Industry Definition
The footwear wholesaling industry works with operators, manufacturers, and retailers to wholesale footwear, such as athletic shoes. The companies in this industry buy footwear from the manufactures and resell those products to retailers and end consumers (O’Malley).
Barriers to Entry
The industry of Footwear Wholesaling in the United States has been popular over the generations and the popularity of the industry also means that there are several potential competitors who want to enter this profitable industry. Due to this risk, there are several barriers to entry, such as government regulation and brand loyalty, which prevent new entrants from joining the industry.
Some of the major barriers are legal and governmental regulations in the footwear wholesaling industry that limit entry. As revealed in the industry report of footwear wholesaling, there is a high presence of license agreements which “provide wholesalers with exclusive distribution of certain brands, creating contracts between themselves and footwear manufacturers” (O’Malley). Legal regulations, such as license agreements, make it difficult for new entrants to find suppliers that would be willing to let the new entrant distribute their products. Many of the suppliers are bound by contracts that have been developed by wholesalers, like Nike, to provide additional security in the industry from potential competitors. It would be hard for a new wholesaler to enter the industry as it would be tough to find footwear manufacturers who are currently not in a contract. Another regulation that exists in the industry is that “some wholesalers will also use trademarks on nearly all of their products . . . This is because penalties are imposed on the infringement of patents and trademarks” (O’Malley). 2 Trademarks can be seen as one of the important barriers to entry because they have serious legal consequences. Major players, such as Nike, can easily drag new entrants into court if their products even resemble the Nike products which makes it problematic for new companies trying to enter the industry.
Intensity of Rivalry
After analyzing the footwear wholesaling industry, Nike appears to be the leading competitor here. As Nike holds a hefty 29.1% individually, it has a huge advantage to ride the smaller company’s low prices as Nike sets their prices significantly higher. With their annual profit growth rate at 42.4%, Nike currently holds a competitive advantage in relation to their price strategies. According to The Strategy Watch, Nike’s price strategy has set itself up to become the largest footwear company on the market by using high prices to establish quality products in the eyes of the consumer. This idea that price affects quality is highly persuasive to the consumer and Nike has successfully made this power move in the marketplace. With a small number of competitor-worthy brands in the footwear wholesaling industry, Nike starting a price war could potentially eliminate some competition and leave consumers with fewer buying options. Because of the stance that Nike has already taken, starting a price war could be dangerous for the company’s health and diminish the strong brand identity that they have built up with its customers who expect quality over quantity. This is the position Nike has currently taken in the market.
Although their high prices make the brand appear more quality-driven than their competition, Nike has the highest risk and highest reward at stake as shown through their high annual profit growth percentage. If and when the small yet many competitors in footwear start a price war in the industry, with Nike keeping their brand image of having quality by pricing their products higher than the average company, they could potentially lose their price-conscious customers and and healthy percentage of their profits. Even with this advantage of having the sole highest percentage of the market, there is still a risk of a price war with such a saturated market.
Nike has to consider there are other options out there in the market like New Balance, Adidas, Puma, Reebok, Converse, Fila, etc., in the wholesaling footwear industry. Other brands that have gone global have positioned themselves to provide lower-priced footwear training shoes with the same necessity and functionality that Nike brings to the consumer. On another note, counterfeit footwear imitating famous brands’ products such as Nike can be an additional rivalry for Nike to overcome. For example, local companies in a country may impersonate Nike’s product to reach out to consumers who do not have the expenses or are not willing to pay the retail price of Nike’s footwear price. With both the most to lose a gain, Nike has to work diligently to continue building on their brand loyal customers and maintain their brand image to entice other customers who keep their buying options open.
Bargaining Power of Suppliers
The inputs needed for the footwear industry are not specific to any one company. This means that suppliers are not likely to form a cartel or engage in price fixing. The bargaining power of suppliers in the shoe industry is low. Their low bargaining power can be attributed to several factors including small business size, fragmentation, and lack of forward integration. The companies also outsource the production to different players depending upon the seasonal fluctuations and changes in the trends. For example, different companies outsource the production of sole to small companies. In the footwear industry, fashion trends also shift quickly. Retailers, wholesalers, and e-commerce businesses are the main distributors and end users for the footwear sector, and they have the power to influence income growth. Even while these businesses have significant market leverage, they are unlikely to use it to pressure suppliers since they are worried about losing their customers. The resources required by the footwear sector are not exclusive to any one company. For instance, because the cost of inputs is not high and businesses are unlikely to locate suppliers offering extremely expensive goods, suppliers do not typically join unions or engage in price fixing. Major players in the footwear industry, for 4 example Nike, influence the suppliers and they will follow their lead when determining what prices, they can charge because it has little power to negotiate with them.
Bargaining Power of Buyers
From a footwear wholesaler perspective, there are two tiers of buyers in the U.S. The first-tier buyers are: shoe stores, sporting goods stores, department stores, E-Commerce & Online Auctions, and warehouse clubs & supercenters. The second-tier buyers are the end consumers. Different groups of buyers have different impacts on the industry and that makes their bargaining power differ. However, bargaining power of buyers in the footwear wholesaling is moderate to low. One factor to determine the buyer’s bargaining power is if they are dominant. To a broad range, there are many shoe stores, sporting goods stores, and E-commerce & Online Auctions in the U.S. market. These buyers are not large, and we have a lot of them. To a narrow range, wholesalers can distribute their products to Target, Walmart, TJ-Maxx, Footlocker, Macys, and many others. The second factor to determine the buyer’s power is if these buyers purchase in large quantities. From this point of view, buyers have some bargaining power. For footwear wholesalers to distribute their products, they might have a contract with some retailers. In that case, buyers can negotiate their price with the wholesales if buyers are placing a large quantity order. According to the IBIS World Products & Market “In 2022, IBISWorld expects that footwear wholesalers will receive an estimated 26.4% of revenue from specialty footwear stores. Discount stores are a fast-growing retail channel for shoes and are expected to account for 23.3% of industry revenue in 2022” (IBISWorld). Because footwear stores and discount stores are major distributors and generate most of the profit for footwear wholesalers, they have some bargaining power. The switching costs for buyers are low in the industry as well. The cost for a 5 shoe store to order from Nike to Adidas is low. In general, bargaining power of buyers in the footwear wholesaling industry is moderate to low.
Threats of Substitutes
As one of the leading companies in footwear wholesaling across the global market, Nike will be facing possible threats of substitutes. Nike’s footwear products are priced at mid-range when considering there are much more affordable and expensive options out there in the footwear wholesale market for consumers’ specific needs. The reason why Nike’s footwear is priced as it is due to the overhead and manufacturing costs, along with the retail markup costs, advertising, demand, and profits all playing a role. Considering there are other options out there in the market like New Balance, Adidas, Puma, Reebok, Converse, Fila, etc., in comparison to Nike’s wholesaling footwear. There are other brands out there globally that provide lower-priced footwear training shoes that provide the same necessity and functionality in substitution for Nike’s. One thing to take note of is counterfeit footwear imitating famous brands’ products. For example, local companies in a country may impersonate Nike’s product to reach out to consumers who do not have the expenses or are not willing to pay the retail price of Nike’s footwear price. This would be a threat to Nike in the footwear wholesale industry as consumers may wear different styles than athletic shoes and priced at a lower retail price. Other substitutes in the luxury brands would be Louis Vuitton, Gucci, Miu Miu, Balenciaga, Versace, Prada, etc. These companies provide luxury for upper-class income consumers. These companies also provide athletic and other different styles of shoes for many occasions. The Berry Amendment may also be a threat to substitutes. “The Berry Amendment has been applied to athletic footwear, the military will stop purchasing from wholesalers and turn to purchasing directly from US manufacturers” (O’Malley).
Conclusion
We have used Porter’s Five Forces to analyze the footwear wholesaling industry. Through our findings, we have identified that the footwear wholesaling industry contains many barriers for new entrants including license agreements, trademarks, and patents. There is a clear lead competitor with little intensity of rivalry present in the market. Retailers and consumers in this industry have some bargaining power when ordering large quantities of product although generally this power is seldom. Likewise, the bargaining power of suppliers is extremely low due to the saturation of suppliers and the companies fear of losing their customers. Footwear consists of a wide range with many variations and options which creates moderately low threat of substitutes.