Women's Clothing Stores Industry Analysis: Porter Five Forces

Introduction

The objective of this report is to provide an analysis of the Women's Clothing Stores industry. The industry comprises ready-made women's clothing, and the category includes specialized women's suits, coats, and dresses. The industry also includes maternity wear and women's misses lines. Since 1990, the structure of women's clothing stores in the United States has changed significantly because of the transition from a "production-driven market to a consumer-driven market" (Baye, 2010, p. 8), and consumers in the United States spent approximately $36.7 billion on women's clothing in 2005.

In the mid-2000s, employees in the industry worked as sales associates performing customer service jobs as well as a variety of operational duties, including product displays and stock organization. Store managers were responsible for overseeing sales and managing store operations. Like other industries, women's clothing has also been affected by recession. The economic downturn that struck the United States between 2008 and 2009 caused the industry to record a decline in sales of 7.6% in 2009.

The purpose of this paper is to carry out an industry analysis of Women's Clothing Stores using the variables described by Porter's Five Forces framework. Data are collected through secondary sources, including the government database at the U.S. Census Bureau's retail statistics portal, the book Managerial Economics and Business Strategy (Baye, 2010), and industry reports retrieved from the EBSCOhost database.

Industry classification provides information about different industries within the U.S. economy. The NAICS (North American Industry Classification System) is a standardized classification system for the three partners of the North American Free Trade Agreement (NAFTA): Canada, Mexico, and the United States (Baye, 2010, p. 242). As shown in Table 1, the NAICS classification of the women's clothing industry reveals that women's clothing stores belong to the retail trade sector, while subsector 448 belongs to clothing and accessories stores. Industry group 4481 belongs to clothing stores, and NAICS industry 44812 and national industry 448120 both correspond to women's clothing stores. Understanding the NAICS classification helps in assessing the competitive position of a firm within the industry.

Table 1: NAICS Levels for Women's Clothing Stores

Sector 44 — Retail Trade
Subsector 448 — Clothing & Clothing Accessories Stores
Industry Group 4481 — Clothing Stores
NAICS Industry 44812 — Women's Clothing Stores
National Industry 448120 — Women's Clothing Stores

The remainder of this paper first discusses the dependent variables influencing industry structure, including the entry conditions facing buyers and sellers. It then examines how competitive forces assist firms in setting prices above costs, discusses industry performance and long-run profitability, and presents trend line analysis and data interpretation.

Background of the Industry

Since the 1990s, the structure of the women's clothing industry has changed significantly. The introduction of online stores has allowed women's clothing retailers to reach the global market. By the end of 1999, online stores recorded sales of $13 billion; however, sales trends over the following five years increased only slightly because of the economic recession. Rising unemployment rates and a decline in American disposable income reduced consumer demand.

The women's clothing business originated in Europe and was introduced into the American colonies in the 1700s, coinciding with the early period of clothing production in the United States. During this period, many traders opened retail stores, and the invention of the sewing machine spurred a proliferation of retail stores in the late nineteenth century. By the 1920s, purchasing women's clothing from retail stores had become fashionable and widespread.

Porter's Five Forces Analysis

Porter (2008) argues that an existing firm's ability to make and sustain profits is tied to the ease of entry into an industry, and that barriers to entry directly affect industry profitability. Analysis of the women's clothing stores reveals that the threat of entry into the industry is generally low because it requires relatively modest financial resources. While financial resources are a major condition for entry, the major players in the industry have used their superior financial resources to deter potential competitors. Their primary strategy is to leverage economies of scale to reduce variable costs of production, thereby setting prices above costs while maintaining a competitive market position.

Economies of scale are one of the key strategies large players use to sustain market power. Firms able to produce at a lower cost per unit enjoy significant market advantages. New entrants, however, may struggle to compete because they typically cannot yet exploit economies of scale to achieve comparable production efficiencies.

Government regulation is another entry condition in the industry, though it does not significantly deter new entrants. Branding is the most powerful force influencing the barrier to entry in women's clothing stores. Since the 1990s, brand has become synonymous with quality, and firms seeking to compete successfully must be prepared to offer fashionable women's clothing that commands broad market acceptance.

Branding and economies of scale together enhance industry performance and allow firms to earn long-run profits. Firms are able to sustain profitability over time when they develop a brand strategy that fosters ongoing customer patronage. In the contemporary business environment, firms that consistently deliver value to customers maintain consumer loyalty and thereby enjoy long-run profitability.

Jedidi, Mela, and Gupta (1999) argue that advertising and promotion are effective marketing tools for maintaining long-run profits and enhancing brand equity. Long-term advertising, in particular, assists firms in building long-term brand equity and profitability. Baye (2010) supports this view by noting that advertising is itself an entry condition within the industry. Advertising can shift the demand curve to the right, influencing consumers to purchase higher-quality women's clothing. For example, if a firm records demand of 8,000 units of high-taste women's clothing per month at $40 before advertising, it can increase demand to 10,000 units per month after advertising by shifting the demand curve rightward. An established firm that has already invested in advertising enjoys customer loyalty that a new entrant must spend significantly to replicate.

Intense competition among women's clothing stores in the United States has enhanced buyer power by giving consumers the ability to switch easily from one store to another. The increasing number of stores selling women's clothing further strengthens buyer power, as consumers can comparison-shop across multiple outlets. Recent growth of the internet has also led to a proliferation of online women's clothing stores, increasing buyer power by expanding the range of alternatives available to consumers. The concentration of both offline and online women's clothing stores has therefore raised buyer power within the industry overall.

That said, some stores maintain stronger competitive advantages than others. Certain buyers prefer shopping at stores that offer high-quality and affordable clothing, and retailers such as Vintage, O'Neill Spiegel, and Heavenly Couture attract customers through this combination of quality and value.

Supplier power is low in the women's clothing stores industry because a large number of suppliers are available to provide goods and services. Baye (2010) argues that industry profits tend to be lower when suppliers have the power to negotiate favorable terms. In the women's clothing stores sector, a high concentration of suppliers keeps supplier power low. Supplier switching costs are also very low, as suppliers can easily shift their business from one retailer to another. Several women's clothing producers offer price discounts to buyers who purchase in large quantities, and low switching costs further reduce any individual supplier's leverage within the industry.

Baye (2010) argues that "the level and sustainability of industry profits also depend on the price and value of interrelated products and services" (p. 10). Porter (2008) also notes that the presence of close substitutes and complements erodes industry profitability. However, the women's clothing industry does not face a true substitute threat, because no substitute exists for wearing clothing itself. Despite the absence of direct substitutes, recent technological developments have intensified competition within the industry by giving buyers greater power to switch from one retailer to another.

Women's clothing stores operate in a highly competitive landscape. The recent proliferation of online stores is one of the primary drivers of intense rivalry among industry operators. The absence of meaningful consumer switching costs is another factor contributing to this rivalry, as is the large concentration of retail stores competing for the same customers. As Baye (2010) argues, the concentration ratio is a primary measure of industry rivalry: the closer the concentration ratio is to zero, the more intense the competition. Baye's (2010) industry analysis of major U.S. industries found that Women's Clothing Stores has a concentration ratio of just 13%, which is among the lowest of any industry studied, indicating highly competitive market conditions.