Page 33 of 131 production, food safety and animal welfare. This can lead to improved opportunities for ex-port for the Danish and European food production.
6.2.4 Technological factors
Lastly, the technological factors relate to how technology can either positively or negatively impact the industry. Technological development is very relevant for the industry, by enabling higher levels of efficiency and productivity in the production. Currently there is an increase in the number of animals which are exported to before slaughter, to countries such as Germany where the salaries are lower (Landbrug & Fødevarer, 2015)
In order to be able to compete with lower-wage countries, investments in production are nec-essary to achieve high efficiency. With the pressure on prices, companies have generally in-vested in efficiency improvements such as new plants, e.g. Danish Crown’s cattle slaughter-house in Holsted or pig slaughterslaughter-house in Horsens (Danish Crown, 2014b).
Page 34 of 131 profitability and subsequent need for economies of scale, combined with the limited amount of pig suppliers and raw materials, causes the threat from new entrants to be extremely low.
6.3.1.2 Processed foods
Apart from fresh meats, Danish Crown and Tican operate in the processed meat industry. Af-filiates such as Steff Houlberg, Plumrose, Tulip in Danish Crown and Direct Table Foods and ZM Nove in Tican are operating in a significantly different industry. In contrast to the Fresh Meat industry, the threat of new entrants is considered moderate to high as there is very little capital requirements related to starting a new food brand and the raw materials can be pur-chased in the market place. Benefits of economies of scale still prevail, but are less important due to higher differentiation of consumer preferences and thus products causing scale to be less dominant. Other barriers to entry are the need for an established distribution chain with high control as products are perishable and the need for size in production to satisfy the retail customers, who are very important in the industry. Yet the investments and resources needed to enter are significantly lower than in the fresh meat market. The affiliates owned by Danish Crown and Tican are large operators and heavily engaged in the Danish market, thus decreas-ing the likelihood of bedecreas-ing threatened although it is still present.
6.3.2 The threat of substitute products
There are several very close substitutes to the products, most dominantly other variations of meat including beef, lamb, poultry and fish. While Danish Crown is also successfully present in the cattle market, limiting their risk of substitution, pork still comprised the bulk share of their revenue and profits. Other meats are considered close substitutes by satisfying the same basic need for food and animal protein. The strength of the competitive pressure will rely on three core factors: whether buyers can easily switch between substitute products, whether the substitutes are priced attractively relative to pork and whether the buyer views the products as substitutes in terms of price (Porter, 1979).
6.3.2.1 Fresh meat
Buyers can easily switch between substitute products, both looking at buyers as well as the end consumers. End consumers can easily shift, causing B2B customers and retail chains to respond to consumer preferences. Furthermore, meat is a commodity product, with only few differentiating characteristics. Pork is relatively cheap compared to fish, beef and lamb and is more closely related to poultry in terms of price, thus poultry may in fact be the biggest sub-stitute to the low cost pork production (MarketLine, 2014). This suggests that Danish Crown is facing competition not only from other pig slaughterhouses, but also face serious substitu-tion from the poultry industry. In relasubstitu-tion to whether buyers actually view the substitutes as relevant, depends on their preferences for special meats and quality – the critical consumer
Page 35 of 131 would indicate a low threat of substitutes, due to the reputation of high quality deliveries of beef and pork products from Danish and European companies, with Tican and Danish Crown both using it as a competitive parameter (Danish Crown, 2016a).
6.3.2.2 Processed foods
While the threat of substitution from poultry is significant, the threat of substitution is even greater when observing the industry for processed food. The ready meals, sausages, meatballs etc. sold by the affiliates of Danish Crown and Tican are subject to a vast amount of substi-tutes ranging from other similar products based on meat to literally anything that can be eaten.
If the price of the product is too high, the consumers may easily substitute it for another prod-uct to satisfy their hunger, thus the substitution threat can be considered very high.
6.3.3 Bargaining powers of buyers
Neither Danish Crown, Tican nor other companies in the industry directly approach the end consumer of their products, but reach them through three channels. The most common cus-tomer types are the retail traders, Business to Business (B2B) and Food service. Both the pig production industry and the food processing industry share similar market lines.
6.3.3.1 Fresh meat and food processing
The retail traders refer to the sale of processed meat to supermarkets and large chains such as Netto, Føtex and Kvickly in Denmark as well as large variety of foreign dealers such as Aldi and Lidl in Germany and the UK (Danish Crown, 2014b; Tican, 2014a). With regards to the B2B segment, Danish Crown operates mainly with other companies that purchase meat direct-ly from the slaughterhouse with the purpose of further processing such as producers of ham, sandwich fillings etc. The final segment, food service, refers to the sale of meat to restaurants, institutional kitchens etc. (Danish Crown, 2016a).
While the pig slaughtering industry and the food processing industry share similar market lines, the bargaining power of buyers is relatively higher for the food processing industry.
This is mainly attributed to the higher fragmentation of suppliers of processed food in Den-mark, whereas the fresh meat production is very concentrated with Danish Crown and Tican.
The larger overhead costs in Denmark due to general price and wage level causes a significant threat as the consumers may easily switch to low cost products imported to Denmark. Retail customer especially hold a large bargaining power due to the share of sales through them, but also the trans-border nature of several of the largest retailers such as Lidl, Aldi and Netto.
Furthermore, there is increasing focus on discount products in several of the large markets in Europe such as Denmark, Germany and the UK, with discount retailers outperforming tradi-tional retailers (A.T. Kearney, 2011). The increased focus on price in the end-customer seg-ment spills over to production due to the high bargaining power of the retail, B2B and
corpo-Page 36 of 131 rate customers, making it increasingly important for producers to have a strict cost focus in production. To accommodate these movements, Danish Crown has moved a part of their pro-duction to Germany to stay competitive in terms of price (TV2, 2014) as well as focusing on cost, with several other companies taking similar steps.
6.3.4 Bargaining powers of suppliers
The bargaining powers of the suppliers are considered identical for the food processing and pig production industry as they both rely on the same raw materials, meat. In the Danish per-spective, the important suppliers are an integrated part of the value chain due to the coopera-tive ownership structure. Other suppliers in the industry include suppliers of machinery, med-icine for the pigs, materials for packaging etc. while the food processing industry requires other raw materials such as spices, flour, vegetables etc.
6.3.4.1 Fresh meat and food processing
The majority of suppliers in Denmark are different from the typical suppliers of raw materials elsewhere, as a consequence of the cooperative structure. The individual pig breeder will have a cooperative share, similar to an ownership share in the company, based on the size of his annual delivery rates of live pigs (Danish Crown, 2015d; Tican, 2012b).
The ownership type facilitates an optimal production planning for the pig breeders, as they are certain that their livestock will be purchase if they increase their capacity. For Tican, due to limited capacity, the articles of association however stipulate the need for approval if live-stock capacity is expanded beyond a certain threshold (Tican, 2012b). While the raw materials supply is stable, it could also potentially cause the companies to purchase more pigs than market conditions would require. Some degree of surplus livestock can be stored in freezers, however inconveniently and with cost. The mutual benefits between the cooperative parent and the interest of their suppliers / shareholders are substantial enough to offset the cost of occasional overcapacity for Danish Crown.
The obligation to deliver majority of livestock to the cooperative company in which the sup-plier is a member ensures a constant flow of raw materials, regardless of the economic situa-tion. The pig breeder is obligated to deliver at the current quoted price per kilo which deprives the breeder’s ability to postpone the sale of livestock until the prices settle in their favour.
Consolidation of suppliers is a general trend in the industry with both fewer breeders with increasingly large farms. This movement is suggestive towards a high bargaining power of suppliers who are becoming fewer but larger entities.
Page 37 of 131 6.3.5 Rivalry among existing competitors
Rivalry among existing competitors relate to the current competition that is faced by Danish Crown and Tican. Rivalry causes firms to use tactics in order to secure their position in the market, such as price competition, product introductions and heavy advertising (Porter, 1979).Danish Crown and Tican operate on both domestic and international markets and is generating the majority of their revenue streams from export markets. This imposes a logisti-cal limitation for the slaughterhouses, as they are torn between positioning their slaughter-house near their export markets and the pig producers due to the cost of transportation. As such, Danish Crown has slaughterhouses located in countries such as Denmark, Germany and the UK to decrease transportation costs (Danish Crown, 2015a).
Danish Crown is among the largest producers of pork on both the European and the global market measures in total pigs produced. However, there are currently a large movement to-wards consolidation within the pig producers, the slaughterhouses and the food processing entities. If Danish Crown does not keep up with this development, they risk losing competi-tive advantages related to economies of scale (Danish Crown, 2015a). The recent consolida-tion trends across various stages of the value chain can be seen as a consequence of excess capacity in the industry, following Koller (2015) categorization of motivations. Thus, the con-solidation trend could also be a way to keep cost low. Tican is obviously subject to fierce competition from Danish Crown, due to the relative resources and size. Furthermore, key markets beyond Denmark are very similar with the UK, Germany, Poland, China and Japan being key markets for both companies, thus intensifying competition.
Looking towards European competitors, the majority of the European competitors are focused on national markets, and not export, which increases the competitive advantage of Danish Crown on the international markets., Both Tican and Danish Crown are in a strong position relative to new entrants and other competitors by having a stable and growing supply of ani-mals for slaughter and established brands and private label agreement in the processed food market on their key markets. Entry through increased imports is however a threat with poten-tial to increase rivalry in the Danish market significantly. In an international perspective, competition is fiercer both within fresh meat and processed meats. Foreign pig producers such as the German SB Pork (Tönnies) are growing domestically, but have also managed an slight-ly increasing production in Denmark whereas Danish Crown are experiencing a decline in total pigs produced in Denmark.
Generally, the competition is moderate to high with products that can be characterized as commodities with many close substitutes prompting large advertising budgets and heavy fo-cus on new product introductions to accommodate changing fo-customer preferences.
Further-Page 38 of 131 more customers and distribution to end consumers are dominated by a few large players with high bargaining power, increasing competition and price pressure in the industry.
6.3.6 Summary of Porters Five Forces
The first research area of the thesis seeks to analyse what characterizes the fresh meat and processed food industries, which has been analysed through the use of Porters Five Forces.
The findings of each of the two primary industries can be found in below in Figure 6-1. Gen-erally, the food processing industry is characterized by a more difficult environment, however companies present in both markets can leverage knowledge and insights as well as possibly lower cost in the food processing industry by having access to stable supply of raw materials and through scale, thus positioning Danish Crown and Tican in relation to their competitors.
Figure 6-1 Summary of Porter's Five Forces (own creation)