Luxury lifestyle company Ralph Lauren‘s (NYSE:RL) revenue growth is expected to accelerate in the future, owing to its strategic initiatives and a more comparable base as it laps the discontinuation of its several businesses in the future. While this top line outlook is encouraging, we look at a Porter’s Five Forces analysis of Ralph Lauren’s business to understand where it could gain or lose going forward.
The competitive rivalry within the luxury market is moderate to high with the presence of a large number of players. Some of these players have greater financial and marketing resources than Ralph Lauren. The growing competition from Internet-based companies could also impact Ralph Lauren’s financials in the future. Wholesale customers such as Macy’s and Kohl’s hold a degree of bargaining power as they account for a significant proportion of sales. While Ralph Lauren enjoys high brand loyalty, if it fails to adapt its products to changing consumer trends and preferences, then customers could gravitate towards other brands. Moreover, the risk from counterfeit products makes the threat of substitute products moderate.
Porter Five Force Analysis
Porter Five Force
|Competitive Rivalry Within The Industry||Medium – High|
|Bargaining Power Of Customers||Medium|
|Threat Of New Entrants||Low – Medium|
|Bargaining Power Of Suppliers||Low|
|Threat Of Substitute Products||Low – Medium|
Competitive rivalry within the industry - The presence of several established players in the luxury market along with rising number of internet-based players poses a threat to Ralph Lauren
- While the global luxury market continues to grow on account of recovery in the global economy and increasing demand from Chinese shoppers, it is highly competitive with presence of various players, including the Jones group, PVH Corporation, VF Corporation, etc.
- Some of these competitors have large financial and marketing resources, and hence could compete more effectively in difficult times. In the event of economic weakness, brands in the industry could resort to promotions, which could harm all the players in the industry.
- Apart from these established companies, RL is also witnessing rising competition from Internet-based companies selling apparel, accessories and other products. Such competitors could affect RL’s sales, prices and profitability in the future.
Bargaining power of customers – Wholesale customers such as Macy’s hold bargaining power
- Ralph Lauren sells its products through the distinct channels of wholesale, retail and licensing, which comprised for around 45%, 52% and 3% of its net revenues in fiscal 2013 respectively.
- Wholesale sales include sales through major department stores and specialty stores across North America, Europe, Asia and Latin America. The three largest wholesale customers accounted for about 45% of the total wholesale revenues in fiscal 2013, with Macy’s comprising for around 12% of total net revenues.
- In addition, the company relies on select customers for the distribution of certain products. For example, it is heavily dependent on Kohl’s for the majority of its Chaps products.
- Wholesale customers hold bargaining power as they could substitute Ralph Lauren’s products with other competitors’ products or private label offerings. Financial problems with these wholesale customers could also cause disruption in Ralph Lauren’s business.
- Ralph Lauren enjoys brand loyalty among end-consumers account of its strong brand image, differentiated product portfolio and high quality products.
- However, if Ralph Lauren fails to keep up with change in customer preferences and trends, then customers could gravitate towards other brands. Low switching costs for customers further heightens their bargaining power.
Threat of new entrants – While capital investments restrict entry of new players, more Internet-based companies could enter the market
- Large capital resources are required to build a new brand as huge investments in marketing and floor space would be required.
- Brand recognition and loyalty are one of the main factors that attracts middle-to-high income earners towards luxury companies such as Ralph Lauren. It will be difficult for a new player to achieve this brand recognition without significant investments.
- Having said that, the low barriers to entry in the Internet business, could attract new companies to start selling apparel, footwear and accessories online.
Bargaining power of suppliers – Diverse supplier base restricts their bargaining power
- Ralph Lauren does not manufacture its products. Instead, the company engages more than 700 different manufacturers across the world to manufacture its products.
- These suppliers have limited bargaining power, as no manufacturer produced more than around 4% of total production in fiscal 2013.
- More than 98% of its product base (in dollar terms) in fiscal 2013 was manufactured outside the U.S., mainly in regions including Asia, Europe and Latin America. The wide geographical base further limits supplier power.
- However, increased costs of raw material and labor are generally shared by suppliers with Ralph Lauren through pricing.
Threat of substitute products – Counterfeit products represents the biggest threat in this area
- Ralph Lauren’s products are bought by upper middle class to upper class customers. Since consumers in this group like to wear high-end luxury brands to display affluence, the demand for brands like Ralph Lauren is expected to continue.
- However, counterfeit products represents a growing problem for the company, especially in markets such as China. As the quality of counterfeit products has been improving over the past few years, we believe this problem has the potential to dilute the company ‘s brand value. Hence, this is an area to watch.
Our $187 price estimate for Ralph Lauren’s stock, represents near 10% upside to the current market price.