How does market power impact on the company?

Kettleby Foods reliance on one buyer can be a blessing but also cause problems. The relationship between the companies has to be extremely good. Kettleby Foods are very aware of the market power that their partner has; they know that Tesco also source ready meals from other suppliers and it is not forgotten that the competition from other suppliers could affect Kettleby Foods.

In this respect, Michael Porter's 'Five Forces Framework' can be highly relevant.

For Kettleby Foods, the bargaining power of their buyer (Tesco) is extremely high given that almost 100% of the output goes to that buyer. The business needs to manage the relationship with the buyer very carefully.

At the same time, Kettleby Foods know that it too has a degree of power over its suppliers. The volume of raw materials that they are buying on a regular basis means that it is an important buyer for those lower down the supply chain.

The company will then have to be mindful of possible new entrants to the industry and to the substitutes for its products - in this case it could be home made foods as well as the ready meals provided by Sainsbury, Birds Eye, Morrisons, Waitrose, Asda, Marks and Spencer and so on. The supermarket business is highly competitive; those that do not adapt get left behind quickly as Sainsbury has found out. The fact that Kettleby Foods has the fastest growing supermarket chain as its main buyer may be good news at the moment but what about in ten years time?

Kettleby Foods also knows that its rivals could quite easily approach Tesco and offer to produce a product at a lower margin thereby undercutting Kettleby Foods. In theory Tesco cold almost hold an open auction between the firms to get the best price. In reality, this may not happen if the relationship and trust between Kettleby and Tesco is strong. It is important that Tesco have a reliable supplier; if Tesco drove prices too low and Kettleby went out of business as a result of having its margins squeezed, it would not be in Tesco's interest, even if they were big enough to secure alternative supplies. Whilst the product is of high quality and whilst Kettleby meet the demands placed on it by Tesco, the two businesses should continue to prosper.

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