It has proved to be difficult for new companies to enter the banana industry. Therefore, there is no strong threat of new entrants into the market. This is due to several factors and entry barriers that exist. These include:
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Banana industry is very concentrated with six companies controlling almost all of the global banana market.
These six companies that control the market are vertically integrated and control the production and distribution of their crop. Therefore, there is little threat of entry on either the upstream or downstream segments of these companies value chain. In addition, this makes access to distribution channels difficult for new entrants.
The capital requirements needed to establish a presence in the industry are substantial. Companies need to invest in land, crop management techniques and crop disease control, transportation technologies and methods, and communication systems.
Economies of scale – Companies in the banana industry have achieved economies of scale due to their size and the fact that they produce one variety of bananas in large quantities.
Existing companies in the industry have formed strong relationships with governments in the regions in which they produce their crop. This could make it difficult for new entrants to enter these markets.
Limited land resources.
Labor intensive industry.
Absolute Cost Advantages.
Rivalry Among Existing Firms
Competitors within the banana industry watch each other very carefully. This is because there are only a few competitors within the industry and their main product is one that is considered a commodity and cannot be differentiated. Therefore, the main dimension of competition has been price rather than product features. The banana industry has had a low percentage of companies leave the industry. Exit barriers are relatively high due to the highly specialized assets that these companies have. There are high cost conditions, which include land, logistical systems, and distribution systems. This also contributes to more intense firm rivalry.
Threat of Substitute Products
Consumers have many options when it comes to the availability of fresh fruit. Other fresh fruit, such as apples, pears, grapes, berries etc. can be purchased in place of bananas. Consumers can easily substitute across product categories. Also, even though bananas are available all year around, the purchasing of fruit has become seasonal. For example, consumers tend to buy apples in the fall and berries and peaches in the summer. Health benefits can also influence the purchase of substitutions. Compared to other fruit, bananas are high in carbohydrates and calories and therefore, consumers may choose berries or apples over a banana if they are trying to control their weight.
Bargaining Power of Buyers
Buyers within this industry are mainly grocery stores and retail stores such as Wal-Mart Superstores etc. The buyers have some bargaining power within this industry because they purchase a large proportion of the supply. However, being such a highly concentrated market, there are not many alternative suppliers to choose from. But buyers can switch from supplier to supplier without a significant expense. Suppliers have high fixed costs, so they need to sell the product. This gives buyers more bargaining power. In addition, buyers are unable to integrate backward and produce the bananas themselves, so this limits their bargaining power.
Bargaining Power of Suppliers
Since there are few suppliers of bananas and many buyers, the suppliers’ bargaining power is substantial. Bananas are available all year around and they have control over price. Other suppliers include suppliers of electricity and pesticides.
There are various stakeholders who care about how the banana industry is run. These include Latin American governments; trade unions and small farmer organizations; retailers; non-governmental organizations (i.e. Human Rights Watch); consumers; employees; shareholders; the communities in which banana plantations are located; and financial institutions that conduct business with these six major companies.
Industry Key Success Factors
Some factors that are critical for performance in the banana industry include strong distribution networks, strong communication networks, government relationships, low-cost production, quality product, and low-cost product.
Industry Driving Forces
Driving forces of the banana industry include:
Economic Forces: Value of the dollar; energy costs; disposable income within markets where bananas are sold; currency exchange rates; unemployment levels within Latin American countries
Political/Legal/Global Forces: Foreign trade barriers; political instability in countries where bananas are produced; demand shifts; environmental protection laws; foreign labor laws
Technological Forces: Investments in technology to improve banana production (fertilizers, pesticides etc.); investments in distribution technology (better product storage and packaging); food safety regulations
Socio-cultural: Eating habits; labor unrest; consumer activism