High Fashion Fights Recession

8 August 2016

There is relatively no threat of substitution in the luxury goods industry. This is mainly because of the quality and price of substitutes, and the cost of switching to the consumer. The price of counterfeit goods that copy the luxury goods causes there to be a positive monetary cost in switching but there is a loss of prestige as luxury goods are characterized as having a persona, paucity, that are accompany by a performance of a quality product with unique design, extraordinary capability and innovation.

There is no comparison between luxury goods and the counterfeit products. Threat of New Entrants The luxury goods industry has a high level capital requirement, brand loyalty and recognition by consumers, the exclusive access to suppliers and distribution along with economies of scale, all make it difficult for new firms to enter the industry. Capital investment restricts entry to the industry as a large investment in marketing is needed to attract customers and to increase brand recognition.

In additional suppliers and distributors have exclusive contractual agreement with manufacturers, thus creating a strain for new firms to build their supply chain. However there is an increase threat from internet based companies. Bargaining Power of Suppliers The risk of losing quality from switching suppliers and the limited number of skills and specialization workers available give suppliers a high bargaining power; however this power is mitigated by the scaling down and cancelation of orders for the supplier of material from other industries during the Great Recession.

Thus there is a moderate power for suppliers, as they are more willing to accept any order given by the luxury goods industry. Bargaining Power of Buyers The bargaining power of buyers is high in the luxury industry. The industry’s size of the luxury goods market is small especially in recessionary times as consumers spend more on quality items; however there is growth in the market from countries such as China and other emerging countries, which have an increase in wealthy households which is expected to grow.

The cost of switching for consumer is low; it is more an emotional cost for consumers as they are extremely brand loyal. Therefore there is a high pressure on firms to remain relevant with consumer’s preference and trends. Firms also sell their products in select retail outlets therefore these outlets have some control over the industry as they directly impact sales. Competitive rivalry within the industry There is a strong level of rival among few large firms in the luxury industry.

The firms have differentiated strategy and some although it is not an industry practice offered reduced prices during the Great Recession to improve their sales, some firms were not able to survive and declared bankruptcy. There is a high exit barrier as it is difficult for firms to recover their investment. Porter Five Force Intensity Threat Of Substitute Products Low Threat Of New Entrants Low – Medium Bargaining Power Of Suppliers Low Bargaining Power Of Customers Medium Competitive Rivalry Within The Industry Medium – High 2.

How much bargaining power did consumers as buyers have during the Great Recession? The fall consumption during the period of the Great Recession 2007-2009, had an adverse impact on the luxury goods industry and meant that firms had to place more emphasis into appealing to the remaining market of discerning consumers. Consumers were less obliged to try and ‘keep up with the Jones’, as they had to reduce their consumption on non-essential goods and services and the ‘Jones’ were less compelled to show-off.

Therefore because of the fall in numbers, the consumers had more of an impact on the luxury firm’s bottom line and the firm thus had to somehow motivate consumers to spend, this is in relation to taste and preference however, since consumers were too small to significantly influence price and price is an important factor in the perceived luxury of a good. Therefore the bargaining power of consumers was medium, since goods not only had to be priced right but also offer some value and be of high quality for consumers to purchase the product. 3. Why was discounting looked down upon by the industry peers, all of which were differentiated or focus competitors?

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