Michael Porter's (1998) five forces is a convenient framework for assessing the structure of any industry which are
- Bargaining power of Suppliers
- Bargaining power of Buyers
- Threat of New Entrants
- Threat of substitutes
These forces analyses any industry in depth and determines the profit potential in an industry by exploring the economic factors and also provides a basis for generating strategic choices.
Bargaining power of suppliers
Vodka is produced by fermented wheat, rice or molasses of sugarcane and Brazil being the top producers of sugar (buzzanell et al 1988), the molasses or byproducts of sugar production are available in plenty and ethanol which is one of the product in the early stages of vodka manufacturing is also available in plenty and Brazil is also one among the top ethanol producers in the world other major raw material being water is also available in plenty in Brazil. Hence there are numerous potential suppliers of raw materials which reduce the power of suppliers to bargain. All these factors together with cheaper labour costs make Brazil an ideal country to start vodka manufacturing industry.
Bargaining power of buyers
Brazil is one among the highest alcohol consuming countries; it has many small buyers which are bottle shops and pubs and few large buyers like supermarkets including WalMart Brazil. Hence buyers hold minimum bargaining capacity which will in turn increase the profit for a firm.
Threat of new entrants
Acai berry flavoured vodka as a product; barriers to enter the market are lower for existing vodka companies as the startup costs are low. Though acai berry flavoured vodka is a unique product which can gain popularity quickly but can be easily produced by other competitors to gain the market share. Building brand loyalty is very important tactic to withstand the force of new entrants. Creating alliance with Vitton 44, the supplier of acai berry would create an economy of scope and by producing large amounts would deter new entrants.
Threat of Substitutes
The most popular alcoholic beverages (Abramson, 2006) in Brazil are Beer and Cachaca and latter also being Brazilian food drink. Cachaca is produced by fermented sugarcane juice where as vodka is produced by molasses of sugarcane and both the drinks vary largely by taste. Cachacas is widely used in pubs to make Brazil's own favourite cocktail caipirinha and now slowly vodka is making its way into caipirinha and few pubs are using vodka instead of cachaca and there were few protests in Brazil against the use of vodka in caipirinha. Vodka and Cachaca act as substitutes for each other. The other major factor is that Cachaca is available very cheaply and also homemade in Brazil where as Vodka (Fuhrman, 2008) is seen as the premium product and also had highest growth in volume in 2006. This can affect the prices that can be set for the flavoured Vodka.
Rivalry among Competitors
This is the strongest force among all the forces and Brazil's vodka industry has major players from all parts of world and many from United States where as flavoured vodka especially acai berry flavoured vodka is a new product in the Brazil's market and if it gains popularity over time, the other competitors can enter the market and make the competition intense which can affect the prices and profit levels. As a first mover to enter the market, 42 Below has opportunity to gain market leadership and form stronger relationships and build customer loyalty which can reduce the threat of rivals.
- Michael Porter, 1998, "Competitive strategy: techniques for analyzing industries and competitors".
- Buzzanell, Peter, and John C. Ronney, 1988 "The Brazilian Sugar and Ethanol Industry: Performance and Prospects." Sugar and Sweetener Situation and Outlook Report, Economic Research Service, July 1988.
- C. I. Abramson, 2006, "A Price Survey Comparison of Alcoholic Beverages with the Five Basic Food Groups in Paraiba, Brazil", Journal of Social Sciences 2 (4): 100-103, 2006
- Elizabeth Fuhrman, 2008, South America: A Brazilian powerhouse, Beverage Industry; Mar 2008; 99, 3; ABI/INFORM Global, pg. 17