The Porters Five Forces Competition Model - Essay Example

 The Porter’s Five Forces Competition Model Fine Fragrance Industry The Porter’s Five Forces Competition Model is commonly used for industry analysis. (Porter, 1998) Based on the Porter’s Five Forces Competition Model, the fine fragrance industry is unlikely to have a new rivalry caused by potential entrants because of the high capital requirement that is needed in setting up the company. Since there is a strong lobbying between the existing players in the fine fragrance industry and the government, there is a very big chance that the government would protect the welfare of the existing players. Since the government is protecting the welfare of the existing giant companies within the industry, the barrier to entry is high and potential threat from new entrants is low. Since the government is protecting the industry because of the high tax rate imposed on fine fragrances, it would be harder for the consumers to have a bargaining power over the price of related products. The local consumers are left with no choice but to avail these items at a high price or simply use a non-branded perfumes or colognes. Therefore, the bargaining power of the buyers on fine fragrances is low. There is a high threat for substitutes for fine fragrances. Many people would choose to use ordinary perfumes or unbranded perfumes as a substitute for fine fragrances because of the high prices. The bargaining power of suppliers is also low because there are a lot of suppliers available in the area competing to supply the raw materials for the big producers of Fine Fragrances like Channel, YSL, Givenchy, etc. Since there are a large number of suppliers in the area plus the option of finding a supplier in other countries, the competition among the suppliers of raw ingredients is very high. (See Chart I – Fine Fragrance Industry on page 4) Chart I – Fine Fragrance Industry Retailing of Fine Fragrance Industry There is a low threat of new entrants because of the limited number of authorized retailers caused by imposing a ‘Selected Distribution Agreement’ on the selling of Fine Fragrance Products. Buyers have a medium bargaining power over the retailers of fine fragrance products because the local consumers have the choice of paying high prices from a legal distributor and/or to buy the same product from grey market traders at a lower price. There is a high threat of substitute because of the grey market traders. These people are selling the over production of fine fragrances at relatively low prices than those being sold from an authorized dealer. The suppliers have a medium bargaining power. This is because they have the option to sell their products directly to the authorized dealers and/or the over production of fine fragrances are sold in grey markets at a lower price. (See Chart II – Retailing Fine Fragrance Industry on page 6) Chart II – Retailing Fine Fragrance Industry Impact of Using Celebrities as Endorser of Fine Fragrance Companies Jennifer Lopez was very successful in launching a perfume that was designed to capture the market for young women between 15 to 24 years old back in September 2002. (Wagner, 2006; Lloyd-Jones, 2005) It is a market strategy to choose J. Lo to endorse the product because her fans J. Lo will not have much difficulty wearing the perfume and preferring it over the others in the same category. In fact, the advertisement of J. Lo really made “Glow” perfume a big hit. She was the first among the celebrities to endorse her own perfume. Since then, more and more celebrities have been creating their own line of perfume. (Shannon, 2006) According to a marketer, using famous singer like Jennifer Lopez in endorsing perfumes would create a new market for the pre-adolescents. (Lloyd-Jones, 2005) Well-known brands that are backed up with pretty faces like Elizabeth Taylor, Naomi Campbell, Cindy Crawford, Britney Spears, etc. would play a big role in portraying an image that would definitely grab the attention of the young consumers. Aiming to increase the revenue from selling fragrances, marketers are trying to increase the sales by using celebrities in endorsing these products hoping that it would attract their devoted fans that are considering buying scents that are endorsed by these famous singers, actors, or actresses. (Lloyd-Jones, 2005) These marketers added that celebrity endorsers are still ‘hot.’ A big evidence for such success was seen as a result when J. Lo launched the newest fragrance Miami Glow. A similar success was evident when Catherine Zeta-Jones launched the Arden beauty perfume. Catherine Zeta-Jones was highly successful when she became the global spokesperson of Elizabeth Arden. Specifically the perfume business of Elizabeth Arden automatically increased by 14.6%. (Elizabeth Arden, 2003) The company was also able to establish and strengthen its brand globally. Celebrities are said to be a better endorser than the other people who are not known by the public because celebrities are able to increase awareness in a company’s advertisement in a way that it creates positive feelings towards brands and are often perceived by the consumers as more entertaining. (Solomon, 2002) However, there are also cases wherein the use of celebrity models are ineffective such as in the case of Sophie Dahl for Yves Saint Laurent’s Opium perfume. (Gucci, 2003a) The advertisement of Opium featuring a naked Sophie Dahl resulted to a total of 730 complaints to the ASA because the advertisement were placed on the poster sites which should not be seen by children. To add up to the insult, ASA commented that the said advertisement is “tasteless to some advertisement readers and could even cause a serious widespread offence.” (Gucci, 2003a) It was reported that the failure of Sophie’s advertisement resulted to a huge slide of 27% in the company’s net profit from GBP 215.9m to GBP 156.7m. Its total sales immediately slide down by 9.6%. (Gucci, 2003b) Abolishing Selected Distribution Agreement’s Effects on Fine Fragrance Companies In case the selected distribution agreement have been abolished by the government, the sales of fine perfume companies will gradually fall since most of the consumers would buy the same goods in other stores that sells the fine perfumes at a much lower price. When this happens, the consumers’ perception of seeing the fine perfumes as a ‘luxury item’ would start to change. Removing the selected distribution agreement would eventually allow the prices of the fine fragrance products to be dictated by the free market. This would result to bringing down the prices of these items relatively low. The government would also be highly affected when this happens because of the tax collected by the government from these big time companies would eventually fall. This would be beneficial on the part of the consumer since these people could easily afford to buy these perfumes. The problem is, the essence of having these items as a ‘luxury product’ will be lost. *** End *** References: 1 Elizabeth Arden (2003) ‘Elizabeth Arden: Annual Report 2003’ Retrieved: May 16, 2007 < http://media.corporate-ir.net/ > 2 Gucci (2003a) ‘Gucci Ad Not Banned’ Retrieved: May 16, 2007 < http://www.fashionunited.co.uk/ > 3 Gucci (2003b) ‘Gucci’s Profit Drops 27%’ Retrieved: May 16, 2007 < http://www.fashionunited.co.uk/ > 4 Lloyd-Jones, T. (2005) ‘Coty Extends the Celebrity Treatment’ BI-ME. November 22, 2005 Retrieved: May 16, 2007 < http://www.bi-me.com/ > 5 Porter, M. (1998) ‘Competitive Strategy: Techniques for Analysing Industries and Competitors’ Free Press; 1st Edition. p. 33 6 Shannon (2006) ‘Kylie Minogue, Gwen Staphani and David Beckham: Celebrity Fragrances Continue to Surge’ December 28, 2006 Retrieved: May 16, 2007 < http://www.piercemattie.com/ > 7 Solomon, M. (2002) ‘Consumer Behavior: Buying, Having, and Being’ 5th Ed. New Jersey: Prentice Hall 8 Wagner, M. (2006) ‘Perfume Review & Musings & Sample Giveaway: Live Luxe by Jennifer Lopez’ August 29, 2006 Retrieved: May 16, 2007 < http://www.mimifroufrou.com/ > Read More