L'Oréal Porter Five Forces Analysis
Five Forces analysis of L'Oréal covering threat of new entrants & substitutes, bargaining power of buyers & suppliers and competitive rivalry.
Threat of New Entrants:
L'Oréal is a leading cosmetics brand with a strong global presence. The cosmetics industry is growing fast, and it requires expertise to manufacture and has strict testing protocols. The ban on animal testing has intensified the complexity of operations and requires skill and expertise to do testing in a new innovative way. All this involves capital to set up, and creating a brand like L’Oréal would take colossal capital. They also have special production operations and process due to experience, patents, and access to cheaper funds because the existing company represent lower risk than new entrants. The switching cost is not that high, but customers use it to create a perception about a particular brand suiting their skin. The new entrants should also be aware of the government regulation of different companies operating in. Even making the products available on local stores is a difficult task but various e-commerce sites have made it easy. Hence the threat of new entrants in the industry is low.
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This concludes the threat of new entrants in the L'Oréal Porter Five Forces Analysis.
Threat of Substitutes:
Below are the threats of substitute products of Porter’s Five Forces analysis of L'Oréal:
The threat of substitutes products is high when a similar product or service is available in another industry at a lower cost. The psychological consequences of transferring from one industry to another are modest, which would increase the threat of substitutes.
A replacement product with the same or better quality and performance than L’Oréal product would increase the threat of substitutes. The price-performance ratio of L’Oréal is one of the best in the market, so it is very difficult for a brand to come up with similar values at that price for the upper-middle-class people. This would decrease the threat of substitutes. Hence overall, we can conclude that the threat of substitutes is moderate in this industry.
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Bargaining Power of Customers:
In the L'Oréal Porter Five Forces Analysis the bargaining power of the customers can be explained as:
There are several local and international brands available on the local and online channels offering similar products to L'Oréal. Customers have a lot of variety to choose from. The switching cost is also meagre as you get a lot of products in a similar price range, but with time customers start perceiving a particular brand suiting them more and become loyal customers of it. The scope of backward integration is low as you need expertise and capital to manufacture the products. The availability of similar products of different brands at the same price makes customers decisions difficult for L'Oréal. Although buyers have a lot of information from the online channels, the decision-making power is influenced by a number of factors like product information, word of mouth, influencers marketing etc.
The companies come up with competitive pricing with the competitors, so overall the bargaining power of customers is low.
Bargaining Power of Suppliers:
Following is the bargaining power of suppliers in the Porter’s Five Forces analysis of L'Oréal:
The supplier's industry is not dominated by a few companies and is not a concentrated industry. So, there are a lot of options to buy raw materials from, which makes it easy for cosmetics companies to negotiate. Although the supplier's product is an important raw material to the industry but the availability of a huge number of suppliers makes it insignificant. Cosmetics companies like L'Oréal would not experience high switching costs if they moved to the product of a different supplier because the supplier products are not differentiated or unique. The threat of forward integration is also low as the suppliers lack the expertise to make the end products. If they had the ability to integrate forward into the cosmetics industry and compete with the players, they would reduce the profitability of the companies drastically. We can conclude that the overall bargaining power of the suppliers is low due to high dependence on the companies.
Competitive Rivalry:
The impact of key competitors in the L'Oréal Porter Five Forces Analysis is as follows:
Cosmetics industry is growing fast worldwide hence a lot of companies are fighting hard to gain the market share. Some of the major brands in the cosmetics industry are L’Oréal, Maybelline, Lakme, Chanel, Urban Decay, Estee Lauder. A number of local companies are now coming into the market. L’Oréal has the highest market share due to its wide range of products and brand reliability which helps to create brand loyalty among the customers. The products available of different brands are not well differentiated, but there is a perceived notion of brand loyalty among the customers.
Although there is huge competition in the market space, but it is not impacting the industry in a bad way as it is increasing at a higher pace.
To conclude, the above L'Oréal Porter Five Forces Analysis highlights the various elements which impact its competitive environment. This understanding helps to evaluate the various external business factors for any company.
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