Assess whether Free-From Ltd should continue to only produce in the niche market of allergen-free foods. [10]
Always start your answer with a definition.
A niche market is a small, specialized market for a particular product or service.
Yes:
Operating in a niche market could be seen as a low-risk strategy.
The price of allergen-free food is up to 250% higher than similar standard products that contain gluten or dairy.
This leads to better profit margins, which means it may not be risky as they’ll only need to sell a small number of products to break even.
Moreover, the niche market of allergen-free goods is price inelastic, which means as they increase prices then there will be a proportionally smaller fall in sales.
This is good, as if Free-From Ltd want to increase revenue they know they can increase the prices further.
This makes it a much lower risk option than competing with the bigger companies in the mass market.
On the other hand the fact Free-From Ltd only operates in a niche market could be considered a big risk.
Due to the successful growth of the gluten-free market it has now attracted the attention of large firms such as Wall’s and Premier Foods.
This is bad news for Free-From Ltd as these larger firms can utilise economies of scale on a massive level, which allows them to offer much cheaper prices, as buying in bulk lowers the average cost per unit.
These savings can be passed on to customers, which makes the larger companies much more competitive in premium-priced markets.
This may lead customers away from Free-From Ltd, as cheaper alternatives that offer the same benefits would be an attractive proposition for customers.
This will decrease revenue and pose a major risk to the company.
In conclusion, Free-From Ltd supplying the niche market is a risky decision to a relatively small extent.
Being in a niche market means they can charge prices up to 250% higher and this coupled with the fact that demand is price inelastic is the most important point that puts the business in a strong position.
However, it depends on how cheap competitors like Wall’s and Warburtons will offer the products.
If the competition increases then the benefits Free-From Ltd currently receives will surely go as prices are squeezed and demand becomes more price elastic.
