The Apparel Industry: Porter's Five Forces

The Apparel Industry: Porter's Five Forces

The apparel and footwear industry consists of four different types of companies: manufacturers, jobbers, contractors and retailers. Gap Inc. is a retailer, but its business is very involved with manufacturers, jobbers and contractors. These relationships are of particular interest in terms of the company's policy of social and environmental responsibility.

Supplier and Buyer Power

Most manufacturers and retailers are heavily dependent on overseas production. This was further spurred with the passage of NAFTA on January 1, 1994. With NAFTA, U.S. companies are allowed to ship U.S. made fabric to Mexico for assembly into clothing and then shipped back to the U.S. without incurring import duties. Overseas sourcing cuts labor costs because of the high expenses of manufacturing low margin/low value-added goods within the U.S. Normally, apparel manufacturers have three choices when producing apparel overseas: they can build a plant (direct investment), establish a foreign agent, or contract with a foreign companies' facilities to produce garments.

Gap is solely a retailer and all of its suppliers are primarily manufacturers that may employ jobbers and contractors. There are some benefits to domestic outsourcing. First, it allows a company to be responsive to quick changes in fashion trends. Secondly, it reduces tariffs, import fees, and transportation fees from overseas. The majority of Gap's suppliers are in Southeast Asia. Retailers, including the Gap, operate from a powerful position because they order in large quantities and the costs of switching suppliers are minimal. These two factors give retailers like the Gap enormous leverage when negotiating price,therefore supplier power is low.

Because labor is such a significant cost component in apparel manufacturing, producers in low-wage developing countries enjoy a significant cost advantage over U.S. producers, creating intense competition amongst suppliers and downward pressure on profits.

Consumers enjoy high buying power in the apparel industry because of the intense competition. Because of the Gap's mid-level prices for the type of clothing it sells, the Gap's strength is in its quality. Still, buyers have power because of the number of competitors and the ease at which buyers can switch to a different retailer. Shopping-savvy consumers relish the search for value and will buy more sale merchandise in department stores. These tendencies have shifted the industry market share somewhat to discount and factory outlet stores.

Threats of new entrants

The apparel industry has had sluggish sales for quite some time. In addition, apparel manufacturers have faced shattered trade conditions following those terrorist incidents. Overall, the apparel industry has challenges