Porter's Five Forces Analysis of Gilt Groupe

Introduction to Porter's Five Forces

Many managers look at competition too narrowly. According to Michael Porter, there are different forces of competition that any business should examine. A business will not gain a return on investment if these forces are too intense within its industry. When competitive forces are favorable, many companies in the industry are profitable. When formulating a strategy, a manager needs to understand that some forces are stronger than others. These stronger forces will ultimately determine the industry's profitability. Focusing on the strong forces rather than the weak ones allows a manager to develop a strategy that keeps the business profitable. An industry's structure sets its profitability and provides a model for influencing and anticipating both competition and returns.

The five competitive forces identified by Porter are: the threat of new entrants, the power of buyers, the power of suppliers, the threat of substitute services or products, and rivalry among existing competitors.

New entrants bring new capacity and a desire to gain considerable market share (Afuah and Utterback 193). This puts pressure on costs, prices, and the rate of investment required to compete. Existing companies must keep their prices low or boost their investments in order to deter new entrants. It is not the physical entry of new competitors that drives profitability down, but the credible threat of entry itself.

Powerful customers capture more value by demanding better services or products, forcing prices down, and playing industry participants against one another. These actions reduce industry profitability, as competitors must respond to buyer pressure. Buyers have power if they possess a negotiating advantage, are price-sensitive, and can use that advantage to push for price reductions. Buyer negotiating power is high when there are few buyers, products are undifferentiated or standardized, switching costs between vendors are low, and buyers can credibly threaten to integrate backwards and produce the product themselves.

Overview of Gilt Groupe

Powerful suppliers capture more value by limiting quality, charging higher prices, or shifting their costs onto industry participants. Suppliers hold power when they do not depend on the industry for a significant share of their revenues, when their group is concentrated relative to the buyer base, when there are no viable substitutes and switching costs are high, when their products are differentiated, and when they could plausibly integrate forward into the industry. A substitute product or service offers the same core functionality through a different means. Substitute threat is high when the substitute offers an attractive price-performance trade-off, when buyers' switching costs are low, or when companies in the industry are unable to coordinate a response (Porter 142). Rivalry among competitors depends on both the basis of competition and its intensity. Rivalry becomes destructive to profitability when it converges on price alone. Rivalry intensity is greatest when competitors are numerous, exit barriers are high, industry growth is slow, and rivals remain highly committed regardless of performance.

Gilt Groupe specializes in highly discounted designer products. When the company launched, it focused primarily on women's clothing, but it has diversified considerably over the years to include baby products, men's clothing, travel deals, food deals, household goods, and city-specific event deals. Gilt operates in the e-commerce industry, offering "flash sales" to its exclusive members.

The company sends emails to its members offering items at discounted prices of up to approximately 60%. Items do not remain available on the website for long, compelling members to make purchase decisions immediately. The deals carry both a timing and a supply constraint, which drives buyers to take immediate action. As a result, the company is able to generate roughly fifty percent of its revenue within the first hour of initiating a sale. Gilt's primary buyers are sophisticated, urban, middle- to upper-income consumers. The company leveraged the social web to communicate with current and prospective consumers, and the emails sent to customers are individually customized, providing a more personalized shopping experience.

Threat of New Entrants

To source its products, Gilt initially relied solely on fashion designers, but has since expanded to include food outlets, event organizers, and travel agents. Having multiple suppliers gives Gilt some negotiating power as a buyer. Diversifying into new product categories and markets beyond fashion and clothing has allowed the company to stay ahead of certain rivals and broaden its portfolio. Gilt's early success in the flash sales market attracted hundreds of competitors to the industry. These new entrants focused on the same products Gilt had pioneered, producing a market shift: suppliers — the fashion brands — became price setters rather than price takers. Gilt's competitors include Rue La La, Ideeli, Beyond the Rack, HauteLook, and MyHabit. These companies were able to replicate the core elements of Gilt's business model, making market entry relatively straightforward.

New entrants into the flash sales industry placed immediate pressure on costs and prices. These entrants were ambitious and eager to capture market share. Increased competition, compounded by the effects of the Great Recession, resulted in reduced remnant inventory from fashion houses. The barriers to entry in the industry are low, which encourages additional competitors. The growth in the number of competitors increased demand for brand products, and suppliers took notice. Suppliers gained a pricing advantage, becoming able to set prices that companies in the industry had to accept, which reduced overall industry profitability. Gilt's customers also faced low switching costs, meaning they could move to a competitor with little friction.

The capital requirements for entering the flash sales industry were not substantial enough to deter new players. Start-ups such as Rue La La, Beyond the Rack, and Ideeli were able to penetrate the market and have consistently grown their membership bases. Gilt did hold certain first-mover advantages — fashion houses had established relationships with the company that provided favorable terms. However, Gilt did not respond aggressively to new entrants, which allowed competitors to enter the market with relative ease. Gilt lacked the resources to mount a sustained defense against new entrants. A more effective approach would have been to leverage its established relationships with fashion houses to create exclusive supply arrangements that would have denied inventory to new competitors, making the market far more difficult to enter.

Conclusion

The negative impacts of supply reduction, deal fatigue, and rising prices will persist, creating an increasingly challenging environment for flash sales companies. The outlook is more positive for companies that can diversify their product and service offerings rather than concentrating on a single category. Maintaining multiple product categories provides companies with greater purchasing power: if one supplier refuses to accept an offered price, the company can redirect its business to another supplier in a different category. Exclusive dependence on the fashion industry is strategically limiting, as fashion houses will continue to dictate prices. The long-term success of flash sales platforms will depend on their ability to balance brand prestige with broad category diversification, keeping e-commerce consumers engaged across a wider range of purchase occasions.