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Executive Summary

P r e s e n t e d b y J u l i e n K a n g

Apparel Industry February 2015

3 different types of retail companies: wholesalers, department or specialty stores

Largest players in the apparel and luxury goods industry: Ralph Lauren, VF Corp and PVH

Corp. (determined by their market cap, revenue, size of the firm, number of employees and

earnings per share)

The apparel market in the United States represents more than $225b annually

Key economics indicators of the industry: unemployment rate, disposable income, and

consumer confidence

The average debt to common shareholder equity of the industry (based on Bloomberg) is

45.5%

Data privacy has been a rising concern for people and several popular lawsuits have made it

harder for companies to gather data

The treat of substitute is really high for the apparel industry

1.0 Introduction........................................................................................................................... 3

1.1 History .........................................................................................................................................5

2.0 Business Model ..................................................................................................................... 5

2.1 Producers (3 Department Companies and 3 Branded Apparel Companies) .......................................7

3.0 Correlations to Economic Drivers ..................................................................................... 9

3.1 Correlation to Unemployment, Disposable Income, and Consumer Conf. .........................................9

3.2 Correlation to Average Change in Temperature and Cotton Prices ................................................. 11

3.3 Summary of Economic Factors ..................................................................................................... 12

4.0 Debt Structure ..................................................................................................................... 12

5.0 PESTEL .................................................................................................................................. 13

5.1Political ....................................................................................................................................... 13

5.2Economic..................................................................................................................................... 13

5.3 Social.......................................................................................................................................... 14

5.4 Technological.............................................................................................................................. 14

5.5 Ecological ................................................................................................................................... 14

5.6 Legal .......................................................................................................................................... 14

6.0 Porter’s Five Forces............................................................................................................ 15 6.1 Bargaining Power of Suppliers...................................................................................................... 15

6.2 Bargaining Power of Buyers ......................................................................................................... 15 6.3 Threat of Substitutes ................................................................................................................... 16

6.4 Threat of New Entrants ............................................................................................................... 16

Conclusion .................................................................................................................................. 17

Apparel Industry February 2015

1.0 Introduction

In a broad scope, the apparel industry is composed of two types of companies; designers and

those that source and market the designers. However, the industry is much more complex than

that. If we break down the companies that specialize in the design of apparels, it is divided into

luxury goods like Louis Vuitton, brands suited for lower to middle class consumers such as

H&M or multi-brand apparel companies like PVH Corp that sells multiple brands through own-

brand retailer or wholesalers.

On the other hand, we have companies that make their profits from sourcing designer brands,

which serves as a marketing tool for those brands. These retail companies are called wholesalers,

department or specialty stores. A branded apparel company can choose to outsource their

garments to retailers exactly like how Wal-Mart may sell different brand of goods, or sell their

goods directly through their own retail channels. Moreover, just like Wal-Mart with their “great-

value”, sourcing apparel companies can also have their own private label brands on top of selling

sourced brands.

I used my methodology illustrated below, to find the biggest players in the apparel industry

based on market cap, number of employees, revenue, same store sales %, number of locations

and price to tangible book value. The sales of garments of wholesale vs direct to consumer are

73.1% and 25.1% therefore, I’ve made two divisions of biggest players; the department stores

and designer brands in order to reflect the largest players in sourcing brands as well as the

leading designer brands.

Consumer Discretionary

Textiles apparel &

luxury goods

Apparel Accessories & luxury goods

Footwear Textiles

Retailing

DistributorsMultiline

Retail

Department Stores

Specialty Retail

Apparel Retail

The tree diagram above includes retailing, department store found from the branches of the

Global Industry Classification Standard (GICS) that I’ve selected to allow me to find the most

influential companies in the department stores sector.

Market Cap Revenue # of

Employees

Price to

Tangible

book value

SSS % # of

Locations

TJX Cos Inc. TJX Cos Inc. TJX Cos Inc. Macy’s Inc. Foot Locker Inc.

Foot Locker Inc.

L Brands Inc. Kohls Corp Ross Stores

Inc.

Nordstrom

Inc.

Stage Stores

Inc

TJX Cos Inc.

Ross Stores Inc.

L Brands Inc. Kohls Corp Dillards Inc. Ross Stores Inc.

L Brands Inc.

Now, let’s look at the biggest players using a tree diagram that only includes the designer brands

and excluding the entire retail side of the GICS.

This gives us a completely different set of results (Note the same store location has been taken

off for branded apparel because they have an average of negative same store sales %).

Market Cap Revenue # of Employees Price to

Tangible book

value

# of Locations

Michael Kors Ralph Lauren

Cor

Hanesbrands Inc. Kate Spade & Co Coach Inc.

Hanesbrands Inc. Hanesbrands Inc. Ralph Lauren Cor

VF Corp Carter’s Inc.

Ralph Lauren Cor

Coach Inc. Fossil Group Inc. Carter’s Inc. Michael Kors.

Consumer Discretionary

Textiles, Apparel &

Luxury goods

Apparel Accessories & Luxury Goods

Footwear Textiles

1.1 History

Before the 1830s, most of the clothes worn by individuals were either custom made by tailors or

homemade. If you’ve ever watched a movie in the 1800s for example, you’ll notice that the

clothing people wore at the time were very similar to one another. Indeed the variety of apparels

available in the market at that time was very little because the tailors made very standardized

styles of clothing. Then, the military ready-made clothes were used as an example of efficient

and rapid production of clothes and so the apparel industry was born. Today, people have the

freedom to choose their own unique styles of outfits. In the 1970-90s, because of the decline in

employment, wages and other factors, the American garment industry declined dramatically,

almost to a point of disappearance. Thanks to the International trade agreements and North

America Free Trade Agreement, the industry thrived once again due to lower tariffs, quotas and

imported goods, making imported textiles a lot cheaper. Additionally, over the past decade the

margins of branded apparel companies improved significantly as clothing costs declined due to

the textile industry moving to China. On top of that, the Chinese government has recently

stopped its price floor policy on the production of cottons, the most popular raw material used in

the apparel industry, improving the margins of companies even further.

The largest players in the apparel and luxury goods industry are Ralph Lauren, VF Corp and

PVH Corp. These companies are largest in terms of market cap, revenue, size of the firm

(counted by number of employees) and earnings per share. The apparel market in the United

States is more than $225b. To give some perspective on its size, the popular fast food industry in

the US is only $191b. The per capita expenditure on apparels in the U.S is $686, which is the

fourth highest worldwide next to Japan, Canada and Australia in first place. This number is

expected to increase by more than 50% in the next 13 years.

2.0 Business Model

Each company has their own and unique business models, but we can find a line of consistency

between them. Here, we use Zara as a standard example of how apparel companies typically

operate. It should be noted however that Zara is the world’s biggest apparel company and not all

companies have the luxury of having some of Zara’s activities, such as having in-house

manufacturing or highly sophisticated logistics. Furthermore, Zara’s business model is aimed at

producing in style fashion clothing that are affordable and trendy while as luxury/designer

brands such as Louis Vuitton for example, aim for a higher class of consumers. These two types

of companies would also have variations in their operations, mainly in the design and fashion

forecasting. Zara, H&M and forever21 are considered as a fast fashion brand which means that

they bring the latest styles from runaway fashion shows to their stores. It takes an average of 18

days for Zara to move a design sketch to store shelves compared to the average 8months to a

year for an average apparel company. Indeed, Zara leads a world example of ready-fashion; they

are trend followers and adapters and less as trend leaders.

The heart of a product starts at the design. Apparel companies have a creative team responsible

for the design, sourcing and product development. Successful apparel companies need to be

following and even leading trends with their seasonal collections. In order to have products

aligned with hot fashion trends, designers use fashion forecasting, that’s why apparel companies

send their designers and employees to runway fashion shows such as the popular NewYork

fashion week. During a fashion week, top designers for luxury brands show their newest

collections of adult, teen and even kids’ apparel for the audience to interpret. This in turn gives

trend followers an idea of the hottest trends in the current and/or upcoming season. However,

fashion is very ambiguous and up for interpretation, making it very risky to rely solely on a

couple designers to lead. A lot of adaptations to trends are made from information that can be

gathered through information technology, but often times, it can also be done informally through

conversations with store managers and discuss their observations. Store managers can find

tendency in colors, textiles and seasonal preferences. Gathering the data from many store

managers can give relevant insights on the current and forward trend as well as adapting to it.

Trend-spotters also find their information through T.V, magazines, newest films or even go to

University campuses.

After the creative team have an idea of the styles they want to create, they select and assemble

the fabric, colors, materials, and many other components needed in order sketch the product. For

Zara, this process is a lot more rapid than smaller companies as many materials can be insourced.

For smaller companies, out-sourcing of all materials is required for production. (This is one of

the fundamental success factors for Zara; because of the rapidity of their production, the latest

trends come to the market first).

The advantages in the manufacturing process are the same for big companies; in-house

manufacturing permits for more rapid production, leading to first-hand market exposure of hot

trends. On the other hand, smaller companies have to outsource their production, making their

apparels more costly and slow to produce. However, even for Zara, some manufactured garments

have to be sent out to out-sourced labour intensive workshops because cheap labour is too

competitive. Once the designs are finalized, only few carefully selected ones are sold in key store

locations. Then, after examining the rate of purchases of each item and opinions of customers,

they can finally conclude whether an item is ready to be produced and sold on a larger scale or if

it should be taken back.

The entire process from design to production would not have been possible without the logistics

of the activities. It takes an average of 8 months up to a year for apparel companies to go from

designing a new style to having it in store shelves. The longer the time, the more the risk of

having the style not in trend anymore, therefore having to either restart new designs or sell them

at discount.

2.1 Producers (3 Department Companies and 3 Branded Apparel Companies) Company Relevant Factor Competitive Advantage Other Comments

TJX

Market Cap: 47.24b Revenue: 29.08b # of Employees: 191k # of Locations: 3.4k Price to Tang: 11.98 SSS %: 4

The size of TJX allows them to leverage their costs by having strong power over their supplier.

Market expects high growth potential for TJX and its current P/E is cheap compared to its comparables.

Foo

t Lo

cker

Market Cap: 8.71b Revenue: 7.15b # of Employees: 14k # of Locations: 3.5k Price to Tang: 3.73 SSS %: 10.20

In the last year, they have closed (50), opened (86) and remodelled (319) a lot of their stores. Indeed, Footlocker effectively manages their great number of locations.

Rise in yoy% comparable sales in the Q4 suggests a rise or conservative trend in basketball and running shoes trend. (Footlocker’s offering of garment is aimed at young sports amateur, especially the basketball ones). Nike and Footlocker has a really high correlation, one of the most significant one in retail. This might be explained by the similar segment of customers that they aim at. Finally, Footlocker recently hit a 52 weeks high.

Ro

ss

Sto

res

Market Cap: 21.97b Revenue: 11.04b # of Employees: 66k # of Locations: 1.36k Price to Tang: -- SSS %: 6.00

“Ross Dress for Less” aligned with its DD (discounted stores) is a strong motto that attracts low to mid class consumers that look for higher end apparel for discounted price.

One of the strongest dividend growths; has been consistently growing since 1995. Dividends tripled since 2010

Han

esb

ran

ds

Inc.

Market Cap: 12.93b Revenue: 5.32b # of Employees: 60k # of Locations: 250 Price to Tang: --

Offers large variety of clothing ranging from stylish apparel to recently specializing in sportswear.

Hit an all time high of $32.48. They have successfully acquired two well-known companies and have announced the acquisition of another one (Maidenform), to drive growth. They are coming out with new products such as flexiblefit. I think this is to adjust to the “healthy life-style” yoga trend especially because of the declining rate of bottom wear (jeans) this year.

Mic

hae

l K

ors

Market Cap: 12.99b Revenue: 4.21b # of Employees: 9k # of Locations: 703 Price to Tang: 6.32

Understands that the market of “HENRY” (High Earners Not Rich Yet) is growing; young adults that aren’t rich but spends a lot on luxury goods. Their products are focused on luxurious but affordable goods. Michael Kors, the mastermind of design, is very talented.

People believe that Michael Kors’s growth is only a short-term trend and will eventually die soon just like the 90’s Tommy Hilfiger or the case of Kate Spade. Recent reports have supported this by showing that the traffic of Michael Kors on the internet is slowly decreasing year by year.

Ral

ph

Lau

ren


Has had a strong history attached to its brand thus having strong brand loyalty. They are currently selling their garments at discounts compared to the other years but it is giving them a strong margin. They also have other strong lines of clothing such as Club Monaco that is making a global presence.

Currently investors are bearish on the stock. The company has one of the largest international exposures therefore exposing them to currency exchange risk as well as the rise of labour wage in China. Currently, the dollar is extremely strong, making it more costly for RL to export their garments in China.

Coach Inc. Market Cap: 11.15b Revenue: 4.49b # of Employees: 7k # of Locations: 1.02k Price to Tang: 5.05

Specializes in leather handbag (61% of sales). Rest of sales are from women accessories. Their turnaround strategy seems to be doing good as JPMorgan gave positive comments following a meeting. Their growth recipe is focused switching from accessory to global lifestyle brand, raising brand awareness in Europe

Currently in the process of acquiring a footwear company – Stuart Weitzman (will be settled in May 2015). The company is not publicly traded but it is a “footwear giant”. It appears that their main operation is e-commerce that ships across 80 countries.

and Asia and opting for a more modern design.

Lululemon Ath


Seen as a brand that promotes healthy choices such as eating healthy, exercising, etc. This in turn makes consumer believe that buying their product is a bright decision if they want to start being active.

Great in promoting active lifestyle. Their biggest competitive advantage is in their marketing tools such as giving free yoga classes, culinary classes, encouraging employees to a fit lifestyle, etc.

Macy’s Inc Market Cap: 21.74b Revenue: 28.10b # of Employees: 173k # of Locations: 825 Price to Tang: 18.87 SSS %: 2

Highly diversified; sells men, women, children apparel and accessories. Also sells cosmetics home furnishing and other consumer goods.

Claims to be world premier omni-channel retailer. That’s the evolution of multi-channel retailing because it evolved with mobile and e-commerce.

Kohls Corp Market Cap: 15.01b Revenue: 19.02b # of Employees: 31k # of Locations: 1.16k Price to Tang: -- SSS %: 3.7

Family oriented, middle income customers. Offers their own credit cards and are omni-channel as well.

Direct competitor to Macy’s, same business model.

3.0 Correlations to Economic Drivers

Correlations and economic drivers of the apparel industry will provide insights on the key factors

that cause changes in the market. Most popular economic elements are GDP, jobless claims, unemployment, CPI index, housing starts, retail sales, oil prices, corn prices, gold price, etc. However, for the apparel industry not all of these will be relevant, thus this analysis is based only

on factors that are believed to have a strong impact on this industry. Numbers for this section have been extracted from a Bloomberg terminal.

Here is a list of key economic data that have been relevant to the apparel industry in the past:

Consumer Confidence - Cotton Prices

Unemployment Rate - Disposable Income

Average Temperature

3.1 Correlation to Unemployment, Disposable Income, and Consumer Conf.

The apparel industry constitute mostly of non-essential goods since consumers typically buy extra clothing or accessories items only when they have spare disposable income. Accordingly,

most of the revenue from that industry is derive from non-necessary purchases and not from the basic needs of the customers, so unemployment rate should have a strong negative correlation

with the apparel industry. Indeed, after performing a regression analysis of the unemployment rate in the US and the ETF, we can observe a correlation coefficient of –0.88, which confirms our argument; when unemployment increase sales in the apparel industry decrease. This

relationship is logical since the last thing unemployed people think about is to purchase apparel, as they have to pay for fundamental needs such as rent and food. All in all, the unemployment

rate vastly impacts the apparel industry; a slight increase of unemployment can mean that millions of consumers will stop purchasing apparels until they find a job, resulting in millions of dollars of loss in revenue, which is not recoverable in later years.

Disposable income is calculated by subtracting personal income tax payment from personal income. In other words, it is what the consumers have left in their hands to either spend or save. In its nature, the more money consumers have, the more they will spend and a portion of that will

definitely be used to buy apparel goods. This claim is supported by the result of the regression analysis performed on disposable income and apparel ETF that yields a correlation coefficient of

0.59. Moreover, when the disposable income is high, consumers have more money to spend on non-essential goods. It is also important to note that the effect of a change in disposable income on revenue of apparel stores will not be the same for all of them. For instance, having more

money to spend will not result in higher sales for lower class brand such as 725 (Wal-Mart clothing line). When lower class disposable income grows, like we concluded before, they will

spend more money on apparel, however it is also very likely that they will change their preferences and visit new stores. Therefore, overall, as the disposable income of US citizens increases, the sales of apparel industry will follow the same trend.

-10%

-5%

0%

5%

10%

15%

Q4

2012

Q1

2013

Q2

2013

Q3

2013

Q4

2013

Q1

2014

Q2

2014

Q3

2014

Q4

2014

Unemployment Rate Correlation

S&P

Growth %

ETF Growth

%

Unemp

Growth %

-8%

-3%

2%

7%

12%

Q4

2012

Q1

2013

Q2

2013

Q3

2013

Q4

2013

Q1

2014

Q2

2014

Q3

2014

Q4

2014

Disposable Income Correlation

S&P Growth %

ETF Growth %

Consumer Confidence: This indicator looks at the outlook that consumers have on the overall

economy. In principle, if consumers believe that the future of the economy is bright, they will

perceive their jobs as more stable, as a result they are more propelled to spend their current disposable income instead of saving that money for an uncertain future. Contrarily, if they have a

bearish view of the market, consumers will spend less on goods, as they fear the loss of their jobs and they will want to save more. However, this economic indicator is considered to be lagging since most of the time it will take some time for the consumers to adapt to forecast about the

economy and they do not always have perfect information about the future of the market. This explains why apparels companies often use the consumer confidence index as one of many

indicators to forecast their sales. All in all, a high consumer confidence will lead to more spending in apparel industry.

3.2 Correlation to Average Change in Temperature and Cotton Prices

While doing some research on Bloomberg it appears that the average change in temperature

should be correlated to the apparel industry in North America. For example, a yoy drop in

temperature of 2 degree Celsius in November, dramatically increased the outerwear sales by

20%. Therefore, here we look at the average decrease or increase in temperature for a season

and the change in sales of overall apparel. The result of the regression test ran through excel

were not as conclusive as we thought they would be at first, having a low correlation coefficient

of 0.27 with the ETF. In this analysis, we look at absolute change in temperature, because any

variation will create a desire for the consumer to buy new apparels. For example, during longer

summer, women will buy more dresses and accessories. In contrast, if a winter is colder people

will buy more winter jacket. The two examples here explain why the correlation of the change in

temperature did not result in a high correlation with the apparel industry; the increase in one and

decrease in the other one may almost offset each other sometimes. Thus, the weather will affect

the revenue of individual stores, but not the overall revenue of the industry, since temperature

changes will shift consumption from one type of clothes to another.

There was a price floor for cotton in china, which has been removed recently. Since the raw

material the most used in the apparel industry is indeed cotton, we expect that this change in

regulation will have an effect on the revenue of the industry. First, the purpose of a price floor is

-10%

-5%

0%

5%

10%

15%

Q4

2012

Q1

2013

Q2

2013

Q3

2013

Q4

2013

Q1

2014

Q2

2014

Q3

2014

Q4

2014

Consumer Confidence Correlation

S&P Growth %

ETF Growth %

Cons. Conf.

to regulate the sale of a commodity for producers to a minimum price. The results of the

regression analysis was a correlation coefficient of -0.49, which would mean that as the price of

cotton decreases the apparel industry is doing better. Indeed, this relationship makes sense, if the

retailers or wholesalers did not pass on the economy to the consumers. For example, when it

costs less to buy cotton, which is the raw material of many clothes, then the profitability of the

industry will be greater, thus leading in a higher price for the ETF of apparel industry.

3.3 Summary of Economic Factors

4.0 Debt Structure The average debt to common shareholder equity of the industry (based on Bloomberg) is 45.5%

Companies Debt to Equity

TJX 38.1%

Macy’s 136.5%

Footlocker 5.4%

Ross Store 17.5%

Hanesbrand 143%

Michael Kors --

Coach 5.8%

Ralph Lauren 7.4%

Lululemon --

Kate Spade 205.8%

Kohl’s Corp 79.5%

Average 58.1%

Companies Interest Rate Debt Interest Rate Paid:

(Int. Rate * Debt)

Comment

TJX 4.5% $1.6B 7.1M

Michael Kors -- 0 400k No long-term debts

Coach -- 0 0 Repaid all debts and stopped issuing more

Ralph Lauren 3.453% $555M $19.1M

Lululemon -- 0 0

Macy’s 1.34 $7.3B $7.2

5.0 PESTEL

5.1Political

A 2014 KPMG survey on large apparel company executives reveal that the majority are worried

about the US health care reform but no further details have been published as to why. The

Obamacare that has been established since 2010 is aimed to ease the rough health care system

that the US has predominantly been known with; many US citizens could not afford basic health

care and it is one of the leading cause of bankruptcy. One of the actions the reform would like to

initiate is to strengthen the employee health care benefits. This would in turn give rise to labour

costs, which is especially important for apparel companies because it is labour intensive.

Other political factors that may influence the industry is the rising concern on unethical practices

such as child labour and sweat shops that have predominantly existed and thus given rise to more

scrutiny. Finally, companies must also be aware of all the different political differences across

the international countries in which they operate.

5.2Economic

The apparel industry report of 2014 from KPMG also revealed that the majority of top

executives in the industry are optimist about the future of the economy. As mentioned before in

the correlation segment of the report, when the outlook of the economy is good the forecast of

sales for retails store is also very likely to be positive. This is true since a positive view of the

future of the economic of a country generally means that the unemployment rate will decrease or

stay low, job will be more stable thus more disposable income, and finally consumer confidence

in the market will be high.

5.3 Social Today, consumers are the leaders of how the apparel industry is being shaped. Because of

stronger data literacy and more sophisticated IT to gather data, companies are using more and

more information about people to shape their strategies on branding, pricing, and expanding. All

in all, changes in socio-economic and cultural trends can impact the industry immensely.

5.4 Technological Since cloud technology has been introduced to the market, the entire world has been

revolutionized. Cloud has proven to be especially useful for apparel companies in terms of cost

saving, transparency in the data, enable executive to find trends with more ease, and many more

perks. In my opinion, technology is what affects the industry the most because we live in the

digital age after all. For example, there is a significant correlation between the size of screens on

tablets and phones to the number of online sales made by consumers. Moreover, companies are

investing significantly amount of resources for their online presence.

Technologies allow stores to sell their merchandise on a global scale within the click of a mouse.

The busiest day for retailers is the black Friday; the day retailers they make the most revenue by

selling a variety of discounted items. This phenomenon was mostly a US one up until recently,

now even online retailers such as Amazon are participating in it. Furthermore, there is a large

opportunity to improve as a survey reveal that consumers believe the average data literacy is

below average.

5.5 Ecological Because of the rise of environmental awareness, there have been initiatives in the apparel

industry to market their garments as being made with “green efforts”. However, popular surveys

reveal that most consumers are indifferent as to whether or not the apparels they purchase are

environmentally friendly or not; they would not pay more to be more “green”

5.6 Legal

A big dilemma for apparel companies is that they rely a lot on gathering data to get insights on

how to better manage their firm. However, data privacy has been a rising concern and several

popular lawsuits have made it harder for companies to gather data.

6.0 Porter’s Five Forces

6.1 Bargaining Power of Suppliers

The bargaining power of suppliers for the apparel industry appears to be low. This is mostly due

to the fact that there are many new designs from year to year, which make a pool of unique

products that need to be outsourced by different manufacturers. Moreover, the fashion is an

industry that is always on the move, so to remain competitive apparel retailers must design the

trendiest items, which may not necessarily have the same textiles as other designs. Additionally,

apparel retailers usually have different merchandises in order to attract as many consumers as

possible. For example, they may be selling leather products as well as line products to appeal to

the different taste of their clients.

Many apparel companies have standard signature materials, which is contained in a lot of

products, like J.Crew’s famous signature cashmere wool imported from Italy. However, many

small components of the item may still have to be purchase from other suppliers. Therefore,

apparel retailers have a significantly larger pool of manufacturers that produce the material for

their products and also ever since the globalisation of markets around the world, retailers can

easily import products they need from the cheapest country. For example, for a big name such as

Ralph Lauren, they do business with more than 700 different manufacturers across the world. All

in all, we can confidently assess that bargaining power of suppliers of the apparel industry is low.

6.2 Bargaining Power of Buyers The bargaining power of buyers is divided into two categories: end customer and intermediate

customer - wholesalers in this case. First, the power of end customers is moderate to high

because they mostly buy in very small quantity, however, companies can have a difficult time

differentiating themselves from similar retailers; thus low switching cost enhances the power of

customers. Furthermore,

Bargaining Power of Suppliers

Threat of Substitutes

Threat of New

Entrants

Bargaining Power of

Buyers

Secondly, the bargaining power of wholesalers is moderate since several of the names in the

apparel industry rely part of their sales on wholesalers. For example, Macy’s a well known

wholesaler in the US retails and sells brands like Ralph Lauren or Michael Kors. When

wholesaler are selling such famous brands with high leveraging power, they might not have as

much power as when they retail less popular brand or brand that don’t have their own store such

as Jessica Simpson’s clothing line. If the wholesaler is not pleased with the prices, they can

easily switch to another brand or a private label.

6.3 Threat of Substitutes

Apparel industry in the US represents $225b annually, which is massive and so is the

competition. One single negative trait on a product can make the difference between buying it or

buying a similar product from a competitor.

In today’s world, social media constitute a dangerous voice for unhappy consumer. For instance,

one small complaint from a celebrity on twitter can deteriorate a brand’s name, which in turn

results in a decrease of sales. In addition to that, the switching cost is low as there is almost no

cost in switching from one brand to another. The only power that apparel companies can use to

prevent consumers from changing brand is loyalty points.

Higher up luxury brands such as Louis Vuitton or Burberry suffers greatly of the threat of

substitutes due to the billion-dollar industry of counterfeit products. Here it is important to note

that the consumers that are willing or have the money to buy Louis Vuitton are not the one who

will buy the fake products, but they might not find it as attractive as before to wear that brand

because of the loss in perceived exclusivity. Moreover, the volatility in taste can also affect the

threat of substitutes if one brand is not able to keep up with the trend of the industry. Each

season, apparel companies release their collections and if they did not predict the fashion trend

well enough, a customer can easily switch to another brand that did. Therefore, the threat of

substitute is high for retailers of apparel.

6.4 Threat of New Entrants

The threat of new entrants is moderate. The capital needed to invest to create a brand and market

is relatively high and the investor must have certain skills and an eye for fashion, creativity and

understand what customers want. However, today the retail world is changing as the proportion

of apparel sales that are performed through a website is forever increasing. These are often called

online store and sometime they do not have a physical location to sell their products which

decreases their cost. Therefore, this intensify the threat of new entrants since building a website

does not require high capital and the risk of loss if they fail to market their apparels is limited to

the product itself. Simply ordering a small quantity of a t-shirt, try to sell them, and observe how

the market react gives the opportunity to more people than before to enter this industry.

Having said that, apparels are very dependent on brand loyalty. The recognition and loyalty that

people develop towards a brand are the main factors that attract middle-to-high income earners to

buy luxury goods such as Lacoste. It will be difficult for a new player to achieve brand

recognition without significant investments of money and time. Therefore, after considering all

the factors mentioned above we can strongly conclude that the threat of new entrant is moderate.

Conclusion

The Apparel, textile and luxury goods companies have many players that play a role in making

the goods. That’s because the flowchart on how to make apparels goods extends from fashion

forecast to designing/sketching, sizing, sampling, cutting & sewing, assembling, coloring and

folding. Since many of the components of apparel products vary on the season and fashion trend,

companies typically outsource most of their components to hundreds of different manufacturing

companies oversea to save cost. However, those that manages to have a vertically integrated

system i.e manufactures their own raw material, can deliver the newest fashion items which

gives them in advantage in early market share exposure. The largest players in the apparel

industry are holding companies such as VF corp for example, that owns many brands including

North Face, Jansport, Vans and up to 20 more. However, aside from large holdings corporations,

the biggest single product brands are Nike, Ralph Lauren, Michael Kors, Gap, Lululemon and

Kate Spade based on Market Cap, Same Store Sale and Revenue. Although the materials of each

brands can be unique, the most commonly used raw material is cotton and the largest producers

of cotton is China.

The biggest factors affecting the industry are Consumer Confidence, Disposable Income and

Unemployment rates, they have all been screen from a pool or other deciding factors based on

the highest correlations.

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