Industry Analysis

Porter’s Five Forces

BuyersClothing is one of the three fundamental human needs.

Everybody needs to buy clothing. Clothing includes wearing apparel such as shirt, pants, among others.

Pants, particularly denim jeans have been termed as the most popular wearing apparel on earth.1 This clothing product is worn by almost everybody thus, considering everyone as its consumer. However, buyers usually buy in smaller quantities and do not purchase regularly. Buyers can also easily switch from one competitor to another in case of product dissatisfaction or if they just want to try other brands.

Personal consumption expenditures in the Philippines have been fairly resistant to adverse changes in the past and in the current Asian crisis as well. Although spending on clothes as a percentage of income has been declining, percent total per capita expenditures on clothing have been increasing, representing 47 billion pesos in 1997, a growth rate of nearly 12.6 percent from 1991 to 1997.2

Jeans customization is somewhat an old concept because of the proliferation of tailoring shops. These shops cater buyers who can be dissatisfied with the jeans available in the market or who just wants to alter a jeans bought from a certain store. However, the idea of custom-fit jeans is still a fresh concept in the garments industry, particularly in the Philippines. Only few buyers, particularly those in the upper class, avail/can avail these products because of the products’ perceived high-end status and high price.

SuppliersDenim has always been made of cotton. Philippine raw cotton

production supplies less than 3 percent of total domestic cotton requirements, thus Philippines manufacturers continue to rely on imports to meet domestic demand. The United States is likely to remain the largest supplier of combed cotton, followed by Pakistan, Australia and South Africa. With the end of the quota system for garments starting in 2005, domestic cotton consumption is forecast to decline next year. The garments and textile sector is the single largest buyer of raw cotton and the garments sector is country's second highest export earner.3

New Entrants

1 A Short History of Denim 2 Cotton Textile and Apparel Products3 Philippine Cottons and Products

Barriers to entry include global and local policies implemented in the textiles and clothing industry, capital requirements, access to distribution channels, product differentiation, and cumulative experience, among others.

For instance, the World Health Organization (WHO) Agreement on Textiles and Clothing (ATC) took effect on January 1, 1995. Under its provisions, the US negotiated market access with several developing countries, including the Philippines, which are major exporters to the US market. The Philippines agreed to improve access to its market. Under this agreement the Philippines is obligated to reduce and bind tariffs, and to reduce and eliminate non tariff barriers. In line with its commitments, the Philippines have bound its textile and apparel tariffs at the following rates: 20 percent for yarn, 10-12.5 percent for man-made fibers, 30 percent for sewing thread; 30-50 percent for floor covering, and 30 percent for textile made-ups. Under its WHO obligations, the Philippine Government initiated a general tariff reduction program to reduce tariffs on raw materials to 3 percent and on finished goods to 10 percent by 2003. In January, 2004, the Government plans to introduce a uniform 5 percent tariff rate.

Another instance is Value-Added Tax applied to all imports, assessed at 10 percent of the value of goods, plus duty.

The Philippines is a member of ASEAN and a participant in the ASEAN Free Trade Area (AFTA). AFTA contains a preferential tariff scheme (CEPT) which requires intra-regional tariffs to be reduced to 0-5 percent by the year 2003. Textiles are on a fast-track schedule for tariff reductions to 0-5 percent by the year 2000. CEPT also requires intra-regional reduction in non-tariff barriers and harmonization of customs procedures and product standards.

The Philippine Government provides incentives to promote investment in preferred activities and geographic areas and for export. Investment incentives include: income tax holidays; tax deductions for labor expenses, infrastructure, capital equipment and spare parts, and investment in less-developed areas. On the other hand, export incentives include: exemption from advance payment of customs duties; tax credits for imported raw materials and spare parts, domestic substitution of imports, export revenue; and various exemptions for duty on imports. A variety of financing programs and guarantee schemes is available through state-sponsored institutions.4

Capital requirements include high-speed and highly-efficient sewing machines, high-quality denim fabric, among others. Human resources in the form of tailors are also essential in this business.

New entrants will not find it difficult to meet distribution network requirements since there are various alternative channels for them to sell their products. New entrants can easily distribute their products without having to invest in creating new distribution networks.4 Cotton Textile and Apparel Products

Product and service differentiation requires vast outlays in several stages of the value chain, most especially in advertising and promotion.

Learning curve effects make a difference as companies with more experience gain advantage through having more cost-efficient manufacturing processes.

Substitute ProductsReady-made retail products are considered substitutes for

custom-made clothing. Moreover, denim pants could be replaced by shorts and skirts as bottom apparel. The denim fabric could also be replaced by other fabrics such as those used in khaki pants and slacks.

Industry CompetitorsThe Philippine garment industry dates to the 1950s and the

emergence of cottage-level industries that replaced homework. As the industry began exporting during the 1970s, it experienced rapid growth, growing an average of 30 percent between 1972 and 1980. The industry is at a crossroads of uncertainty regarding the effects of global trade liberalization. It is expected that the removal of quotas will cause further erosion in the industry, with only larger, well-capitalized firms able to survive.5

The garment industry is comprised of many players, both operating on a large scale and small scale basis. The industry is a growing one; exports of garments are steadily increasing too as more foreign companies continues to trust the skills of local manufacturers in producing quality garments. The local garments and textile industry is the country's consistent second top performer in terms of export revenue. The Philippines is also one of the main product suppliers for high-end clothing brands such as GAP, Old Navy, Ann Taylor, Liz Clairborne, and Polo Ralph Lauren.6

Customers are free to change their suppliers thus creating high uncertainty for competitors. In terms of origin and operating styles, competitors may range from boutiques, specialty stores, bazaars, tiangges, direct selling agents, department stores to big malls.

A relatively large amount of money is tied in equipments such as high-speed sewing machines and inventories, but liquidating such assets is relatively easy.

Market Targeting

5 Cotton Textile and Apparel Products in Philippines6 Behind the Seams http://www.philippinebusiness.com.ph/archives/magazine/vol11-2004/11-/forecast.htm\

Pantsaloon, as a customized and tailored-to-fit jeans boutique, will focus on the needs of our market specifically as follows: (1) upper class male and female residents near our location (Katipunan area, Loyola Grand Villas, La Vista, Loyola Heights, Blue Ridge, White Plains, UP Village, etc.); (2) male and female students (specifically college students from Ateneo de Manila University and University of the Philippines-Diliman); and (3) young male and female professionals not more than 29 years of age.

Pantsaloon subdivided the market into location-based segments (residential areas within a common radius from the location of the proposed business) because this geographic measure is quantifiable and accessible. The distribution of population in these areas is important to the company because the market within these areas generally tend to share similar values, attitudes, and style preferences, given that they are in the same level of social class. Despite the similarities, significant differences still exist among these residents because of differences in their culture, social customs, upbringing, and other factors. Hence, other factors need to be considered.

College students, specifically from Ateneo de Manila University and UP-Diliman, do not have school uniforms. Thus, denim jeans have been a staple clothing item for them. But with different body structures as well as different tastes in denim jeans, Pantsaloon aims to address their dilemma on those differences. Furthermore, individuality is important to these particular individuals, thus Pantsaloon’s concept of customization would definitely cater to their need of distinctiveness.

Young professionals also have this need of uniqueness and standing out among others. They make sure that they are distinctively different from others, whatever it takes. Having their own source of income lets them address this need.

Pantsaloon caters to both genders—male and female. Though females are more known to be fashionable and vain, males nowadays are also into fashion. Metrosexuality has been a coined term for males that address their feminine side—the need to look good.