The threat of new entrants is very low in this industry. Most of the companies have several years of history and their brands are based on their heritage and tradition. Even if a new company with a large amount of initial capital wants to step in the industry, it is very hard for the company to build a high reputation over the world in such a short-term period. Many customers in this industry will value products by their brands.
There are very few suppliers. Large luxury companies dominate the industry but the suppliers are relatively decentralized, therefore the supplier power is quite low. Many companies have their own in-house manufactories and only source component parts. In this industry, suppliers have to meet the component parts' high quality requirement as well as competing with qualified manufacturers over the world. The manufactories in different countries have different labor and material costs, which can be a factor that restricts supplier power.
The buyer power level is low to moderate in the luxury goods industry. This industry has three customer segments, which are absolute, aspirational and accessible. The first two segments care more about product's quality than the price. They have high net worth and seek flawless products. These consumers are the most price insensitive group, and they even expect high priced products, which most people cannot afford. On the other side, the accessible customer group is more price conscious, but they are also willing to buy high price products with acceptable quality. Therefore, the industry can control the price and retain a high year round growth level.
The luxury goods almost have no direct substitutions. Although the products such as handbags, watches, jewelry, cosmetics and perfumes always have lower price substitutions, some of the loyal customers will not take these substitutions into consideration. The accessible customers may purchase relatively lower price products, but they also have lower contribution to the industry growth than the other two segments.
