2.3 Porter’s 5 forces Model
2.3.1 Threat of new entrants
The apparel industry has very low entry barriers. Entering the market does not require huge amount of capital. The setup can be as simple as a person selling his own designed apparel online which only required relatively low skills level.
In fact, the fashion retailing is a diversified market with numerous single shop retailers, local chain stores, international fashion chain stores, online shop… etc. However, if we focus on the fashion retail chain with economy of scale in production and distribution, that would create significant barrier for entry. Moreover, brand identification and production differentiation also set a barrier for entrance.
2.3.2 Threat of substitute products or services
The threat of substitute products in the fashion retailing is very high. Customer can buy another piece of garment in turn satisfying the same need. The competitors can even copy ...view middle of the document...
3.3 Bargaining power of customers
Customers’ switching costs are low and the brand loyalty is also low in the apparel industry. There are also substitute in the market available to them. However, if we look at the buyer’s concentration to retailer concentration, together with low possibility of customer integration, the fashion retail chain also enforced certain power over their customers.
For Inditex, they have put effort on differentiating themselves from other shop by building up their image on quality high fashion with middle price. The designs of apparel is also not one-way from the designer but taking into account the purchasing pattern, information gathering in the front line and retail stores so as to build up a bottom up demand.
2.3.4 Bargaining power of suppliers
For the fashion retailing industry, the bargaining power of suppliers is low because there are many suppliers for garment manufacturing process as well as supply of raw materials especially in the developing countries (i.e. China, Bangladesh etc.). The switching cost of suppliers is also low since the technology or skills of workers required are low. The fashion retail brands command strong bargaining power and able to push the supplier’s margin for large orders.
Moreover, Inditex Group has adopted a vertical integration strategy and houses their own production facilities primarily for the production of most fashion forward items in order to respond quickly to the fashion changes. In fact, the Group mainly outsource the sewing procedures which are relatively simple. They are also expanding their supplier pool and has own management procedure on the supplier list.
2.3.5 Intensity of competitive rivalry
The market comprised of few large companies acquired significant market share while the rest of the share is competing among many small sized retailers. The exit barrier is high due to high fixed and SG&A costs and excess inventory with lots of cash tied up in out-of-fashion inventory. On the other hand, the low switching cost of customer and transparent information on the pricing and fashion items among the retailers also induced the competitive market. Indeed, the high advertising expense to revenue indicating the intense competition in the market.