Greg's Porter's 5 Forces, well 2 of them

The Power of Suppliers

The power of suppliers, as it pertains to competitive forces, refers to the ability of an industry’s suppliers to usurp retailer’s profits by raising prices. According to Michael Porter in The Five Competitive Forces That Shape Strategy, an industry’s suppliers are powerful if:

• It is more concentrated than the industry it sells to.
• The supplier group does not depend heavily on the industry for its revenues.
• Industry participants face switching costs in changing suppliers.
• Suppliers offer products that are differentiated.
• There is no substitute for what the supplier group provides.
• The supplier group can credibly threaten to integrate forward into the industry. (Porter, 2008)

The first point refers to the availability of multiple suppliers. Coffee suppliers are not particularly concentrated. Therefore, coffee retailers have several options when looking for a supplier; Green Mountain Coffee Roasters, Crimson Cup, Stone Creek Coffee, and Kaldi just to name a few. This enables management to shop for the best deal among many suppliers.

The next four points from Porter’s list above can be answered in a favorable fashion for coffee retailers. Suppliers do depend on the industry for their revenues, switching costs are minimal, all suppliers basically offer the same products (although many suppliers try to differentiate their products with unique names), and substitutes are plentiful.

The final point from Porter’s supplier power list does provide reason for concern for coffee retailers. It is very easy for coffee suppliers to integrate forward and become retailers as well as suppliers. This is evident in the fact that two of the industry’s main suppliers; Green Mountain Coffee Roasters and Crimson Cup, have opened coffee shops.

Overall, suppliers to coffee retailers do not have significant power. Competition is considerable and switching costs are minimal. The main area of concern is the suppliers’ ability to integrate foreword.

The Power of Buyers

Buyer’s power pertains to the ability of buyers to negotiate lower prices. Michael Porter (2008) has also provided a list for determining if an industry’s buyers have power:

• There are few buyers, or each one purchases in volumes that are large relative to the size of a single vendor.
• The industry's products are standardized or undifferentiated.
• Buyers face few switching costs in changing vendors.
• Buyers can credibly threaten to integrate backward and produce the industry's product themselves if vendors are too profitable. (Porter, 2008)

Coffee retailers’ customers are final consumers. Porter’s list pertains largely to business-to-business customers. The buyers in the coffee retail industry essentially have their power limited to switching vendors. Prices are typically not negotiated and the likeliness of many buyers to integrate backward is low. Therefore, buyers in the retail coffee industry have little power.

Porter, M. (2008). The five competitive forces that shape strategy. Harvard Business Review, 86(1), 78-93.