Apparel Retail in China_02

CHAPTER 1 FIVE FORCES ANALYSIS

The apparel retail industry will be analyzed taking retailers as players. The key buyers

will be taken as individual consumers, and clothing manufacturers and wholesalers as

the key suppliers.

1.1 Summary

The socio-political environments that individuals operate within coupled with the need

for individual and group identity makes retail clothing essential to consumers. Where

brand loyalty exists, it is more likely to be to the designer than the retailer, although

this is usually towards the top end of the industry.

However, increasingly there is a growing industry for 'Discount Apparel Retail' with

stores such as Wal-Mart, Costco, H&M or Primark providing, low-cost, prolific-output

fashion. Fashion, by its very nature, is unpredictable. The products are determined by

designers, sub-cultures and creative industries and are subject to sharp and unpredictable changes.

Key suppliers in this industry are clothing manufacturers and wholesalers, with retailers able to source from both.

Although clothing manufacturing remains a significant part of total manufacturing in certain developed economies the ability of retailers in a given country to source from foreign manufacturers means that the effective supplier fragmentation is made greater. The apparel retail industry is fragmented, and there is room for large numbers of smaller players.

1.2 Buyer Power

The apparel retail industry will be considered from the point of view of retailers as industry players. Virtually all buyers are individual consumers, which weakens buyer power. Retailers can differentiate themselves quite strongly through the styles of clothing that they offer. This fragments consumers as style is an abstract concept that defines individuals, to an extent, an extension of personality and therefore highly individualized, which significantly weakens buyer power.

Although there are other possible sources of apparel, such as home-made clothing, generally the demographic and psychological bearing of retail garments is highly important to consumers, further weakening buyer power. However, buyers have negligible switching costs. Where brand loyalty exists, it is more likely to be to the designer than the retailer, although this is usually towards the top end of the industry.

However, increasingly there is a growing industry for 'Discount Apparel Retail' with stores providing, low-cost, prolific-output fashion. Here brand loyalty is associated with the retailer, and switching costs are low, somewhat strengthening buyer power.

The position of retailers at the end of the value chain, making it impossible for them to integrate forwards, means that they are obliged to offer buyers what they want, further strengthening buyer power. Fashion, by its very nature, is unpredictable.

The products are determined by designers, sub-cultures and creative industries and are subject to sharp and unpredictable changes. These factors strengthen buyer power, assessed overall as low to moderate.

1.3 Supplier Power

Key suppliers in this industry are clothing manufacturers and wholesalers, with retailers able to source from both. Recently, significant increases in power cost, dyes & chemical cost and rapidly rising cotton cost have strengthened supplier power in an industry that relies on the availability of raw material.

Distribution channels for apparel industry in China are very diversified - ranging from Hyperindustry and Departmental Store to Commodity industry. The wholesale and clothing manufacturing sectors are fairly fragmented. Switching costs for retailers are not very high: they include the risk that choosing a low-cost supplier involves a more extended supply chain that may not be able to cope with sudden changes in demand in an industry susceptible to changes in fashion.

Suppliers are further weakened by their lack of diversity, which makes the apparel retail industry highly important to their business. Overall, there is low to moderate supplier power in this industry.

1.4 New

Entrants

The Chinese apparel retail industry is undergoing strong rates of growth recent years, which increases its attractiveness to new entrants. Entry to the apparel retail industry does not require large capital outlay; setting up a single, independent apparel retail store is within the means of many individuals, even in countries where median incomes are quite low.

However, in some countries a few large corporations account for a major share of total industry revenues. Their scale economies include the ability to build brands in multiple retail outlets, and greater buying power when negotiating with suppliers.

Negligible switching costs for consumers mean that they are free to transfer their custom to a new player.

However, industry entrants face several other barriers. Retaliation by existing players, such as the launch of a price war, is a possibility, especially where a new entrant moves into a more concentrated segment. The immerging brand strength of the major 'discount' chains is considerable, which may negate much of the effect of low switching costs. Overall there is a strong likelihood of significant new entrants to this industry.

1.5 Substitutes

Substitutes for apparel retail include buying direct from manufacturers, which is facilitated by the growth of online sales. Home-made and custom-made (couture) clothing are also niche alternatives to retail of ready-made clothes. Counterfeit clothing can be a significant threat to revenues in some countries.

However, the socio-political environments that individuals operate within coupled with the need for individual and group identity makes retail clothing essential to consumers. Overall the threat of substitutes to the apparel retail industry is assessed as moderate.

1.6 Rivalry

The Chinese apparel retail industry is moderately fragmented. As described above, there is room for large numbers of smaller players in this industry. Major increases in capacity may be fairly costly to smaller players, if they require the outlay of opening additional outlets, less so if they can be accomplished by taking on more staff on a flexible basis.

While some retailers selling apparel are highly diverse, many retain a strong emphasis on clothing, which intensifies rivalry. A good industry performance over the past five years reduces rivalry, which is assessed as moderate overall.