Low & No Category Evaluation - Porters 5 Forces

The reason I am highlighting Micheal E.Porters 5 Forces Model is that I feel it is a vastly underused but a basic tool, founders should use.

The purpose of this model is to assess the ATTRACTIVENESS of an industry in terms of its profitability.

It is interesting to note that it is suggested that businesses should reassess the market if one of the 5 forces should change.

Obviously this is an industry wide analysis, each company within it will have its own unique forces at play with in the industry.

1. Threat of New Entrants:

• The low and no alcohol beverage market has witnessed an influx of new entrants, driven by the evolving consumer demand for healthier alternatives.I cannot find an accurate stat for this however see below:
• US non-alc industry database contains 3740 companies, but that includes soft drinks.
• Another stat I have is from the Grocer 2022, that states there are 300 no-alc spirits brands globally
• There are now 29 non-alc beers stocked in Tesco
• Barriers to entry are relatively low. New players can quickly develop and launch products, especially in the non-alcoholic beer and wine segments.
• Established brands with a strong market presence and existing distribution enjoy a competitive advantage, which can be a significant barrier to new entrants.
• Buyers know they need a solution for their customers, however in a new category for them they will likely turn to the more established brands, and one’s they recognise first.
• Overall, the threat of new entrants is moderate, but the competitive landscape is evolving rapidly.

2. Bargaining Power of Suppliers:

• Suppliers of ingredients and raw materials for low and no alcohol beverages have a moderate level of bargaining power.
• The market benefits from a wide array of ingredient sources, reducing dependency on specific suppliers.
• Companies that prioritise sustainable sourcing and establish strong relationships with suppliers have a competitive edge. No one knows exactly where Lucky Saint produce their beer, but there is no shortage of supply so nailing that relationship from the offset is key.
• However, in cases where specific ingredients are unique or rare, supplier power may increase, affecting production costs.
• Very few businesses in this space actually produce their own liquid. So controlling consistency and ensuring their is capacity to scale is a challenge.

3. Bargaining Power of Buyers:

• Consumers / retailers hold a significant level of bargaining power in the low and no alcohol beverage market.
• With a multitude of options available, consumers / retailers can easily switch between brands, leading to low brand loyalty. It is paramount to set your brand building stall out early, but in reality this takes along time to seep into the consciousness of consumers.
• For consumer their choices are influenced by factors such as taste, quality, price, and alignment with health and wellness trends.
• For retailers their choices are influenced by the factors above as well as brand awareness, promotional support, training, incentives and merchandise.
• The bigger businesses pumping out non-alc versions of bigger more established brands, can wrap their non alc brands up in larger conversation with retailers giving them better pricing and more promotional support.
• Independent founders must continually meet consumer demands and maintain competitive pricing to remain relevant.

4. Threat of Substitutes:

• The threat of substitutes is high in the low and no alcohol beverage market, driven by the diverse range of available options.
• Consumers can easily opt for alternatives like soft drinks, non-alcoholic cocktails, sparkling water, or specialty tea and coffee. It is the blurring of category lines that interests me the most - how close is an RTD non-alc cocktail, to a functional soft drink ?
• Changing consumer attitudes toward alcohol and a growing focus on health and wellness further enhance the appeal of substitutes.
• Companies must consistently innovate to differentiate their products and retain a competitive edge.

5. Rivalry Among Existing Competitors:

• Intense rivalry characterises the low and no alcohol beverage market, stemming from the industry's growth and evolving consumer preferences.
• Companies compete vigorously on product innovation, marketing strategies, and distribution channels.
• The market is highly fragmented, featuring numerous brands competing for market share.
• High competition encourages innovation but can also lead to price wars, making it challenging for any one brand to dominate the market. As a result, differentiation and effective branding are key to success.

Conclusion:

Companies that successfully navigate these forces by focusing on innovation, brand building, differentiation, and sustainability are likely to thrive in this rapidly changing market.

The current market size is $11billion with a CAGR of between 7% and 9%, and rising. That does still represent a huge opportunity as there is so much white space.

However with the emergence of big brands with big budgets, it is important for independent businesses to have a clear investment strategy that includes a path to profitability as well as a laser focus on their niche of retailers and consumers.