about 46.5% of the total market value. Shopping for baby food is becoming easier than
ever with an increasing variety of retail outlets now selling baby food products. Retailers must consider
brand loyalty in an effort to meet consumer demands and will stock certain branded items. This drives
down buyer power slightly. However, buyers offer the wide range of products and the baby food segment
constitutes only a part of their business, which strengthens buyer power. Furthermore, buyers are
frequently integrating backwards, with many retail chains offering their own branded baby food products,
and this gives buyers more power. For example, Wal-Mart offers its own brand Parent’s Choice for baby
products, including food, diapers, formula, and accessories. Overall, buyer power is assessed as
moderate.

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 FIVE FORCES ANALYSIS

Supplier power

Figure 8: Drivers of supplier power in the baby food market in Germany, 2010

Source: Datamonitor DATAMONITOR

Major raw materials required for the production of baby food products are fruits and vegetables, dairy
products, grains, vegetable oils and minerals. These raw materials are subject to fluctuations in price due
to factors such as a change in crop size, seasonal conditions, weather conditions, and import and export
requirements, which can have an adverse affect upon companies’ revenues. Market players are usually in
a stronger financial situation than suppliers, meaning they often enter into contracts with suppliers, with
fixed-term contracts seen frequently. Furthermore, contractual agreements indicate high switching costs
and penalties upon termination, boosting supplier power. In addition, manufacturers have relatively little
freedom to substitute alternative raw materials if they are to maintain consistent product characteristics for
the end-consumer. It is highly unlikely that suppliers would forward integrate, which reduces supplier
power. Overall, supplier power is assessed as moderate.

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 FIVE FORCES ANALYSIS

New entrants

Figure 9: Factors influencing the likelihood of new entrants in the baby food market in Germany,
2010

Source: Datamonitor DATAMONITOR

The main manufacturers are large international companies such as HiPP, Nestle and Groupe Danone. In
order to compete with leading incumbents, a new player needs to establish production facilities; this
means significant capital outlay on machinery and factories. Furthermore, potential new entrants will also
need to persuade stores to stock their products. The presence of strong brands is a barrier to entry for
new companies, as they cannot compete on the same scale. Major challenges for the baby food industry
are low birth rates and static market conditions in developed countries. However, the growth in the
consumer demand for baby food products has opened up avenues to entry for new players. In Germany,
the baby food market is regulated by the European Food Safety Authority as well as the Bundesamt fuer
Verbraucherschutz und Lebensmittelsicherheit (BVL) which requires that the products should be safe to
eat, produced under sanitary conditions, contain no harmful substances, thus making it more difficult for
the new entrants to enter the markets. Overall, there is a moderate likelihood of new entrants.

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 FIVE FORCES ANALYSIS

Substitutes

Figure 10: Factors influencing the threat of substitutes in the baby food market in Germany, 2010

Source: Datamonitor DATAMONITOR

Baby food is a nutritional supplement to breast milk for babies. Baby food products have few substitutes
as such. The main substitutes would be fresh fruit, vegetables and home-made baby food. However, any
substitutes prepared at home, are relatively time-consuming, and may have unpredictable results.
Furthermore, the lack of time for preparing baby food at home and parents' concerns towards nutrition
has resulted in the growing demand for commercially available baby food. Value sales of baby foods have
continued to report positive growth in Germany, supported by added-value products. The market
performed well, despite the recession, with parents ready to pay more for premium products, in order to
ensure their baby’s health and wellbeing. The threat of substitutes overall is assessed as moderate.

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Rivalry

Figure 11: Drivers of degree of rivalry in the baby food market in Germany, 2010

Source: Datamonitor DATAMONITOR

The German baby food market is highly concentrated, with the top three players holding 86.6% of the
total market value. As most players own their own production facilities, fixed costs are relatively high, and
as the successful presence in the market requires significant capital outlay for financing the fixed assets,
the rivalry level is enhanced. The switching costs may not be high, but retailers are usually unwilling to
switch between market players, as their customers will seek the brands they are accustomed to.
Furthermore, the diverse product range produced by the leading market players reduces their reliance on
the baby food market, thus easing rivalry. Exiting the market would require divestment of the specialized
assets, and the high exit costs imply stronger rivalry. However, the steady market growth may help to
diminish the rivalry. Overall, rivalry is assessed to be moderate.

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