Porter's Five Forces Model is a helpful tool prospective investors use to help analyze the industry in which a certain company operates. The model, developed by Harvard Business School professor, Michael E. Porter in 1979, is used to analyze and identify five competitive forces that shape every industry while determining its strengths and weaknesses.
The model analyzes and identifies 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. It allows investors a chance to learn about an industry's competitive dynamics to better identify an investment opportunity in a particular stock by looking at factors outside the company's financial metrics such as price-to-earnings (P/E) ratios. This article analyses athletic apparel manufacturer and retailer Under Armour using Porter's Five Forces.
- Under Armour's main competitors are Nike and Adidas, both of which have historically earned much higher revenue than UA.
- Although the barriers to entry in the sports apparel industry are very high, UA successfully found its place in the market by marketing primarily to American football.
- UA's innovation in the materials it uses helps it avoid the disadvantage of buying the same materials at a lower volume and higher cost than its competitors.
- The company has been able to establish its brand through endorsement deals and stave off the threat of substitute products.
Under Armour: An Overview
Under Armour (UA) manufactures and markets clothing, sporting goods, and accessories. The company operates in the sports apparel industry—a highly competitive industry characterized by rapid growth and strong consumer demand. According to Statista, the global sports apparel market was worth an estimated $181 billion in 2019 and is forecasted to reach more than $207 billion by 2025.
Headquartered in Baltimore, Maryland, the company was founded in 1996 by Kevin Plank, who serves as executive chairman. Plank began the business from his grandmother's basement. The company went public in November 2005 when it began trading on the Nasdaq under the ticker symbol UARM. Under Armour jumped to the New York Stock Exchange (NYSE) in December 2006.
The company reported a 1% increase in revenue for the full year in 2019 from the previous year to $5.3 billion, while net income for the fiscal year came in at $92 million. As of April 30, 2020, the company's market capitalization was $4.2 billion.
UA is a relatively young company and faces the challenge of competing against longstanding industry giants such as Nike and Adidas.
Under Armour in the Market
Under Armour must rely on superior product innovation and unique marketing techniques to compete. 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 on acquisitions—notably, mobile technology companies such as MyFitnessPal in 2015—to engage with athletes and create deeper brand affiliations more effectively. Its ability to innovate and provide increased perceived value to its customers is necessary for future success due to the intense competition it faces.
Competition in the Industry
While there's no dearth 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 offered by UA. The largest of these competitors are Nike and Adidas. Both are older companies with higher total annual sales than UA.
Revenue for Nike came in at $39.1 billion for the 2019 fiscal year. Adidas, on the other hand, reported revenue of $23.6 billion for the same period. The market caps for both as of April 30, 2020, were $135.6 billion and $44.5 billion respectively While the disparities are enormous, UA has seen a significant degree of growth. Although it may not be as diverse in terms of products or when it comes to international market penetration, UA has been successful in nearly every industry subsection it entered.
Potential of New Entrants
The barriers to entry for a diversified athletic apparel company are generally 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 2019, UA was the most recent case study of a significant new entrant into the sports apparel industry, and it has proven it can be successful.
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 did just that by marketing primarily to American football, creating a better base-layer shirt than what was available on the market at the time. It's 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, creating product differentiation from the competition. This also helps the company avoid 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. Thanks to online shopping, customers can 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 like 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. The company managed to snag NBA champion and MVP, Stephen Curry, in 2013 and quarterback Tom Brady in 2010.
The 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 grow. For each product, there is always the threat of a more innovative version entering as a substitute. However, in UA's industry, it is difficult for a company to create many such substitute products across various sports successfully.
For example, UA's flagship stretchy base-layer shirt has mostly replaced the standard 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.