People's Food's customers include hotels, restaurants, shops and end consumers.33 Hence, People's Food faces a market that has numerous buyers, where most buyers are small in terms of their share of purchases from the company. In such a situation, People's Food is unlikely to face pressure from its buyers to lower the prices on its products.
People's Food's meat products (mainly pork though chicken comprises a limited share) are considered to be staple food items by the Chinese consumers. Pork is the most popular meat consumed in China, accounting for 68% of all meat consumption in the country. Indeed, China is the world's largest pork consuming country, accounting for 50% of global pork consumption. What used to be seen as a luxury, pork is now a staple meat item given China's robust GDP growth and increasing disposable income of the Chinese consumers. As a result, the growth rate of meat consumption was 9% each year for the past four years.34 Since pork is such a staple item in the diet of the Chinese consumers, they will still purchase it regardless of price changes. As such, buyers have limited bargaining power against the pork sellers.
Currently, the Chinese consumers do not have much brand awareness of the products they buy and this applies to food items. A survey found that the Chinese consumers do not bother themselves with the branding and packaging of meat products, instead they simply purchase what is on the shelves.35 Given this nonchalant attitude towards different brands, People's Food is taking up the challenge by positioning its "Jinluo" brand of meat products to be of higher quality than the meat products of their competitors.
At present, the "Jinluo" brand is already among the top 10 brands for meat products in China.36 However, many consumers are still unaware of the "Jinluo" brand.37 If People's Food can successfully convince the Chinese consumers that their meat products are indeed more hygienically prepared and of much higher quality, thereby making the Chinese consumers prefer their brand over others in the market, the company will have more bargaining power over the consumers and be able to price their products at a premium. The current market trend seems to favor People's Food's strategy due to the Chinese government's increasing hygiene standards for food items38 and shifts in consumers' preferences for higher quality products as disposable income rises.
However, all is not so rosy for People's Food. It is important to bear in mind that People's Food is operating in an industry where there are over 2000 players and despite being the largest player in the market, People's Food only commands 0.6% of market share as of 2001. This means that consumers have many different brands available to them and can easily switch between brands, as there are virtually no switching costs involved. Further, the entry of China into the World Trade Organization will only serve to increase the competition in the meat products industry as foreign producers, once denied access into the China market due to government restrictions, will now be able to compete with the local companies.40 This will benefit the consumers as they can now choose among different local as well as foreign brands. Local companies such as People's Food will have to consistently differentiate themselves in terms of price or product offering.
From the analysis above, it appears that neither People's Food nor consumers have significant bargaining power over each other. The meat products industry currently functions almost like a perfectly competitive market with numerous buyers and sellers and where the product is not very much differentiated in the eyes of the consumers as at present. Hence, it is fair to say that People's Food cannot as yet price their meat products at a premium and buyers cannot demand lower prices from People's Food.
People's Food gets its supply of pigs mainly from rural families.41 One of People's Food criteria in choosing a location for its production plant is that there must be an abundant supply of pigs and pig farms nearby. This is to ensure that supply will not be disrupted and to reduce costs.42 Cost savings arise in the form of reduced transportation costs due to close proximity and cheaper prices of pigs as a result of abundant supply.
As evidence of People's Food's ability to keep its raw materials costs low is the acquisition of its fifth plant in Daiqing, Heilongjiang Province. The acquisition, completed in April 2002, is a strategic move by People's Food as it ensures an abundant supply of pigs for People's Food as well as the existence of a well-connected transportation network and a readily available market.43
Since People's Food sources pigs mainly from rural families mainly, it is unlikely that these rural pig farmers have the bargaining power to demand higher selling prices for their pigs. People's Food is also likely to have many suppliers in order to meet its production requirements and hence is able to play suppliers off against each other. This puts People's Food in the advantageous position of being able to bargain for low prices for pigs. Therefore, the bargaining power of suppliers only constitutes a weak force against People's Food.
With regards to the threat of potential entrants into the pork industry, the low entry barriers means it is easy for new entrants to break into the industry. This will represent a force against the incumbent firms. However, People's Food will be in a good position to counter this force given its large market share in the China market at present and its "Jinluo" brand, which is one of the top 10 brands in China.
The pork industry is a highly fragmented industry with more than 2000 players. This should imply intense competition among incumbent firms in terms of either price or product differentiation. But in reality, competition in the industry is weak as many of the players are small-scale family-run enterprises and inefficient state-owned companies. As such, the force due to domestic rivalry in the pork industry will be negligible.
There are numerous buyers of the pork industry and the purchases of these buyers seldom account for a substantial portion of each pork producer's total revenues. Thus, these buyers do not have much bargaining power against the pork producers to ask for lower prices. However, the pork producers themselves are also small in terms of their individual market share and none of them will be able to raise prices substantially above the industry average. Thus, the buyers do not have much bargaining power over the pork producers but the pork producers similarly do not have much bargaining power over the buyers too.
Most of the suppliers to the pork industry are the small rural farms. As such, these suppliers are not able to ask for higher selling prices for their pigs. Pork producers like People's Food are also likely to contract for many suppliers which puts them in a position to source for the cheapest suppliers and to play suppliers off against each other. Hence, suppliers to the pork industry do not have any bargaining power against the pork producers. This will act in the interest of the pork producers.
The substitute products to pork are other meat products such as chicken, beef and mutton. Although there are numerous meat products that are substitutes for pork, it should be noted that pork is a staple food item for the Chinese. Therefore, unless some drastic events occur, such as serious pig diseases, pork will likely enjoy high consumption even with many substitute products available.
In conclusion, we feel that the pork industry in China has a favorable outlook for People's Food. This is due to the low domestic rivalry in the industry and negligible bargaining power from both buyers and suppliers. The threat from substitute products is moderate as there are various alternatives available but the significance of this threat diminishes in view of pork being a staple item. Lastly, the low barriers to the industry present incumbent firms with a strong threat of potential entrants. But in People's Food's case, this threat is only of moderate concern since the company enjoys the largest market share in the industry.