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In Packaged Foods, Success Is More Than Just Good Taste

Scale matters, so major players have a competitive edge over smaller peers.

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When we evaluate businesses, Morningstar analysts frequently employ a widely recognized framework known as Porter's Five Forces. Since it was first developed by Harvard business school professor Michael Porter in the 1970s, the Porter's Five Forces model has had a profound impact on the way business leaders assess their markets, and shape their business strategies. Quite simply, the Porter's Five Forces paradigm has evolved into one of the most commonly used analytical tools for assessing the strategic and competitive advantages and challenges of individual companies, as well as entire industries.

Here at Morningstar, we find the Porter's Five Forces model to be especially useful when evaluating companies we cover in the highly competitive packaged foods business. In fact, using Porter's model, we can identify a key industry truism:  Despite its weak supplier power, the packaged food industry's potent combination of intense rivalry, strong buyer power, and substantial number of substitutes make it a challenging one in which to develop a sustainable competitive edge. The packaged food competitors who are best-positioned to reward investors with solid cash flows and long-term excess returns on invested capital tend to have three secrets to success: significant economies of scale, expansive distribution networks, and leading brands.

Erin Lash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.