Since its development in 1979, the Porter's Five Forces Model has been a helpful tool used by prospective investors to help analyze the industry in which a certain company operates. By looking at factors outside of the company's own financial metrics, such as price-to-earnings (P/E) ratios, investors can learn about the competitive dynamics in the industry to better identify a solid investment opportunity in a particular stock. By definition, Porter's Five Forces analyzes the competition in the industry, the potential of new entrants to the industry, the power of suppliers, the power of customers and the threat of substitute products.
Under Armour in the Market
Under Armour, Inc. (NYSE: UA) manufactures and markets cutting-edge clothing, sporting goods and accessories. The company operates in the sports apparel industry, which is competitive and growing rapidly; it is expected to exceed $180 billion in worldwide industry sales by 2020.
UA is a relatively young company, having only gone public in 2005. It faces the challenge of competing against long-standing industry giants such as Nike and Adidas. As such, Under Armour must rely on superior product innovation and unique marketing techniques. Its product development and marketing techniques prove UA has been on the front line of changing competitive dynamics in its industry.
UA's strategic management decisions prove its desire to be the industry leader in product and marketing innovation. For example, the company has spent substantial money acquiring mobile technology companies such as MyFitnessPal to more effectively engage with athletes and create deeper brand affiliations. Its ability to innovate and provide increased perceived value to its customers is absolutely necessary for future success due to the intense competition it faces.
Competition in the Industry
While there are countless numbers of athletic apparel companies that compete with UA in certain market niches, only a few companies have the sheer size and established distribution channels to compete across all the product lines UA offers. The largest of these competitors are Nike and Adidas. Both of these competitors are older companies with higher total annual sales than UA.
By comparison, Nike's trailing 12-month sales is over $31 billion, Adidas' trailing 12-month sales is over $16 billion, and UA's trailing 12 months sales is just under $4 billion. While this disparity is enormous, it must also be noted that UA has achieved a significantly higher growth rate in recent years than either of its giant competitors. Although it does not possess the same diversification of products or the international market penetration, UA has been successful in nearly every industry subsection it has entered.
Potential of New Entrants
In general, the barriers to entry for a diversified athletic apparel company are very high. It takes a significant amount of financial and human capital to develop products, manufacture them with quality and affordability, and push products into the appropriate distribution channels. As of January 2016, UA is the most recent case study of a significant new entrant into the industry, and it has proven it can be successful. However, achieving the size and market share of a company such as Nike takes years or even decades.
It is highly possible for new companies to enter smaller niches of the industry. For example, a new entrant may find success in marketing an innovative product to one particular sport, such as golf or tennis. UA started by marketing primarily to American football, creating a better base-layer shirt than had been available at the time. It is more likely for certain segments of the industry to be susceptible to new competitors than the entire industry, at least in the near term.
Power of Suppliers
Suppliers in the athletic apparel industry often sell materials to competing companies. Larger buyers obtain cheaper prices from these suppliers by ordering larger quantities than smaller companies. For example, Nike may be able to buy exponentially more cotton for T-shirts than UA and negotiate a substantially lower price. This may partially explain why UA, in general, tends to have higher-priced products than Nike.
But UA has been extremely innovative in the materials it uses by creating various proprietary fabric blends it sources from third parties. This not only creates product differentiation from the competition, but it also avoids the disadvantage of buying the same materials at a lower volume and higher cost than competitors.
Power of Customers
Customers certainly have a wide range of choices when it comes to buying clothing and accessories for their favorite sports. In the world of online shopping, customers also have the ability to quickly and easily shop for the lowest price for a similar product. With that in mind, it becomes critical for a company such as UA to create products for which customers are willing to pay a premium over mainstream, price-competitive goods.
Research shows customers also buy based on brand recognition and association. This is why companies such as Nike have famously paid huge amounts of money to sponsor athletes; customers perceive value based on associations. With this in mind, UA started spending huge dollars to sign some of the best athletes in the world to represent its brand. Tom Brady, Stephen Curry and Jordan Spieth are just a few such athletes.
Threat of Substitute Products
Clothing is a staple item that is always in demand. As worldwide interest in sports continues to rise, the demand for athletic clothing and accessories is expected to continue to grow. For each product, there is always the threat of a more innovative product entering as a substitute. However, in UA's industry, it is difficult for a company to successfully create many such substitute products across various sports.
For example, UA's flagship stretchy base-layer shirt has largely replaced the normal cotton T-shirts previously worn by athletes. UA was able to use that early success and brand recognition to create other products, but it took time and investment to expand. Style and fashion trends also play a significant role in the industry. While pure function might be the only factor a professional athlete considers, the everyday consumer cares much more about appearance and styling. This is a much more subjective area and may be more susceptible to other brands becoming popular.