Industry History & Analysis – Keerthi
In terms of size the apparel industry in the United States is the largest in world, which is perhaps due to the fact that our nation hosts one of the largest global economies. Retailing which is mostly performed in-store contributes approximately 292 billion dollars to the United States apparel market (Statista Research Department, 2020). Nationally the apparel and textile industry is currently worth 70 billion-dollars and this is measured by the value of the industry shipments. This industry is globally competitive in manufacturing of textile raw materials, apparel, fabrics, and home furnishings (Statista Research Department, 2020). Looking back at the past couple years, companies are constantly changing their business strategies to effectively find ways to competitively produce product while simultaneously, controlling expenses by seeking alternative methods of manufacturing and finding answers in advanced technology, offshoring and near shoring production (Dyer, 2018). If we focus on brands and examine home companies in the apparel industry, in 2017 Nike, holds 2.8% of market share as the leading apparel supplier and manufacture in the United States. The company is also one of the largest, dominant players in the global market coming second to Zara. Nike has a revenue of 4.89 billion dollars in North America in 2017 which makes it the highest GDP contributor, in the apparel industry in the united states. According to American Apparel and Footwear Association, the United States apparel and footwear industry has contributed approximately 383.6 billion dollars in retail sales to the national economy (Statista Research Department, 2020).
As the world progresses the same is true for the fashion industry, and as we evolve and changes take place, the face of fashion and the industry itself has drastically changed from decade to decade. Taking a glance back into the 1930’s when the garment district in New York was considered a headquarters to apparel manufacturers then years down the line, these manufacturing jobs moved to other countries, mostly oversees in countries located in Asia and now South and Central America. In the past several decades, United States employment in the apparel manufacturing industry has dramatically decreased due to the ongoing trend of using outsourcing for the purpose of taking advantage of cheaper labor. In the early 1990’s, there were roughly 940,000 jobs in manufacturing, using those figures to compare to the 144,000 jobs in early 2010’s, the 796,000 drop in manufacturing jobs in a twenty year period reflects the way businesses are transitioning their strategy to focus on taking advantage of the cheap labor offered by countries oversees. While many manufacturing jobs are leaving the United States there is now a new focus which is related to jobs in fashion that pay higher than manufacturing offered. These jobs appeal to nations workforce and assist the loss of manufacturing jobs to the apparel industry. These jobs which are been created in some of the cities nationally focus on companies that concentrate on the apparel global supply chain. Jobs also include research and development, design, and marketing and advertisement. To work in these positions, people need to have higher education and then they can earn higher wages. United States apparel manufacturing industry runs a trade deficit at present. In 2014, apparel exports reached 6 billion dollars and imports are around 82 billion dollars from that, 36% of imports come from manufacturing powerhouse China, 11% come from Vietnam, 6% come from Bangladesh, another 6% comes from Indonesia and lastly 5% come from Mexico. The United States focuses on importing apparel from these five countries.
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Nike Company Background – Daniela
Originally created in 1962 Blue-Ribbon Sports, later renamed Nike in 1972 Inc. became one of the world’s largest apparel and footwear company, founded by Phil Knight and Bill Bowerman in Oregon. From inception Nike focused on superior product quality development, design, and worldwide marketing and advertisement. They compete in footwear, apparel and sports accessory sector holding 44% of the world’s footwear share that is valued at 10 billion dollars. The Nike company relies on outsourcing for their manufacturing which was part of their original strategy after noticing how this strategy worked for camera manufacturers in Japan while competing with German camera manufacturers. By 1992 this labor cost maximizing strategy allowed Nike to become the leading player in the apparel and footwear market against Adidas who held the leading spot prior. Since then, Nike has created many barriers that have effectively granted them power, over competitors, to secure their position as industry leaders. Their presence in170 countries, with retail stores, outlets, distribution facilities and e-commerce, secures Nike’s spot against entrants, rivals and provides them with an upper hand in dealing with suppliers while focusing on delivering the best value to their buyers. In this report, we will analyze economic influences that enable Nike, to secure their leadership position in the apparel industry, using Michael Porter’s Five Force Analysis (Dyer, 2018).
Current Industry Status – Harita
Nike is the best recognized brand all around the world. Their caption “JUST DO IT” has captured a huge share of the market for its products including athletic wear, apparel, equipment and accessories.
As of 2019, fourth quarter revenue was $10.2 billion, increased by 4 percent on a reportedly and was up by 10 percent on a neutral basis. So, when the full year revenue was reported, the fiscal years rose to $39.1 billion, increased by 7 percent reportedly and up by 11 percent on a neutral basis. Having lasted in the corporate business, NIKE has been standing tall since nearly five decades and with a few speed breakers along the way, the fiscal year reported in 2019 suggests company’s progressive growth (Amed & Berg, 2018).
Now NIKE is also doing well in terms of apparel industry as compared to footwear and equipment. The apparel sales generated $10.73 billion in revenue in 2018. This indicated a 9% increase over the previous year of the company. Nike apparel performed well across the board, especially notable increases in sportswear, NIKE football and basketball categories.
As of 2018, NIKE brands and CONVERSE made 42% sales in the United States, whereas the others 58% was from the international market. With the successful run for all these years NIKE managed to gain ownership of other companies in the same business-like Hurley, Converse, Umbro and Cole Haan. All of these are NIKE’s subsidiary companies doing equally well financially.
Talking about NIKE’s current status in the international market, then NIKE is a market leader in China. The major driving force for that is the NBA because of which the sales increased by 22 percent to $1.68 billion in the quarter of 2018.
Between 2009 to 2019, NIKE is operating more than over 648 NIKE factory stores outside of United States. The financial growth of NIKE over the last 10 years has been increasing exponentially as compared to its major competitors like Adidas and Reebok. Here is statistical look at the financial growth of the company over the last 10 years.
FY 2019: $39.1 billion
FY 2018: $36.4 billion
FY 2017: $34.4 billion
FY 2016: $32.4 billion
FY 2015: $30.6 billion
FY 2014: $27.8 billion
FY 2013: $25.3 billion
FY 2012: $23.3 billion
FY 2011: $20.1 billion
NIKE has over 3000 retail partners and it widely contributes to its sales across the globe. NIKE has multi-million deals with NBA stars like Kobe Bryant and Michael Jordan which really drives up their sales. By the fiscal year 2020, NIKE estimates to increase their annual growth up to $50.1 billion in revenue.
Five Forces Analysis
Entry – Daniela
Considering the national apparel industry, the threat of new entrants is weak given that the industry is greatly populated by an abundance of existing brands who occupy the space. Sustaining market share in this 292 billion-dollar industry requires current occupants to consistently create barriers that make it difficult for new entrants to gain market shar (Amed & Berg, 2018) e. From an economic standpoint there are several forces negatively contributing to barriers new entrants face when making efforts to occupy space. In the following section we will explore economic factors like, sunk cost and economies of scale, that impact entrants to the apparel industry in the United States (Baye & Prince, 2017).
In relation to the apparel industry, sunk cost are moderate to strong barriers for entrants who want to compete here in the United States. Sunk costs are onetime purchases that once paid are unrecoverable. The purchase of costly textile machinery is an example of a sunk cost for those who choose to manufacture apparel. This sunk cost, acts as deterrent to entrants who consider making the capital investment to compete in this space should they choose to manufacture their own apparel. However, the purchase of textile machinery is possibly irrelevant to new clothing companies, who wish to compete in the United States market, because most companies often choose outsourcing channels (Baye & Prince, 2017).
Contracting oversees to clothing manufacturers in countries like, Vietnam, China, and Indonesia lead to cost savings that cannot be obtain if one decides to manufacture in the United States. Oversees countries, like the ones named above, are considered the clothing manufacturing powerhouses of the world. These clothing manufactures who are mostly located in Asia, possess economies of scale because of their proven experience in efficient manufacturing that provides cost advantages for each unit of output (Baye & Prince, 2017). Incumbents, like Nike have an advantage over entrants, in this space because they have 56 years of experience in dealing with oversees manufacturing which provides them with a competitive advantage against entrants who will experience a high learning curve (McFarlane, 2019).
Nike’s strategy to avoid sunk costs, capital investment costs and overhead costs from choosing to avoid inhouse manufacturing and opting to outsource, has proven to be an effective competitive strategy (McFarlane, 2019). Consider Adidas, a German company who competes with Nike and held market share upon Nike’s entry to the industry; whose strategy to manufacture in Germany failed once Nike was able to focus their profits on core capabilities like brand design and advertising, instead of product manufacturing (Barclay, 2019). While Adidas, used the German labor workforce to manufacture and paid premium hourly labor costs of 35.49 USD per hour, Nike used the economies of scale from outsource manufacture’s and paid a discounted price between 1.08 USD per hour and at most 9.46 USD per hour. As the entrant using outsource strategy Nike was able to gain market over Adidas and eventually became the industry leader in athletic apparel (Dyer, 2018). Adidas has since shifted their strategy and began outsourcing their manufacturing to companies oversees. Newer entrants like Under Armour, who are competing in the athletic apparel industry, initially chose to manufacture here in the United States but have since begun changing their strategy to manufacture oversees or focus on automation technology to manufacture in order to compete against Nike (Barclay, 2019).
Power of Buyers – Keerthi
In the fashion retail industry, individual customers will have very little bargaining power. Anyhow, there are many factors which will make the customers as a group and they can influence this force. In this 21st Century, customers are switching from one brand to the other brand which are available in the market. Several brands are available in the market. Many brands are available, and the competition is more between the brands, so the customers are having many options to do shopping. They are having easy time to select between the various brands, and they are comfortable to switch between them. Some of the fashion brands will attract the new customers and these brands will even retain the existing customers. And that would one of the best reasons why the top brands will spend on marketing.
These days most of the brands are following some trend to retain the customers. Some brands are offering discounts and sending an email to them to attract them back with the offers. Few other brands are giving the membership cards. With the membership you will get some extra discount when compared to the regular customers. Many customers will apply for the membership. Once we get the membership, we will be in a mood to buy from that brand store because of the extra discount. We can get reward points also. Reward points can be redeemed for shopping purpose. So, we can say that buying power of the customer is more in the apparel industry. Sometimes customers will not be influenced directly, they can be influenced indirectly also. Each brand is going beyond and trying to impress and influence the customers. Each and every brand is trying to give more and more discounts basing on the membership. These brands are even using the technology and they are trying to improve the experience of the customers. They are having various apps and websites available. Using the app, we can even locate where we have the required apparel is in the store. Some brands even design the required apparel as per customer needs to attract them. You can have a design on apparel with your name on it. It is all completely customized. To design that type of apparels we do not need to visit the stores. We can design that type of apparels in the online website itself.
Business performance of the Nike company is been directly affected by the customers. This force would define how the customers will affect the industry environment and how the business gets effected. Power of customers is moderate because the switching cost is low. Individual buyers switching is very low and its very small size. Substitutes are normal and they are not at high range so to switch the brands it would take some time. One person cannot shift very soon. It would take some time so this force is a moderate force and it would show normal impact on the business.
Power of Input Suppliers – Harita
The main purpose of this force is to analyze how much how much a business has control over it and the potential to raise prices over it. The suppliers have the power to either increase or variably lower a business’s profitability. The suppliers definitely have the power to affect Nike’s business by the availability of raw materials. Although Nike’s sales cannot be as much affected by the individual suppliers because the company has a large population of suppliers. The company’s products are available in 42 countries in over 620 factories. So, when this happens the chances of competitions is reduced in terms of suppliers. Since Nike is such a big brand it set a standard for the suppliers in terms of complying with availability of raw materials and timeliness. If a supplier does not adhere to these standards, then the company can easily switch to other suppliers. So, Nike holds a greater control over the suppliers.
Nike’s footwear and apparel are produced outside the US by third-party companies in various countries including Vietnam, China, Indonesia, Argentina, Brazil, India and Mexico. In terms of supplier power, Vietnam, China and Indonesia are the biggest supplier countries. In the year 2013, the major supplier countries contributed around 42%, 30% and 26% of Nike’s total brand production. No single apparel or footwear industry contributed to over 6% of total Nike’s brand production but because of the considerably large number of suppliers around the globe, it is believed the power of suppliers is limited. The industry in which Nike participates, the suppliers do play a significant role, but it is believed to be moderately less threatening.
The only threat suppliers impose to Nike is that they have the ability to create counterfeit or imitations of the brand product which Nike has created a barrier against this. The barrier that Nike placed in action to avoid imitations from suppliers to creating counterfeit product is to contract different suppliers with small portions of the manufacturing process; meaning that one supplier does not create 100% of one product instead; several suppliers are tasked with different components of the item. These suppliers do not have contact with one another and are typically located in several parts of the world and create different components of the product that eventually Nike assembles.
Nike’s major suppliers like Hansea Co, Youngone Corp, Sea-A trading are apparel suppliers to Nike, Zara, Fitch, Patagonia which built their own brands to supply their products. In 2000 Nike had sub-contractors and distribution proficiency in cheap labor, raw materials and low tariffs and duties of a country. Suppliers have a very concentrated region and their concentration is higher than their buyers. Bargaining power of buyers shows the pressure that customers exert on businesses and because of this pressure Nike is influenced and increases their ability to achieve greater objectives to meet customer needs. As such, suppliers play a very weak role in determining Nike’s strategies in sports footwear, apparel, and equipment industry.
References
Amed, I., & Berg, A. (2018). The State of Fashion 2019: A year of awakening. London: The Business of Fashion and McKinsey & Company.
Barclay, P. (2019, August 29). Adidas vs. Nike vs. Under Armour: Which Is a Better Investment for 2019? Retrieved from Investopedia.com: https://www.investopedia.com/articles/markets/012616/adidas-vs-nike-vs-under-armour-which-2016-nkeua.asp
Baye, M., & Prince, J. (2017). Managerial Economics and Business Strategy. New York: McGraw-Hill Higher Education.
Dyer, J. H. (2018). Nike: Sourcing and Strategy in Athletic Footwear. In J. H. Dyer, Strategic Management: Concepts and Cases (pp. C77 – 82). John Wiley & Sons.
McFarlane, G. (2019, September 24). How Nike Makes Money: Revenue in Sports Equipment and Apparel is Growing Fast. Retrieved from Investopedia.com: https://www.investopedia.com/articles/markets/080415/how-nike-nke-makes-its-money.asp
Statista Research Department. (2020). U.S. Apparel Market – Statistics & Facts. New York: Statista, Inc.
