CFA Institute Research Challenge Industry Analysis Because JJSF’s customer base is so diverse, it is difficult to say that any particular company is directly comparable. Selling directly to consumers through retail supermarkets and restaurants, allows JJSF to target whatever the end-consumer’s preference may be. The markets the company participates in are relatively saturated, and this keeps profit margins low. This is where JJSF’s economies of scale become a primary advantage in the industry. The $620 billion food industry is predicted to grow at just under 4%.1 Being a low cost producer gives JJSF a competitive advantage in relation to their competitors. Primary competitors include: PepsiCo’s Frito-Lay, Kellogg, Mondelez, Snyder’s-Lance and ConAgra Foods.
Competitive Analysis Figure 7: Porter’s Five Forces Analysis Rivalry
Supplier's Power
Buyer's Power
5 4 3 2 1 0
New Entrants
Porter's Five Forces Rivalry (High): The snack food industry is highly competitive. JJSF faces competitors of varying size and resources for each of their product lines. The snack food industry is also highly concentrated with the top 50 companies generating 90% of industry revenues.2 The company’s primary competitive advantages are logistics and production efficiency. In a highly competitive market, profitability is increased by raising volume and lowering overall production costs per unit. As an industry leader, JJSF is not largely affected by smaller competitors entering the marketplace. The company also has employed an acquisition based growth in the past to increase the company’s product lines and overall influence in the marketplace.
Substitutes
New Entrants (Moderate-High): Due to the competitive nature of the snack food industry, new competition is constantly entering the marketplace. Though it is relatively cost intensive to enter the marketplace, JJSF faces competition for each of their 28 snack food brands. One way JJSF minimizes this threat is through a strong distribution network and economies of scale, especially for their larger brands such as ICEE, Super pretzel, and L.A. Churros. Another factor that lowers the company’s risk to the threat of new entrants is the company’s product differentiation within the snack food industry. Substitutes (Moderate): As a producer of moderately priced snack foods, the threat of substitutes is always a concern. Although the threat of substitutes is high, the quality control and availability of JJSF’s products lessens this risk. As long as the company continues its commitment to quality, substandard substitutes will not be able to compete for long. The primary reason for the moderate rating is that existing competitors with the capital to expand their existing product lines could diminish market share for JJSF. Buyer’s Power (High): JJSF faces little pressure from individual consumers to influence pricing. Unfortunately, several large customers contribute a significant percentage of overall revenues. JJSF’s ten largest customers made up 41% of overall revenue during FY2012. The company’s largest customer accounted for 8% of overall revenue during the same year.3 Also, Taco Bell is currently the largest contributor of revenue for JJSF’s churro segment. Since JJSF is reliant on these large customers, it gives these buyers substantial buying power and is a cause for concern should they decrease their orders or find a substitute producer. This also creates a credit risk for the company since approximately 25 customers have accounts receivable balances between $1 million and $10 million. Supplier’s Power (Low): JJSF’s products are primarily produced from raw materials such as wheat, sugar, and cocoa. Since raw materials can be sourced from numerous sources, suppliers have little influence other than current commodity prices in the marketplace. The primary risk that JJSF faces is the current inflationary environment of commodity prices. One exception is the custom pretzel twisting and funnel cake production equipment that is produced by a third party. The next exception is the company’s frozen beverage dispensers that are purchased primarily from IMI Cornelius, Inc. and FBD Partnership. Drink syrup is purchased through Coca-Cola, Pepsi Cola, and Dr. Pepper/Seven Up Inc. which reduces any one supplier’s influence on syrup pricing.
1
(2013). U.S. foodservice industry forecast. Technomic, Retrieved from https://www.technomic.com/Resources/Industry_Facts/dynUS_Foodservice_Forcast.php 2 http://www.firstresearch.com/Industry-Research/Snack-Foods-Manufacturing.html 3 JJSF Annual Report 2012
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