Porters 5 force model for the automatic vending industry

Porters 5 force model is framework for industry analysis that determines the competitive power and appeal of a market. These 5 forces show a companys ability to serve its clients and make a profit.

The model is particularly useful for those who are looking to enter into the market as the model creates a clear picture of the industry.

Porters 5 key forces for the automatic vending industry are:

1. 2. 3. 4. 5.

The threat of potential entrants The bargaining power of suppliers The bargaining power of buyers The threat of substitutes Competitive rivalry amongst existing firms

The threat of potential entrants Low The threat of potential new entrants for the vending industry is considerably low as there are many barriers to overcome.

Barriers to entry can be viewed as follows:

Access to distribution channels The vending industry depends heavily upon a variety of products from different manufacturers. As the industry serves all kinds of public and private locations (under highly governed regulations and policies, it requires strong access to distribution channels in order to maintain a competitive edge. This in itself represents a threat for any new entrants.

Cost and price disadvantage

There is no clear cost and price advantage for any organisation in the vending industry. Vending organisations generally sell retail commodities through their machines, which are entirely control by their suppliers. There are few external factors like vulnerable inflation and food pricing and increasing employee wages.

Switching to substitute costs Unfortunately there are several substitutes available in market and they represent a huge threat for possible new entrants. Substitutes are highly focused, selling all the possible varieties of products with clear cost advantage.

Government actions Heavily governed regulations and policies offer another threat for the potential new vending entrants. The Smoking ban and restriction of use of tobacco in public places. Standardisation applied by the EU regulatory over the sale of junk food, especially in educational establishment.

The bargaining power of suppliers - LOW

The bargaining power of suppliers for the vending industry is generally considered to be low for several possible reasons.

Supply industry is more distributed As vending operators are now able to offer a range of products, they face challenges from a supply and distribution viewpoint. They need to ensure that they can re-stock their products on time and with minimal cost throughout their location network.

Low switching costs for buyers Vending machines have their own disadvantages for example it is not possible to sell every consumer product. Issues exist such as space restrictions; the machines require electricity (and technology). Availability of substitutes and their operating patterns of 24/7 at a wide range of locations are a threat for the industry.

Powerful suppliers

As the vending industry mainly sells retail commodities, it means the bargaining powers of suppliers are high. Few vending operators sell their own products through vending machines. In this case coffee ingredient producers and machine manufacturers are considered to be more powerful.

The bargaining power of buyers high The bargaining power of buyers for the vending industry is considered to be high due to mainly three reasons.

Selling of Everyday products The Vending industry generally sells those products, which are offered by most local retailers in the market who have more competitive costs and without technical complexities.

Ease availability of substitute products Vending machines serve products like junk foods, drinks, confectionaries and tobacco, which are easily available in most local shops.

Importance of the customers Customers are the primary focus for the vending industry. Complex operating procedures of machines, higher price of products, less variety, and poor product awareness can make customers wary from purchasing vending products

Threat of substitute High Threat of substitute is considered to be very high for the vending industry. For several reasons a substitute presents competitiveness within the vending industry and can be identified as:

Highly focussed substitutes For the sales of various vending products, it entirely depends upon awareness, satisfaction and the comfort of the customers. Highly focussed vending substitutes are selling products, which bring a smile to the customers face.

Switching cost to substitute

Vending machines products are generally slightly higher in price compared to their competitors, as it requires special attention for machine maintenance and technology development. A customer may very switch to a substitute for this reason or indeed if they prefer a greater variety which cannot be provided by the vending machine.

Profit margin for substitute Profit margins for the vending substitutes are impressively higher then vending organisations. Specialised coffee shops, confectionary retailers, 24/7 grocery shops and beverage sellers are generally operating their business with less human resources, more variety of products, higher level of customer intimation which makes them more profitable.

The extent of competitive rivalry High The extent of competitive rivalry for the vending industry is observed to be high as market size and growth rate are nominal. Competitive rivalry can be analysed on several important aspects of the vending industry.

The size of industry The size of the vending industry is generally considered to be small with 3.5 bn in the United Kingdom and growing at moderate average of 2.8%. In the UK there are 12 main players of which only a few account for the majority of revenue.

Growth of the industry Over the last five years the vending industry has grown at a moderate pace with just over 2.8% yearon-year. Life cycle for the vending industry is considered mature where almost 12 players share the majority of profit of the 3.2bn revenue. Few players are set to exit from the industry and some are seeking to merger with one of the bigger players.