Cosmetic retail is quite developed industry. However, every industry has its peculiarities, which are sometimes hard to understand. Thus, in order to better understand the context in which this or that the company operates, it is crucial to use Michael Porter’s Five-Forces Model.
As stated by Berger, this framework “considers the five competitive forces that influence a business success or failure” (10). Each of the forces has variables. Five variables have been chosen for each force and rated on a scale of 1 to 5 according to their importance for the cosmetic industry.
Rivalry among competing firms
Number of competing firms
Fixed costs/Value added
According to David, it is “the most powerful of the five forces” (75). Thus, the number of competing firms matters a lot. The difference of cosmetic is wide, so there is an opportunity for rivals to sell different products. The industry growth influences the development of competition. If fixed costs are high and switching costs are low, they increase the rivalry in the industry.
Potential Entry of New Competitors
Barriers to entry (rights)
Economies of scale
If there are no considerable barriers to enter, there may be many new entrants (Berger, 11). For the cosmetic industry, the most important barriers are the exclusive rights and economies of scale. However, this industry has large capital requirements since the differentiation of products that are sold in it. Moreover, cosmetic retail is more widespread as chain stores or exclusive brand retailers, which also make up chains.
Potential Development of Substitute Products
Ease of substitution
Buyer inclination to substitute
Buyer switching costs
Relative price performance of substitute
For the cosmetic industry the crucial issue is the way for buyers to substitute and their willing to do this. For the retailers it is better to sell unique products, for example to sell one cosmetic brand. The less valuable is the change of quality, due to the fact that retailer cannot influence the quality of products they sell.
Bargaining Power of Suppliers
Supplier concentration to firm concentration ratio
Strength of distribution channel
Impact of inputs on cost or differentiation
Switching costs of firms in the industry
Differentiation of inputs
Suppliers tend to have very little power in the retail industry. However, for the cosmetics the exclusive suppliers matter a lot and influence the market. They can make retailers have large inputs on the scale of orders. If the supplier is exclusive, the switching costs are very high. As for the cosmetic retail – the inputs are slightly differentiated, so this variable is less crucial.
Bargaining Power of Consumers
As for cosmetics retail, “buyers are fragmented – no buyer has any particular influence on the product or price” (Porter’s Five Forces:A Model For Industry Analysis, para. 18). Still, buyer has to be provided with the information and has a choice of substitutes. Some buyers tend to choose only one brand. Buyer volume and price sensitivity are less important because cosmetic is what people tend to buy all the time, and prices do not react on the slightest changes.
Berger, Alexander. Contemporary Development in Business and Management: Beiersdorf. Pakistan: GRIN Verlag, 2011.
David, Fred R. Strategic management: concepts and cases. 13th ed. New Jersey: Prentice Hall, 2011.
“Porter’s Five Forces: A Model for Industry Analysis.” QuickMBA. n.d. 3 Nov. 2011.