Last Saturday, while strolling in
Soho with my mom and sister, we stopped by Sephora to pick up some lip gloss and perfume. For those unaware of what Sephora is, Sephora is one of the fastest growing retail chains best known for carrying makeup, fragrance, hair care, skin care and beauty accessories as well. They have over 750 stores in 21 countries and they launched their online site in 1999, available in 9 countries.
With their marketing offices located right here in New York City, I began to think about how competitive the cosmetics and toiletries industry was. This was where good old Michael Porter’s 5 Forces come in to play. As suggested in the name, there are 5 forces that determine an industry’s attractiveness: threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitute products and rivalry among existing competitors. With the mix of these forces, it can be used to explain why some industries are more profitable (attractive) than others.
In relation to the cosmetics and toiletries industry, Porter’s 5 Forces can be applied in the following ways…
One of the forces that affect an industry’s attractiveness is the threat of new entrants. There are new competitors constantly entering any industry and with that, they also bring the need to gain more market share leading to more intense competition. There are many companies right now that are entering the cosmetics and toiletries industry. Because this is not an industry considered to have high barriers, it is not seen difficult for a new firm to step into the industry, therefore, it makes the threat of new entrants high. In fact, there are so many new makeup and fragrance companies such as Elf makeup, celebrity branded makeup, etc. that have entered the market the last 2 years. In relation to economies of scale, since makeup and perfume are usually produced in large volumes, there is probably low relative cost per unit. As a result, many firms would see this as an advantage to step into the industry. Also, because not much relative capital is needed to become a player in the cosmetics and toiletries industry, it makes it easier for new firms to enter the industry which lead to increased competition. (UNFAVORABLE)
Another force is the bargaining power of buyers which is when the customers of an industry are constantly on the look out for reduced prices, added services (which can affect a firm’s competition) and good/improved product quality. Another way to look at this is if buyers in the cosmetics and toiletries industry fairly loyal to a particular company and if they have the ability to switch around to other brands. This is not applicable in the makeup and toiletries industry because customers do not always stick to one brand of makeup or perfume. This means that buyer power is high. Yes, there are people that only swear by Chanel No. 5 or M.A.C (makeup) products, but the majority of people own a variety of different brands of makeup and perfume. This also allows customers to shop for favorable prices and products. (UNFAVORABLE)
The third force is the bargaining power of suppliers; otherwise, how much influence do suppliers have in this industry? I would believe that suppliers have a little, close to no amount of power in the makeup and toiletries industry. The cost of switching suppliers is not high because there are many makeup companies that manufacture and create their own makeup using minerals and their own ingredients. There are even books that teach you how to make “at-home” makeup. I would assume that the materials needed to create makeup and perfume is not hard to attain at all. (FAVORABLE)
The fourth force is the threat of substitute products which is extremely high in this industry. Let’s use me, for example. When I need new eyeliner, I buy the same brand as the one I previously used 50% of the time. But the other 50% of the time, I browse the selection of eyeliner in Sephora and buy a new brand. I am not speaking for every woman out there, but for me, I like to switch makeup brands around because I get sick of using the same old thing. Substitute products affect the profitability of an industry by limiting the prices a company can charge. So for those who don’t want to spend $25 on a Christian Dior lip gloss, they can opt for an L’Oreal lip gloss with a similar shade at Duane Reade for $4. Perfume is the same too, if you don’t want to spend $60 for Cartier Delices de Cartier, you can spend $25 for a bottle of CK One. Even though these scents don’t smell the same, their function is the same; the purpose is to make you smell good. (UNFAVORABLE)
Finally, the last force is rivalry among existing competitors, which is relatively strong in the cosmetics and toiletries industry. There are a large number of small firms in this industry, where there is no particular dominant firm that exists. Also, as mentioned before, it is easy for the customers to switch from one company’s makeup or perfume to another. Another thing to keep in mind is that in this industry, there is little product differentiation where most makeup is relatively the same and the same applies for perfume, where scents smell similar. (UNFAVORABLE)
So after analyzing the cosmetics and toiletries industry, I realized that 4 out of the five forces are unfavorable while only 1 is favorable. This made me realize that…
THE COSMETICS & TOILETRIES INDUSTRY IS NOT AN ATTRACTIVE INDUSTRY TO ENTER AT THIS TIME
By entering this industry right now, there is little profit that can be made.
Last week, at our usual girl’s night out dinner, we discussed the usual- boys, school, work, and nonetheless, fashion. In particular, we were talking about hand bags. We were comparing each other's handbags to see the difference in quality, the material, the price, etc. My girlfriends were complaining about their Gucci handbags and how over time, the threads on the G logos were beginning to unravel (P.S. They are authentic bags). I was carrying my Louis Vuitton Damier Duomo, which I had since June of last year. I told them how durable my bag was; it has trekked through the snow, rain and sleet with me and has experienced some beautiful sunny days as well. I told them that I have not encountered a single problem with any products from Louis Vuitton because they are hand crafted with precision and care.
