Porters Five-Forces Model: A. Risk of Entry by Potential Competitors; The cosmetics industry possesses rather high entrance barriers for the competition. The fact that the cosmetics are used on humans and therefore in the worst case can damage human health, makes the regulatory agencies very demanding of the new entrants in terms of product testing, safety and usefulness. The Advertisements aimed at promotion of at least one brand can cost millions per 30 sec TV Ad to several hundreds of thousands for magazine ads establishing barriers for new entrants.
Brand Loyalty. Brand loyalty is very high in the cosmetics industry and Estee Lauder makes a great use of it enjoying the customers buying Tommy Hilfiger, and Aramis brands without even looking at other brands. Yet still if customers are used to some skin care products like the one from the P&Gs series Oil and Ol ay Estee Lauder will face this barrier if it wants to launch a new brand aimed at that very same market. Absolute Cost Advantage. Estee Lauder does not deploy the absolute cost advantage and focuses on the upscale, prestigious brands that are sold at high prices and that bring high returns for the company. It should be noted that Estee Lauder has an average mark up on production cost for its products of over 500%, meaning that a $100 bottle of perfume costs Estee Lauder only $20.
For new entrants, est ee lauder does not pose the entry barriers on this one. Plus it should be noted that customers are willing to pay more for something that cost only 1/5 of the price they pay because of the image. I am confident that if customers would watch the brands like Origins or Estee Lauder sell for only 20% of their previous price-they would consider these brands cheap and would not buy them at all. Economies of Scale Unlike the competing Proctor and Gamble with its Oil and Ol ay brand that is aimed at mass production, Estee Lauder does not engage in mass production in the traditional sense. The main reason for mass production is to be able to sell at cheap prices and because of the large volume to make much money. Estee Lauder prefers to sell at high prices, custom made perfumes for the most part, yet also having some semi-custom, semi-mass production brands (like Hilfiger and a veda).
Perfume and cosmetics market is not usually aimed at mass production for image reasons, yet companies like Unilever and P&G indeed create these barriers. Customer Switching Costs. The customer switching costs in the perfume and cosmetics industry are pretty low. Apparently, the brand loyalty plays the main role psychologically for the Estee Lauder customers, yet cost-wise, it is even cheaper for a customer to buy most perfumes from P&G, LOreal, or Unilever simply because Estee Lauder aims at high-income customers. Government Regulations (any legislative / judicial issues that heighten / lower the entry barriers of potential competitors? ) The government requires a lot of testing and adherence to the safety standards and certainly it creates additional costs and thus, barriers for new entrants into the cosmetics market. B.
Rivalry Among Established Companies Industry Competitive Structure; the cosmetics industry is still fragmented yet now more efforts are made to consolidate the most revenues in three companies like Estee Lauder, P&G, Unilever and LOreal. Other companies like Avon, or Mary Kay that are also present on the market currently lose their share to the big four. As it has been previously noted the demand is growing at a rate of 7% annually for the past 5 years and this certainly provides a lot of opportunities for Estee lauder and new entrants. The exit barriers are less high than the entrance barriers, yet the company est ee lauder strives to remain in the industry to assure the correspondence with the tradition of the company creators, the Lauders. C.
Bargaining Power of Buyers. The consumers can hardly bargain in this industry simply because they associate value with high costs. As for the skin care products like creams, tanning lotions, the customers indeed prefer mid-priced products that appear to possess high quality and reasonable price. D.
Bargaining Power of Suppliers. The main products used in production of cosmetics are natural herbs, oils, or perfume spirits that companies use for most of its products. As it has been said the costs usually account for only 20% of the total price on most cosmetics and therefore unless the supplier double the prices the modest raises cannot be harmful for the companies. Another thing worth noting is the fact that most of the natural products used in cosmetics can be bought in third world countries and therefore can be bought at cheap prices. E. Substitute Products.
There can hardly be any substitutes for perfumes. Various skin creams can be substituted by the regular sour cream, cucumber rings put on the face, or olive oil applied to the skin, things popular in the 1950 s, and which are nowadays are hardly even considered to be useful for cosmetic purposes by the customers. Therefore, companies like est ee lauder can enjoy the market with hardly any substitutes, yet can watch the customers switch to competitors which provide competing substitute alternatives.