Pestle Analysis Of Confectionery Industry

The following sample essay on Pestle Analysis Of Confectionery Industry discusses it in detail, offering basic facts and pros and cons associated with it. To read the essay’s introduction, body and conclusion, scroll down.

Although it has been nearly 4 years since the destruction of the twin towers in the US, terrorism remains a very real threat in much of the world, and a powerful political and economic influence on business. The political unrest caused by insurgencies is very detrimental to the economic situations of countries, affecting economic factors like interest rates, consumer spending, and foreign investment.

Terrorism is especially relevant to the confectionery industry – terrorist attacks have taken the form of food poisoning in the past1. Companies in the confectionery industry will have to select the countries that they operate in wisely, and take the necessary security measures to ensure that their products are not tampered with.

The ALF in 1984 claimed to have poisoned MARS Bars in the UK. Every MARS candy bar in the UK was removed from the shelves at a cost of over 3 million pounds.

Again, in 1988, the ALF terrorists poisoned a lot of confectionary sugar at a Swiss chocolate factory with rat poison and sent the results to the media. As a result the company had to halt production and clean the factory at a cost of over 30 million US Dollars.

An economic trend with profound effects on operations of Western European confectionery companies has to do with the cost of labour. Growing wages are currently pushing production of confectionery products out to Central and Eastern Europe.

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In particular, the Czech Republic is emerging as new centre for European confectionery production2. Companies that do not quickly adapt to this trend will find themselves at a cost disadvantage, which will hinder their competitiveness in the industry.

Retail Pestle Analysis

Changes in world demographics also have weighty sociocultural implications for the confectionery industry. Western European populations are growing very slowly and in some instances actually declining (Eastern European countries have negative growth rates) while Africa, parts of Asia and South America have rates of population growth near 3 percent per year. Europe is also said to have an ageing population, whereas Africa, South America, and most of Asia have populations that consist of 30-40% who are under the age of 15 (See Appendix A). There is a grave threat for confectionery companies operating in European countries due to the declining and aging population. An extremely substantial portion of the confectionery market is made up of children; even adult purchases are often motivated by children. These threats have to be addressed in order to maximize profits in the industry. The growing populations in Asia and South America, on the other hand, are a source of much opportunity. Though they are outside of the Western European market, it would be wise for the large multinationals to start giving them more attention. Perhaps marketing strategies in Europe may need to be adjusted while using the original strategies to penetrate Asia and South America further.

A relevant sociocultural trend occurring in developed countries today is increased health consciousness; there is growing public concern over the ingredients in products, appropriate labelling, and other related health issues. Consequently, ethical marketing is becoming more prevalent, both in Europe and in the United States3. Much of the focus has been on children’s diets being loaded with sugar, salt and fat, as well as the related issue of childhood obesity.

In the UK, Martin Paterson, Deputy Director General of the Food and Drink Federation made a statement to the press in February 2003 in response to heightened media coverage of the ethics of targeting children with food and drinks, saying advertisements should not: Encourage children to eat or drink frequently throughout the day; condone excessive consumption; suggest confectionary or snacks should replace balanced meals; take advantage of children’s natural sense of loyalty4.

This trend has legal implications as well. The food industry is finding itself increasingly under pressure from legislators to accurately inform customers of the nutritional value of their products5. Confectionery companies will have to adapt to the laws that are passed due to these changes in consumer lifestyles and perceptions, or face legal consequences.

Growing health consciousness has sparked the pursuit of healthier chocolate. For example, recent research has shown that natural cocoa contains the highest capacity of the antioxidant procyanidin6 has allowed for technological developments such as the process of retaining polyphenols in cocoa beans throughout chocolate processing7. Another technological development resulting from growing concern for the environment is the use of biodegradable wrappers.

Australia’s confectionary manufacturer Cadbury Schweppes was the first manufacturer in the world to implement a new form of environmentally friendly packaging in 2003. They used the biodegradable polymeric material for packaging Cadbury Milk Tray Chocolates8.

These new developments are vital opportunities for the industry in its current situation, and if exploited, may be the means by which companies can quell some of the threats brought about by the sociocultural trend of increasing health consciousness.

Threat of Entry

Entering the industry to compete with the leading players is extremely difficult. Scale economies in production, research, and marketing are very high. In the two years from December 2002, Mintel (2004) recorded nearly 300 new product launches into the chocolate confectionery market and an average of �8.67 million spent by the top three advertisers in the industry. Product differentiation is also a powerful entry barrier. Branding plays a key role, particularly in the impulse market. And according to Porter (1985, p. 135), overcoming customer loyalty towards more venerable players is likely to cost new entrants substantial amounts. Capital requirements are also very high. One of the market leaders, Cadbury Schweppes, had tangible fixed assets amounting to �1.63 billion and total assets amounting to �9.7 billion in 20049. Overall, the huge investment needed to create and maintain a market-leading brand means that it is difficult for smaller, or new, players to enter the market (Mintel, 2004).

Bargaining Power of Suppliers

The main inputs for the manufacture of confectionery include dairy products, sugars, cocoa and other ingredients. Since these products are commodities, which can hardly be differentiated and do not imply high switching costs for buyers, their suppliers have little bargaining power over chocolate manufacturers (Porter, 1985, p.137). However, there are also more specialist additions supplied to the industry, such as flavours, fragrances, chemicals, and machinery for cocoa processing and confectionery manufacturing. These suppliers would have more bargaining power than those previously mentioned since the products that they supply are more specialized, and imply higher switching costs (Porter, 1985, p.137). A chocolate manufacturer would, for example, be highly dependent on the company that supplies it with machinery. The supplier would be responsible for things like training employees to use the machinery as well as its service and maintenance.

Intensity of Rivalry

However, it is the larger players that dominate the market, particularly for chocolate confectionery. Branding plays a key role, particularly in the impulse market. The investment needed to create and maintain a market-leading brand has meant that it is difficult for smaller, or new, players to enter the market. As with other food sectors, there are considerable legislative needs to be met, which requires a larger scale of activity in order to operate profitably. Consumers of chocolate bars and confectionery are very price conscious, especially on basic items. The market is highly competitive and price-cutting is widespread. Retail prices and margins vary widely according to product and outlet. Prices in large food stores, especially for products sold under distributors’ brands, are much lower than those of products retailed by other miscellaneous shops and this has been an important factor in the growth of own labels in this market.

Bargaining Power of Buyers

The retail distribution of take-home and eat-later confectionery is basically done through two groups of channels, i.e. multiple grocers and impulse retail channels. Like with most food products, the major multiples have substantial buying power, and often buy directly from chocolate manufacturers. This is primarily because they buy in very large volumes and because they are highly concentrated. It is also because the product is not of strategic importance to the retailer, since large groceries and supermarkets offer a wide range of products and even offer own-brand ranges. The impulse market experiences a higher level of distribution through smaller outlets such as kiosks, confectioners, tobacconists, and food courts. These outlets have much less bargaining power and According to a retail panel, 87 per cent of the value of sales of chocolate bars of all types went through large grocery outlets in 1995 while the market share of small grocers’ shops was 13 per cent.