Spa/Beauty and wellness industry analysis using Porter's 5 forces model

For this assignment, I decided to do a competitive analysis on the spa/beauty and wellness industry. The spa/ beauty and wellness industry comprises of face and body treatments to maintain, improve and enhance the skin. It also promotes overall relaxation and wellbeing through the services provided by the particular spa. A spa may also sell products to its clientele. By applying Porter’s five forces model, I will analyze substitutes in other industries, buyers, potential new entrants, suppliers and rivalry among current competitors to see how attractive this industry is.

First, to what extent are there substitutes in the spa/beauty and wellness industry? I would say the potential for substitutes is low. The spa/ beauty and wellness industry comprises of facial and body treatments. The potential for substitute for facial treatments is mediocre because customers can purchase alternative facial products such as creams, masks, etc. Even miniature machineries used for a facial treatment can be purchased for at home use. Customers can easily perform facial treatments on themselves at home with such substitutes. However, in products purchased by customers often come from the spa/beauty and wellness industry, so even if this industry loses customers for treatment, they can still obtain customers through sales of products. The substitute for body treatments such as massages and wraps is low. Despite the innovative technologies making massage machines, it is difficult for customers to perform such treatments on themselves. It is often more relaxing and convenient for a professional to perform body treatments on a customer –the results are also more effective. Thus, the threat of substitution in this industry is relatively low, particularly because many people have stress from their daily lives and enjoys being pampered by services from this industry.

Next, I will look at the bargaining power of buyers. I would say the bargaining power of buyers is high in this industry because there are so many selections of spas customers can choose from. For example, in the Chinatown area of New York City alone, there is at least a spa/facial center on every block. Thus, customers have a substantial influence and power over the firms in this industry. Prices must be kept at a competitive level because if spas offered similar services and some were priced lower, customers would much rather join the cheaper spa. The services provided must be of utmost quality because many spas offer similar services at similar prices, so one distinguishing feature is the quality of services provided. Because this is primarily a service oriented industry, customers have a high degree of power in terms of brand loyalty; brand loyalty builds on your ability to communicate and foster a relationship of trust between you and your customer. Clients can switch over to another spa easily with little or no cost. Thus, because there are so many selections of similar products/services at similar price levels, brand loyalty is difficult to maintain.

The bargaining power of suppliers. I think the bargaining power of suppliers in this industry is low. Suppliers in this industry provide products for facial and body treatments. This may include bed sheets, salon-sized washes, creams, masks, facial products, machines, etc. However, because of the fact there are so many suppliers offering similar products at prices which are relatively the same in the United States, the bargaining power of suppliers is rather low. Their power is further reduced by the fact that the cost of the exact same products is substantially cheaper if imported from another country like China. Suppliers of facial product might have a slightly higher bargaining power, since customers develop brand loyalty towards a product they’ve been using. Even so, because there are so many selection of other facial products in the market, suppliers might not have a high bargaining power neither. Also, often times, it is up to the esthetician to recommend or persuade customers to buy a particular product. Prices for facial products are often set at a wholesale price; however prices for all other products are often negotiable. Thus, the bargaining power of suppliers is low.

Rivalry among current competitors. The rivalry among current competitors is high. The spa/beauty and wellness industry is a fragmented one in which there are many small to medium firms. These firms have low to medium market share. Many of these firms are individual firms and some are chains. This means customers have a wide variety of options because they can easily change amongst competitors. This leads to an opportunity for price wars because customers have more power and the fragmented firms need to give customers an incentive to consume from that firm. Also, the demand for services and products in this industry is medium. Services and products are not absolutely necessary, they are things that people enjoy and become necessary when they hope to achieve a desired result and find that product/service effective. Thus, I would conclude that the growth in demand isn’t too high, that’s why there is more competition.

Finally, in looking at exit barriers, if a firm wanted to exit the industry, it is quite easy. They can close down or another firm can buy them out. Although this typically means less competition, the fact that there’s easy entry into this industry balances the easy exit barriers. Also, a startup firm typically stays in the industry for a minimum of one year and during that period, new firms are opening. Service providers have gained enough experience to start up a firm on the own. So, despite the easy exit barriers, the fact that the rate of new firms entering the industry is greater than exiting firms makes the rivalry among current competition high.

Potential New Entrants. What is the potential for new entrants in this industry? It is high. When assessing what the potential for new entrants is, we should look at the capital requirement to start the business and how accessible the capital is. Brand loyalty to current firms, government regulations, switching costs, experiences, and access to key suppliers are factors that should also be taken into account when evaluating the potential for new entrants. If consumers have developed brand loyalty, it would be a barrier for potential new entrants to break into the industry and compete for current customers. Government regulations affect entry into the industry. Laws require industry personnel to be licensed for practice. Also, different insurance regulations affect the industry, which varies on the procedures done. Government regulations don’t pose as a large barrier to entry because a firm needs to comply with licensure requirements to operate, which isn’t too complicated.

Typically, switching costs for buyers are minimal because they don’t have many obligations. They can purchase a package or membership at a discounted price, which would obligate them to use the services or they could do single treatments at prices higher than the package rate, which would be no obligations at all. Similarly, for products, consumers can choose to buy a product with no obligation. They will continue to use the product or services if they feel it’s beneficial to them, which is partially developing brand loyalty. Thus, because switching costs are minimal, the potential for new entrants is high, therefore, the competition is also high. Access to key suppliers is another fact to look at. The more difficult access to key suppliers is, the bigger the barrier to entry. In this industry, the access key suppliers is high because there are many suppliers selling similar products, all competing to sell spas the products.

So in conclusion, by applying Porter’s five forces model, I would say the industry is a competitive one. Substitutes are high, buyer’s power is high, potential new entrants is high, power of suppliers is low, and rivalry among existing firms is high. So overall, this is a competitive industry that might not be too attractive to enter. Since this industry is primarily service oriented, it takes a lot of time for firms in the industry to develop relationships with customers, and patience is something much needed to survive in this industry.