Competitive forces in the fashion industry

The following section will move from the general environment to the competitive environment. As presented in the theoretical framework of this thesis, the competitive environment of a company is essential to its strategy formation, as the goal of competitive strategies is to identify a defendable position against competitive forces within a given industry. In order to examine the competitive environment of the fashion industry, Porter’s (1980) framework of five competitive forces will be used (p. 4).

5.2.1. Porter’s five forces

Porter’s (1980) five competitive forces include: threat of new entrants, threat of substitute products, bargaining power of buyers, bargaining power of suppliers, and the intensity of rivalry among existing competitors (Porter, 1980, p. 3). These five forces will be used to identify the state of competition in the fashion industry to later on be able to determine how a fashion company can formulate its strategy accordingly.

5.2.1.1. Threat of new entrants

In an industry, new entrants often bring substantial resources, new capacity, and the desire to gain market share. Profitability of the existing companies are thereby threatened. The threat of new

50 entrants is dependent on the barriers to entry in the given industry. The threat of new entry is low if these barriers are high (Porter, 1980, p. 7).

In relation to the fashion industry, economies of scale could force new entrants to either produce on a larger scale or accept a cost disadvantage (Porter, 1980, p. 7). Furthermore, new entrants would have to fight brand identification and customer loyalties of existing brands. In 2017, Nike had the largest global market share of clothing brands, the second largest was Adidas, the third H&M, the fourth ZARA, and Uniqlo came in fifth (Statista, 2020b). Well established brands and companies can also have substantial resources to fight back new entrants (Porter, 1980, p. 14). Opposed to these relatively high entry barriers, access to distribution channels is a low entry barrier in the industry, for instance through an online distribution channel provided by today’s digital age and the increasing prevalence of retail online shopping worldwide (Statista, 2020c).

Today the fashion industry is a trillion-dollar industry and it has been growing steadily throughout the last decade (Statista, 2020d). Furthermore, in the bottom 20 percent of public companies in terms of economic profit the rate of bankruptcy is 3 percent (Business of Fashion & McKinsey & Company, n.d., p. 95). The highest mobility in the industry is also among this bottom 20 percent, 60 percent of the companies ranked here moved out of the group within a five-year timeframe (Business of Fashion

& McKinsey & Company, n.d., p. 95). This indicates low barriers of entry into the fashion industry.

5.2.1.2. Threat of substitute products

Companies within a given industry are competing with other industries producing products that can be categorized as substitute products, as they can limit the potential returns of an industry. Substitute products can be identified as other products capable of performing the same function as the product of the given industry (Porter, 1980, p. 23).

In relation to the fashion industry the threat of substitute products is low, as there exist no clear substitutes to clothing items and it can be seen as a product that is always in demand as people use it on a daily basis. However, technology and innovation might lead to future change within the fashion industry that can potentially disrupt fashion as it is known today and substitute traditional clothes (Lehmann et al., 2018, p. 86).

51 5.2.1.3. Bargaining power of buyers

A buyer group can be powerful in the sense that they can affect the degree of competition within the industry by playing competitors against each other, bargain for better quality and services, and force down prices. All of which has expenses for the profitability of an industry (Porter, 1980, p. 24).

Due to the size of the fashion industry buyers have a wide selection of choices when it comes to different brands, designs, and levels of quality and price. This generally gives them a high degree of bargaining power as they can easily find alternatives (Porter, 1980, pp. 24-25). Furthermore, clothes are used on an everyday basis, and therefore purchased regularly. Products that represent a significant fraction of a buyer's total purchases increase their bargaining power. It also causes the buyers to be more price sensitive and selective in their purchasing behavior. Consumers also tend to be more price sensitive when they purchase undifferentiated products (Porter, 1980, pp. 25-26). The survey conducted for this thesis shows that price is one of the most important factors for the respondents when purchasing clothes (Appendix 8, Q9). This can indicate that they are price sensitive, which can point to a lack of differentiation in the industry. Overall, this high bargaining power of buyers makes it important for fashion companies to understand consumers and their needs.

5.2.1.4. Bargaining power of suppliers

Suppliers can have bargaining power over companies in an industry by threatening to raise prices or reduce quality, which can limit the industry’s profitability. A supplier can for example have this power if the supplier sells to a number of other industries, or if the selection of suppliers is small compared to the size of the industry that it sells to (Porter, 1980, p. 27). If the number of suppliers is limited the supplier group becomes very important to the industry and is not easy to replace.

In relation to the fashion industry it is challenging to determine the total, global number of available suppliers. One reason for this is the often fragmented supply chains of the industry and the fact that the majority of fashion brands do not own their manufacturing and supplier facilities (Fashion Revolution, 2019, p. 9). Brands may work with hundreds or thousands of factories at once in the manufacturing stage of cutting, sowing, and assembling the items. On top of that, additional suppliers for instance deal with cultivation and sourcing of the raw materials and the processing, weaving, and dying of the fibers (Fashion Revolution, 2019, p. 9). This suggests that the industry consists of many suppliers that are potentially replaceable, which in turn gives the suppliers low bargaining power.

52 Fashion Revolution also insinuates that too many fashion companies do not know where their products are made, which makes it impossible for them to assure that proper working conditions and human rights are respected (Fashion Revolution, n.d.b). Kirsti Reitan Andersen also highlighted this challenge of many fashion companies not being in the know/ or having control over their production facilities (Appendix 2, l. 144-145). She argues that higher demands for fashion companies’ level of transparency could increase the control to the benefit of both the companies and their suppliers (Appendix 2, l. 149-151).

The supply chain of the fashion industry has at times been debated in the media, such as with the collapse of the factory Rana Plaza. As mentioned in the introduction, the people that make clothes predominantly live in poverty, with a lack of a living wage and the possibility to negotiate their pay and working conditions. The Global Slavery Index appoints garments to be a predominant product at risk of modern slavery (Fashion Revolution, n.d.b). The predominance of poverty and poor working conditions among clothing suppliers could indicate that the fashion industry is a vital customer to the suppliers, both in terms of livelihood and economic viability, which also leaves the suppliers with low bargaining power. Kirsti Reitan Andersen confirms that especially large companies can exercise power over their suppliers for example by using the implementation of a new technology as a condition for the brand to keep placing large orders with the given supplier in the future (Appendix 2, l. 95-97).

5.2.1.5. Intensity of rivalry among existing competitors

Rivalry among companies in an industry occurs because one or more either sees an opportunity to improve their position or feels pressure. This pressure can be due to other companies’ competitive moves such as price competition, advertising, product launches, and increased customer service. If such moves and countermoves increase, all companies’ risk being worse off than before. However, some competition can also benefit all companies in an industry, one example is advertising battles that can increase demand and the level of product differentiation in an industry (Porter, 1980, p. 17).

Today, the competition within the global fashion industry is more intense than it has ever been before and therefore, fashion companies must strategically consider how to position themselves within it (Amed et al., 2019). The fashion industry is generally dominated by low mobility across performance groups. The companies placed in the top 20 percent in terms of economic profit have a strong staying

53 power and are challenging for other brands to join (Business of Fashion & McKinsey & Company, n.d., p. 95). Consumers from the focus group conducted for this thesis also found big players very visible in contrast to smaller brands (Appendix 6, l. 138-139 & l. 142-146). According to Berg and Lafrenz (2019) public fashion companies in the top 20 percent were responsible for almost all of the industry’s economic profit in the past decade. However, there are also several private companies on the same level as the top public companies that have significant power and influence in the industry (Business of Fashion & McKinsey & Company, n.d., p. 95). Berg and Lafrenz (2019) also argue that the ‘winning group’ in the industry is getting smaller by the year. Especially, the middle 60 percent of the public industry players have a slim chance of mobility towards the top. In the recent period, one of the most dominant drivers of industry dynamics has been price competition (Berg & Lafrenz, 2019). Especially, one of the focus groups and the survey conducted for this thesis reflected that price is a dominant factor when consumers purchase clothes (Appendix 8, Q9; Appendix 6, l. 87-118).

Joachim Marc Christensen also emphasizes that it is a tight market, where it is very much about the price. To this, he adds that consumers have increasingly gotten used to being able to buy cheap clothes (Appendix 3, l. 188-191).

It is challenging for brands to figure out how to respond accordingly to the increasing polarization of the industry. According to Berg & Lafrenz (2019) the industry “(...) must be prepared to make radical and consistent decisions to renew their brands, customer relationships and distributions models” (l.

111-112). To be able to make these decisions, fashion companies must seek to understand what is missing from their strategies as well as what has become obsolete. Following the global trend of sustainability in the general society, among consumers, and businesses, a possible way for fashion companies to position themselves is to consider sustainability as a strategic tool. Hence, the following analyses will focus on this topic by examining the current opportunities to participate in sustainability in the fashion industry as well as to what extent the industry is currently participating in sustainability.

5.2.2 Sub-conclusion: Competitive forces in the fashion industry

This analysis of the competitive forces in the fashion industry can help a fashion company to better position itself within an intense industry. The analysis contributes to an overview of the competitive forces and the state of competition within the industry. In regard to the five competitive forces of the fashion industry the following can be concluded. The barriers to entry can be viewed as low in terms of distribution channels and mobility out of the bottom of the industry. Nevertheless, it can be

54 challenging to gain market share in the industry, as big players dominate the top. The current threat of substitute products to clothing is very low, but future technologies might possess the power to disrupt this force. Furthermore, the bargaining power of buyers is high due to the wide selection of choices that consumers have, which enables them to easily find substitute brands. Moreover, consumers frequently buy clothes, which causes them to be more price sensitive and selective in their buying behavior. In regard to the power of suppliers, they appear to have a low bargaining power because there exists a large number of available suppliers and the fashion industry is an important customer to the suppliers both in terms of livelihood and economic viability. Lastly, the intensity of rivalry in the industry can be characterized as high, due to an intense competition that is dominated by price, low mobility, and polarization of the brands in the industry. The following sections of the analysis will explore how the social trend of sustainability, a force outside the industry, can be a key in a fashion company’s ability to form a strategy and find a competitive position within the industry.