Pizza is among the key fast food items that are consumed across the world. In 2018, the international pizza market was estimated to be $ 134 billion. The following discussion evaluates the pizza industry using porter’s five forces tool.
Threat of new Entrants
Setting up a new pizza restaurant is dependent on having the availability of finances to get a restaurant on rent, hire the employees that can prepare the food items and also manage the operations of the restaurant. Along with that, the business owners have to invest in marketing of their restaurant in order to compete with the existing players in this industry. To open up a new pizza venture requires moderate level of financial investment, however, the presence of large firms managing chain of franchises creates barriers to entry. The new entrants face immense pressure to keep their profitability while offering price and quality that is seen as appealing by the consumers. The threat of new entrants in the pizza industry is also associated with the ability to achieve economies of scale, which is possible in cases where the restaurant is able to form long term supply contract. Due to these factors, it can be seen that the pizza industry has moderate level of threat of new entrants.
Bargaining power of Buyers
Pizza industry targets customers of different age groups, with a distinct preference for fast food, mainly pizza. These customers are quality conscious and are seeking different types of pizzas in affordable prices (Dejournett, Hynum & Green, 2018). Since changing from one pizza restaurant to another doesn’t entail a high cost, these low switching cost makes it easier for the customers to influence the price of menu items. As a result, the pizza restaurants are not able to charge high prices in order to maintain customer interest in their brand. However, some large brand names can charge a higher price for their pizzas as compared to the competitors and the customers continue to purchase from their franchises due to the brand image. Therefore, it can be seen that the buyers in pizza industry have a high bargaining power.
Bargaining Power of Suppliers
The raw material required for making pizza is acquired through suppliers who hold considerable degree of bargaining power. Smaller restaurants have limited influence on the price of these raw materials, making it hard for them to use supplier contract as a major point of advantage. According to Barrett (2017), cheese is the most consumed ingredient by the pizza chains, making it the highest area of expenditure in the domain of raw materials procured for manufacturing of pizza. The suppliers have a comparatively lower bargaining power in case of international pizza franchises, but in case of local and small set ups, the supplying companies can charge a price that leaves a higher level of profit for them than in the supplier contracts with larger businesses. Owing to these dynamics, the suppliers in pizza industry can be viewed as having a moderate level of bargaining power.
Threat of Substitute Products
The threat of substitute products in case of pizza industry is quite high. There are other fast food items readily available in the market such as sandwiches, tacos and burgers. Apart from the alternative range of fast food, rival pizza restaurants constitute a part of the industry, offering substitute options to the customers. In addition, to reduce the threat for substitute products, pizza businesses need to be innovative. For instance, pizza hut came up with an addition of dairy free pizza, attracting the customers who are seeking vegan based food items (Rowland, 2017).
Competitive Rivalry
The pizza industry is filled with different companies manufacturing a diverse range of pizzas, making it a high competition industry. Some of the international franchises are Pizza Hut, Papa John’s, Dominos and Little Caesars (Hitt, Ireland, & Hoskisson, 2012) with each of these businesses using promotional offers and innovative recipes to gain a higher market share. The pizza restaurants have to focus on quality and convenience of the customers in order to retain their market share and continued stream of profitability (Barrett, 2017). The competitors in the pizza industry further use technology to keep an edge over other firms to deal with high competitive rivalry.
References
Barrett, L. (December, 2017). The 2018 Pizza Power Report: A State-of-the-Industry Analysis. Pizza Magazine. Retrieved from http://www.pmq.com/December-2017/The-2018-Pizza-Power-Report-A-State-of-the-Industry-Analysis/
Dejournett, B., Hynum, R., & Green, M. (December, 2018). The 2019 Pizza Power Report: A State-of-the-Industry Analysis. Pizza Magazine. Retrieved from http://www.pmq.com/December-2018/The-2019-Pizza-Power-Report-A-State-of-the-Industry-Analysis/
Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2012). Strategic management cases: competitiveness and globalization. USA: South-Western Cengage Learning.
Rowland, M. P., (November 29, 2017). Pizza Hut Restaurants Just Added A New Cheese, And Their Choice Will Surprise You. Forbes. Retrieved from https://www.forbes.com/sites/michaelpellmanrowland/2017/11/29/pizza-hut-vegan-cheese/#265843bb3765