Analysis of Primark and H&M Clothing Shops

Introduction

Primark Stores Ltd is located in UK and also in the Republic of Ireland. It specializes in clothes and linen. Moreover, the company has more than 180 branches. According to TNS rankings, the company ranks second largest in UK, in terms of market share and sales volume for clothes. On the other hand, H&M is the world’s arguably largest fashion company. It owns stores throughout the world and has based its operations in 6 continents. More specifically, the company operates in 37 countries, where it owns 2,000 stores, employing a total of 76,000 people. Due to the leadership aspect of these two companies, it is imperative to carry out a study, seeking to determine factors behind their success. In this regard, the foregoing study will take two dimensions; making use of Porter’s Five Forces and PEST frameworks. The former analyzes the internal environment of a company, while the latter analyzes the external environment (Rajeev 2011).

Porters Five Forces Analysis

This analytical model was formulated in 1979 by Michael E. Porter, a professor in Harvard School of Business (Richard & Patricia 2007). The model is widely used by managers and investors to analyze the internal environment of a company, which is vital for decision making. As the model suggests, it comprises of 5 forces viz. competition intensity, threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of new substitutes and threat of new entrants in the market. All these factors are important in evaluating a company’s performance, hence, amicable decision making. This model has been regarded as the most influential model in analyzing a company’s performance. In this regard, it is imperative to embrace it in determining the performance of Primark and H&M.

Porter’s Five Forces for Primark

Threat of New Substitutes

In Porter’s framework, substitutes usually refer to products from other industries or from other competitors that can be used to serve the same purpose as another product. In economic terms, threat of substitutes arises from a change in the price of the substitute, which results in change in demand for a company’s product. As more substitutes become available, the elasticity of demand of a company’s product becomes high. This is because customers have more alternatives to choose from. This acts as a threat to a company, since it is constrained to hike its prices.

Primark has managed to keep the risk of threat of substitutes at a minimum level. This can partly be attributed to the fact that the company has a valuable brand. However, a variety of substitutes, such as Tesco, Top Shop, Manchester United, Zara, ASDA among others, are available. Moreover, Primark charges a reasonable price compared to other retailers. They also provide a variety of discounts to their customers. This has further reduced the threat of new substitutes. It is also important to note that Primark’s customers face high switching cost; this further reduces the substitution threat. However, new substitutes from Tesco and Sainsbury, despite their higher price, pose potential threat to the company since they emphasize on value.

Finally, Primark has embraced the recent technological developments like the internet, which has facilitated e-shopping.  Moreover, the company makes extensive use of credit cards, which promotes security and privacy. On the contrary, other retailers seem to use traditional technologies. This makes it even more difficult for their products to substitute Primark’s products.

Competition intensity

The UK retailing industry comprises of very many retailers. This implies that Primark operates in a very competitive environment. Additionally, competitors like Next & Gap, who have fully exploited the clothing demand for young people, poses a major threat of driving the company out of market. The high competition intensity is further facilitated by the fact that in UK, there are no barriers of entry or exit in the tailoring industry. This acts as an incentive for foreign retailers to establish their businesses in the country, further intensifying the competition. In this regard, the company has been facing major challenges like loss in market share. Moreover, Primark faces competition from lower as well as higher ends in the retailing clothing industry. For instance, ASDA offers brands like Matalan and George, which are not only quality clothes but also lowly priced. The two brands have snatched away traditional customers of Primark. Besides, competitors like Gap, Top Man, Zara and Oasis have designed latest clothing fashions that have attracted the younger generation. This implies that the stiff competition has led to Primark losing a significant number of its clients.

Threats of New entrants

As stated above, Primark has little control over new entrants in the market. The ease of entry is further facilitated by lenient policies by the UK government, which encourages free entry and exit. This has been an incentive for new firms to enter the industry. In fact, it explains why there are very many players in the UK market.

Bargaining power of suppliers

For a company to succeed in its operation, it must manage the bargaining power of the suppliers appropriately (Stark 2011). High suppliers’ bargaining power is considered as detrimental to a company’s success, while low suppliers’ purchasing power is considered to be healthy. Primark has a wide supplier’s base; both domestic and foreign. Moreover, it does not demand much from a single supplier. This means that there is no single supplier who possesses sufficient power to influence the raw material prices. It also means that Primark is able to obtain raw materials at a low cost, hence, the huge profits. To illustrate the low suppliers’ power, Primark is currently putting more pressure on local (Britain) suppliers to reduce their prices for raw materials, which remains high compared to that of foreign suppliers. Finally, Primark faces low cost of switching to new suppliers. This further increases the company’s purchasing power over its competitors.

Bargaining Power of the Buyer

Being the largest retailer store in UK, Primark has a large customer base. However, given that there are many players in the industry, the bargaining power of buyers is relatively high. Moreover, buyers are more prices sensitive and visit all shops, seeking for the lowest price before making a purchase decision. This has been considered as detrimental for the company, since it lacks the power to review its prices upwards. Moreover, it can contribute to less profitability, whereby despite the high cost of production, increasing prices would mean losing customers.

Porter 5 Forces of H&M

Competition Intensity

The company faces stiff competition. For instance, in Brazil, it competes with Zara, Lojas Renner, C&A, Marisa S.A., Riachuelo among others. This implies that the H&M faces intense competition in the retailing industry. Nevertheless, it ranks among the world’s largest fashion company globally.

Threat of new entrants

As stated earlier, the UK tailoring market has few barriers to entry. As such, many companies local and foreign are likely to enter into this market. Such a move can lead to a fall in profitability in this segment. The high number of new entrants in the industry lowers the profit of the company.

Threat of Substitutes

Many consumers usually seek for cheap and fashionable clothes. H&M strives to achieve this goal. However, competitors like Marisa and Riachuleo have managed to appeal more to low income and middle class people. This means that the company’s products are at risk of being substituted by cheaper products by the competitors.

Bargaining Power of the Suppliers

Like Primark, the company has many suppliers, local and foreign ones. This has helped to reduce the bargaining power of the suppliers. As such, the company is able to obtain low materials at a competitively low price. Moreover, H&M has established distribution outlets internationally to help reduce the lead time and relevant costs.

Bargaining Power of the Buyers

H&M has a broad customer base. However, customers in the retailing industry are price sensitive. This is analogous to saying that buyers have a high purchasing power. It also implies that the company is constrained from increasing the prices of its clothes; otherwise, it would incur losses.

PEST Analysis of Primark Company

Unlike Porter’s Five Forces analysis, which deals with the internal environment of a company, PEST analysis is a framework that deals with the macro environment of a company. It includes Political, Economical, Social and Technological factors. These are factors that simultaneously affect all players in a certain industry.

Political Analysis

It is important to note that all governments in the world control the manner, in which business is conducted in their countries. In this regard, government formulates monetary, fiscal and legal policies that companies should comply with. Like any other company in UK, Primark must comply with: Consumers Protection Act, Health and Safety Act, Sales Protection Act and Discrimination Acts. Additionally, it is important to note that the company has been recognized for providing its workers with good working conditions. As such, the company is part of Ethical Trading Initiative (ETI)

Economic Analysis

Economic factors, affecting a company’s operations, include factors like:  changes in taxation, economic growth, exchange rates, interest rates, inflation among others. High interest rates and inflation are detrimental in that they discourage investment. For instance, with inflation, workers may start demanding salary increment. Similarly, a strong currency may deter exports by raising their prices in terms of foreign currency. However, economic growth facilitates smooth running of a company’s operations. In UK, Primark is renowned for substantially contributing towards National Income. Moreover, the company’s main customers are young consumers, aged 35 years and below. Finally, Primark is focusing on fully exploiting the European Market. This may be illustrated by the fact that since 2008, the company has opened more than 10 branches in Europe.

Social Analysis

Social factors basically refer to demographic changes. These trends are important since they affect the demand for a company’s products (Matthew 2009). Primark Company has equally been affected by these demographic trends. For instance, given that the UK’s population is ageing, demand is shifting towards clothes for old people. Demographic changes have also increased some of the company’s costs; pension payments have risen because the company’s staff comprises of many old people. Moreover, with the low growth rates in UK, companies are facing labor shortages. In fact, Primark is considering hiring older staff to offset this demand. Besides, Primark has scooped many awards for being the best retailer of the year both in Europe and in UK. Moreover, the company is presently operating in a wide area: 5.4 million Square feet. This is an adequate selling space, which facilitates more sales in terms of goods and services.

Technological Analysis

Technological factors refer to new technologies that are capable of developing new products as well as processes (Lipsey & Chrystal 2004). As stated earlier, Primark embraces modern technologies. Some of them include e-shopping and credit cards technology. Moreover, the company makes intensive use of modern surveillance technologies, which checks on incidents of shop lifting and pilferage. These are conducts that would make the company incur substantial losses. The company has also signed a management system deal with BSI. The deal entails provision of entropy software, which is expected to promote ethical business strategy. The software will facilitate the management of conformances, remedial actions and the suppliers’ audits.

PEST Analysis of H & M Company

Political Analysis

Given that it is a Swedish brand, H&M Company must comply with Swedish legislations and Swedish Companies Act. The Swedish Government Act refers to a list of agreements with OMX Nordic Stock Exchange Stockholm. However, the subsidiaries of the company that are located in other countries like China are subject to laws of those countries.

Economic Analysis

At the present, H&M holds substantial market shares in Germany as well as in UK. Furthermore, the company is pursuing expansion strategies, implying that the market share is expected to grow bigger. The company aims at increasing the number of stores at a rate of 14 % annually, which still maintaining profitability at a high level. Finally, the company owns approximately 200 stores globally.

Social Analysis

Since H&M pursues “fashion and quality at the best price!” strategy, demographic changes enters their management decisions. This helps the company come up with new fashions that are consistent with demographic changes. It also relates well with the societies from where it operates and this has been essential in quality provision.

Technological Analysis

The company is making extensive use of two technologies. These are: printing technology and media technology. Given that technology is dynamic, new machines are always needed by the industry to make some coloring patterns. Moreover, with the development in media technology, H&M will be able to advertise via the media and website, thereby, attracting many customers.