II. Environmental Analysis

To fully assess the feasibility of the business idea of a custom-made jeans service

shop, EALA Inc. has made two key environmental analyses: macro- and

microenvironment analysis. The macro-environment analysis takes into the account

the political situation under the Philippine government; the economic environment,

which mentioned pertinent economic indicators that are relevant to the analysis of

the market and described the current economic situation in the country; the cultural

environment, which took note of important socio-cultural demographics to better

understand the target market; and the technological environment, which listed

capabilities that the local garments industry has as of the moment. On the other

hand, the micro-environmental analysis focused on the garments industry in which

the group wishes to enter. The analysis discussed the developments and issues in

the local garments industry. In addition, as part of the micro-environmental

analysis, the group considered the retail trade in the Philippines as well as possible

competitors within the industry.

A. Macroenvironment Analysis

Political Environment

The country is currently facing political instability, as there is a desire to change

our current political system to a parliament type, thus creating a pessimistic

hype for some potential long-term investors because of possible negative

political issues that loom ahead, which can cause economic tribulations. Not to

mention the unending corruption issues of our politicians, the alleged election

fraud and corruption charges against the president and her family, the dawn of

value-added tax resulting to higher prices, and the time-to-time resignation of

the president’s economic team. Such political crises negatively affect the

profitability of the country’s businesses due to rating outlook downgrades and

higher interest rates. If debt levels continue to decrease and higher foreign

reserves were maintained, there would be no major negative effect on business

profitability.1

1 “Philippine Political Crisis Could Hurt Business Profitability.” [Online] Available. http://en.ce.cn/World/biz/200507/14/t20050714_4189155.shtml, July 14, 2005.

1

In the meantime, the country’s political crisis has brought international credit

rating companies to downgrade the country’s debt payment credit ratings and

also affected Asian Development Bank to threaten the country with suspension

of loans if fiscal and other reforms remain stagnant if the political crisis would

not be resolved.

The political crisis may not just negatively affect the country’s economic

performance, but may also damage the confidence of the consumers and

investors as well as hinder the developments in the financial markets.

Ultimately, the political crisis only serves to aggravate the country’s external

variability to global trends such as growth moderation, rising interest rates and

oil prices.2

Economic Environment

The country is currently suffering from a weaker economic base as a direct result

of the political instability, which has resulted in higher interest rates, low credit

ratings, and other performance risks as the value of peso continues to grow

weaker. These further on result in a steady increase in the unemployment rate

of Filipinos. The lack of local job opportunities has also increased the trend of

“brain drain” as more and more Filipinos seek jobs abroad.

However, a robust growth in the economy is being anticipated though it would

be moving at a slower pace than that achieved in the previous year. A positive

outlook is also being projected from the growth in the performance of major

industry players last 2004. The service sector, particularly that of

telecommunications and trade continues to lead in providing potential industry

growth and development. (Cayetano: 2005)

Gross National Product. As of the third quarter of last year, the Gross National

Product, at Current Prices, amounted to 4,150,771 million pesos. There has been

2 “Rating Firms’ Outlook on RP Turns Negative.” [Online] Available. http://www.bworld.com.ph/BW071205/topstory.php, August 2005.

2

a 0.7 percent decrease in GNP, making the 2004 13.5 percent rate down to the

current 12.8 percent.3

Gross Domestic Product. By the end of last year’s third quarter, Gross

Domestic Product at current prices amounted to 3,836,727 million Pesos. As

compared to the 14.1 percent GDP growth rate from 2004, there has been a big

3.7 percent decrease leaving 2005’s GDP down to 10.4 percent. However, it is

expected to grow approximately by 5.5 percent this year. The expected growth

in GDP in 2006 can be attributed to the growth in personal consumption, the

recovery in government spending, and also the strong demand for export

products.4

Personal Consumption Expenditure. Personal consumption expenditure is

currently 72.9 percent of GNP, a decrease from last year’s 73 percent,

experiencing an annual change of 5.8 percent.

Wage Rate. Currently, the minimum wage rate in Metro Manila is currently

pegged at Php 288 to Php 325 a day (eight working hours per day), the highest

among the regions. However, there is an ongoing legislation in Congress to

increase the minimum wages to cushion the impact of the expanded value-

added tax on workers.5

Inflation. As of the year ended 2005, Inflation rate rocketed to 7.6 percent

from the previous year’s 6.0 percent - a 1.6 percent difference. The Bangko

Sentral ng Pilipinas is targeting the inflation rate to average between four to five

percent in 2006. The inflation forecast for the year, however, is placed at 7.5 to

8.2 percent.6 According to the BSP, there is little sign of any inflationary

3 “National Accounts Third Quarter 2005” [Online] Available. http://census.gov.ph, January 11, 2006

4 “Selected Economic and Financial Indicators.” [Online] Available http://www.bsp.gov.ph/statistics/sefi/sefip1_files/filelist.xml, August 2005

5 “Selected Economic and Financial Indicators.” [Online] Availablehttp://www.bsp.gov.ph/statistics/sefi/sefip1_files/filelist.xml, August 2005. 6 Gil C. Cabaccungan, Jerome Aning, “Palace: It’s Time Congress Enacted Wage Increase”[Online] Available http://news.inq7.net/nation/index.php?index=1&story_id=55347, November 3, 2005

3

pressures building in the Philippine economy. The BSP Deputy Governor Diwa

Guinigundo also said that the planned rise in the sales tax to 12 percent from 10

in February could cause an upward blip in inflation levels, but that would be

short-lived. 7 However, high oil prices will remain as the main threat to inflation

this year, which have already taken some of the buoyancy out of consumer

spending last year. But amidst the threats, the strong peso and easing food

prices help balance inflationary risks.

Foreign Exchange Rate. As the year opened, the Peso closed at its highest for

the past eight months at roughly Php 52.00 a Dollar. If the political situation

slowly stabilizes, the country can experience a continuous lift in the peso.

Factors that can strengthen the peso include political stability, income

remittances from OFWs, inflows from portfolio investments, and proceeds from

government bond sale.8

The 2006 Fiscal program assumed that the average exchange rate would settle

at Php56.00 to a US Dollar, and that the benchmark 91-day Treasury bill rate

would hit eight percent. 9

Value-added Tax. The month of February has been welcomed with the

imposition of, the new 12 percent value added tax. Moves by the government to

raise the level of value added tax (VAT) from 10 percent to 12 percent would hit

hardest the country's poor and its small businesses, the American Chamber of

Commerce of the Philippines said. They also asserted that any increase in VAT

would pose a serious burden on the country's poor and small to medium size

enterprises and would also lead to greater tax avoidance. With the current

minimum wage rates, it is highly doubtful if the Filipino wage earner could

absorb price hikes to be triggered by the increase in VAT as well as other taxes.

7 “Economic Statistics.” [Online] Availablehttp://www.philippinebusiness.com.ph/economic_stats/economy.htm, August 2005.

8 “Inflation Seen to Remain Stable”, B5 Business Section, The Philippine Daily Inquirer, January 25, 2006

9 “Government Expects Billions in Savings” The Philippine Daily Inquirer. January 23, 2006

4

Employers likewise may not be prepared to incur additional expenditures

particularly at this time of economic crises, concluded by the business group.10

Socio-Cultural Environment

Population. Population in the Philippines is increasing at a 1.84% growth rate

and is now currently pegged at 87.9 million Filipinos. The highest concentration

of people is found in the NCR, Southern Tagalog, Central Luzon, and Western

Visayas.

The age structure of the population is divided into three brackets. The first one is

from 0-14 years old, which include 35.4% of the population. The second bracket

of ages 15 to 64 comprises of 60.6% of the population. The third age bracket,

which is composed of Filipinos 65 years old and above, covers only 4%. The

median age for males is 21.77 years whereas for females, it is only 22.8 years.

Based on the 2000 Census of Population and Housing taken by NSO, it was found

that there were more men composing the population with 50.4% than women

with 49.6%. From 1995 to 2000, the sex ratio was pegged at 101.4

Labor Force. The total number of individuals within working age (15 years old

and over) is equivalent to 54,194,000, of which 64.8% participates in the labor

force. The employment rate in the country is currently 91.7%, an increase from

last year, whereas the average unemployment rate is currently 8.3%, increasing

at a 0.3% rate. Almost half (49%) of the total unemployed individuals in the

Philippines are aged 15-24 years old. The underemployment rate is currently

26.1%.

According to the NSO’s Labor Force Survey, men and women comprise 61 and

39% of the 2002 labor force, respectively. In addition, it was found that women

had a 51.7% labor participation rate while men participated in the labor force at

a rate of 80.8%. The Survey also showed that, in 2002, the 89.9% of the total

labor force were employed. Employment rate for women was 89.9% whereas

10 “Increase in VAT will hurt poor, small businesses”. [Online] Available http://www.inq7.net, January 27, 2006

5

men’s employment rate was at 89.9%. In terms of major occupation groups,

majority of professionals, clerks and officials and special-interest organizations,

corporate executives, managers, managing proprietors and supervisors were

women. On the other hand, majority of plant and machine operators and

assemblers, farmers, foresters and fishers, and tradespersons were men. In

terms of major industry groups, more women belonged in the education, health

and social work, and wholesale and retail trade industries while more men were

found to be dominant in the construction, transportation, storage and

communication, and fishing industries.

Consumption and Expenditure. According to NSO, average income and

expenditure has shown an increasing trend as of 2003. The target market of the

business, which is NCR, was one of the top three regions in terms of average

income. The other two were CALABARZON and Central Luzon. These top three

regions posted estimates of income that were higher than the average income of

148,757 pesos in 2003.

The annual average saving as of 2003 showed a downward trend. However, on

the average, Filipino families in all regions earned more than they spent, as

stated in NSO’s 2003 Family Income and Expenditure Survey results. In 2003,

families located in NCR showed the biggest annual saving of 46,923 pesos.

In 2004, personal consumption grew at a rate of 5.8% due to double-digit growth

of income remittances. In the first quarter of 2005, there appeared a decrease in

personal consumption expenditure, which can be attributed to higher prices of

goods and services. There was a slowdown in growth for food, beverages,

clothing and footwear, household furnishings, household operations, and

miscellaneous expenditures as well as fuel, light and water due to low electricity

consumption. On the other hand, expenditures on transportation and

communication increased due to rise in road and railway ridership and mobile

phone usage.

Technological Environment

6

Industrialization. The manufacturing, along with the closely associated

activities in the clothing and garment production, continues to be one of the

driving forces of industrialization the world over. The clothing industries have

fought to maintain their share of the total value that is created throughout the

series of apparel design, manufacturing and distribution.

Automation. At present, technology in the garment industry here in the

Philippines consists mainly of automation of the processes. These include the

automated designing of the patterns as well as that of fabric laying and cutting.

Electronically controlled mechanisms are also used for stitch formation and

fabric feeding for the basic sewing machines. 11The last of the processes include

automated machines and devices for pressing the clothes. In addition, current

developments in machineries include designs which enable fast adjustments of

equipment from one style to another thus eliminating the non-productive

handling of fabrics and garments. In the process, quality is thus being improved. 12

Other developments. The Garments and Textile Board of the Philippines has

recently installed an Electronic Data Interchange (EDI) system to reduce

processing time to help improve production and delivery lead-time. It allows

garment manufacturers-exporters (GMEs) to transact with GTEB electronically.

The costs associated with implementation of EDI include the costs for acquiring

the software and the hardware themselves, training and ongoing costs such as

Value-Added Network (VAN) charges, maintenance and support costs.13 In

addition, the leading companies in the industry have started to acquire CAD/CAM

techniques, Quick Response and Just in Time philosophies to allow flexible

manufacturing.

11 Byrne, Chris. “The Impact of New Technology in the Clothing Industry: Outlook to 2000” [Paper]

12 “Clothing Engineering.” [Online] Availablehttp://www.fs.uni-mb.si/en/study/ects/IP%20-%20Clothing%20engineering.pdf

13 “Electronic Data Interchange – A Management Overview.” [Online] Availablehttp://66.102.7.104/search?q=cache:JAUTozWtU_4J:www.unece.org/trade/untdid/download/r1222.pdf+GTEBNet+EDI+costs+OR+fee&hl=en&client=firefox-a. August 2005

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B. Microenvironment Analysis

The Garments Industry

The Philippine local garment industry started as a cottage industry in the late

1940’s. The pioneers are engaged in dressmaking, tailoring as well as

subcontracting activities for the Americans. The golden years of the garment

industry was in the 1970’s, during which the Philippines was considered to be a

nice and attractive place to buy or manufacture apparels. This continued on for

about ten more years, which then catapulted many garment manufacturers as

leaders in the export business.

During the 1980’s, the government implemented the structural adjustments

program (SAP) as trade policies shifted from trade protectionism to trade

liberalization. The program opened doors for foreign companies to increase their

investments as well as encouraged the local manufacturers to tap into the

potential of the industry. What made the local garment industry a viable

investment for foreign companies was the high quality of the Filipino labor force

– highly trainable, industrious, and highly literate.

The local garment industry is currently involved in the production of men’s,

women’s, children’s, and infant’s wear, gloves, undergarments, stockings and

socks, neckwear and other apparel. Subcontracting activities include performing

embroidery and sewing services (i.e. printing, dyeing, knitting, laundry, finishing,

pattern-making and design-making). In addition, it is the country’s leading

employer of the manufacturing sector, with industrial relations no longer an

issue, and with minimal labor problems. Through the help of Garments/Textile

Industry Tripartite Council Board, industrial relations are continuously being

improved upon. The government also has provided different means to adapt to

the changing HR needs of workers in the garments industry. Such actions that

would help make the industry more competitive, and thus, improve the HR

scenario, include productivity enhancements like skills upgrading, productivity-

8

based wages, trade facilitation, market/product development and financing

assistance. 14

As of the 18th of July this year (2005), accounting for 6% of total export receipts

were the articles of apparel and clothing accessories. This was the country’s

second top earner which garnered almost $192.9 million in revenues or a 7.4%

increase from last year’s $179.6 million.

The industry for articles of apparel and clothing accessories is the country’s

second biggest dollar earner albeit it experienced a decline of 4.0% in terms of

value of production index. However, it experienced a gain of 27.5% in volume

net sales from last year. The improvement in the performance of garments

exports can be attributed to the shift towards higher value-added items due to

the improvement also in the high-end premium categories.

According to Garments and Textile Exports Board (GTEB) Executive Director

Serafin Juliano, the growth of the local garments industry stems from the

country’s advantages and its improving competencies in moving up the value

chain. Improved performance is also a result of cost-effective manufacturing and

logistics systems as well as increased store sales locally made premium

products. The current implementation of the quota-free scheme resulted in the

shift of brand market and product mix combinations of garments exports as well

as enabling the garments manufacturers to align its sourcing strategies with

local capabilities, product design specifications, and consumer preferences.

Despite the stiffer competition resulting from the abolition of the quota system,

the local garments industry will benefit from the freedom to source with the

most efficient suppliers at the lowest costs and with the shortest cycle times.

Other Issues

Threats to the local garments industry include high power and labor costs and

smuggling of imported clothes that were undervalued and can be sold at very

14 I-Transporte, Aletha. “IR/HR Implications in the Garments Industry.” [Online] Availablewww.fu-berlin.de/iira2003/papers/track_3/Workshop_3_2_Trasporte.pdf. August 2005.

9

cheap prices. Cheap imported second-hand clothes define ukay-ukay and its

proliferation serves to damage the local garments industry that cannot compete

with such low prices, and also incurs losses for the government. As of 2002,

demand for ukay-ukay clothes was 4%. For 2003, we could only conclude that

the demand must have risen due to higher prices of clothing. In addition, 4% of

the demand also attributed to preference for foreign brands over local ones. It

was said that the root of this was the inability of local manufacturers to compete

with foreign brands in terms of quality. One reason for such a trend includes the

inclination of local producers to set aside quality products for export while

bringing poorer ones to the local market. Garment manufacturers in the country

would want to take hold of the relatively higher payments foreign markets offer,

as a result, more focus is thus being employed in the quality of the apparels they

produce for exports. In the long run, this particular action increases the

tendency for local consumers to patronize foreign brands due to the lack of

quality for local brands.

Another reason for the local consumers’ preference for imported used clothes is

the lower price. Legally imported second-hand clothes have lower prices than

local brands because of the lower labor cost and the modernized facilities that

other textile and clothing manufacturing countries have. 15

Relevant Industry Indicators

Customer Price Index. The consumer price index (which is a measurement of

the changes in the price level of goods and services that most people buy for

their day-to-day consumption) increased from last year to 129.4 overall, gaining

9.1 points. In the National Capital Region, the consumer price index also

increased to 131.4, a gain of 10.2 points, whereas for areas outside NCR, the

customer price index is128.6, a gain of 8.8 points. Monthly, the consumer price

index for the clothing commodity group shows an upward trend.16

15 Bacalla, Tess B. “Gov’t Fails to Stem Flow of Smuggled Goods.” [Online] Availablehttp://www.manilatimes.net/others/special/2004/oct/25/20041025spe1.html, October 25, 2004.

16 “Summary Inflation Report: Consumer Price Index.” [Online] Availablehttp://www.census.gov.ph/data/pressrelease/2005/cp0506tx.html July 5, 2005.

10

Clothing Inflation Rate. The clothing inflation rate for this year is 3.6 while it

was 2.7 as of last year. The clothing inflation rate experiences a year-on-year

change of 0.9%.

Philippine's Top Exports (2001-2003)

Coconut Products1%

Electronics68%

Other Products17% Garment and

Textile7%

Machinery/Transport

4%

Food3%

Major Product Classifications. The major products produced in the local

garments industries include garments, non-garments and textile products. As of

March 2004, garments accounted for 88% of the product share in total exports.

Non-garments, which include luggage, home textile furnishings, tents, nets,

industrial clothing, has 7% of the total share. The remaining 5% share of total

export sales is composed of textile products such as fabrics, yarns and fibers.17

Political Developments in the Garments and Textile Industry

The government is working with the private sectors of the garments and textile

industry in launching investment missions that would establish strategic

alliances with foreign partners and attract investments in apparel, textile and

production of accessories. Through the introduction of ASEAN Free Trade

Agreement and the World Trade Organization (WTO), opportunities for

investments are presented as a result of tariff reduction and the phasing out of

17 “The Philippine Garments and Textile Industry Profile (as of March 2004).” [.pdf file sent by Garments and Textile Export Board c/o Jennelyn Gatuz] August 2005

11

Figure 1 | Philippines Top Exports (2001-2003)

quotas with low demand as well as the growth for remaining quotas of products

that are import-sensitive. Such developments would reduce the industry’s

production costs and also minimize smuggling, which is one threat to the

industry.

To enhance investments in the industry, the government offers incentives such

as income tax holidays, additional deduction for incremental labor expenses

during the first five years from registration of the company, tax and duty

exemption from taxes and duties on selected imported spare parts, unrestricted

use of consigned equipment, employment of foreign nationals, simplified

customs procedures, access to bonded manufacturing warehouses, tax credit for

taxes and duties paid on raw materials used for the exported products.

To improve the industrial relations in the industry, the Garments and Textile

Industry Tripartite Council Board was revived to serve as a venue for resolving

issues and any conflicts. Unwarranted industrial action or harassment is put off

through this forum. According to Philippine Exporters Confederation, Inc.

problems regarding industrial relations are very minimal within the industry

through the help of the Council Board.18

Clothing and Footwear Retailing in the Philippines

Consumer expenditure on both clothing and footwear amounts to 73.3 billion

pesos in 2002. A 12.9% increase is estimated for 2003 which will result in

spending of P82.8 billion in this sector. Spending on these items increased by

40.3% over the review period.

Filipinos in general has strict fashion sense and invests much of their money on

clothing and footwear. The Filipino upper and middle-income classes are known

to be more fashion-conscious as compared to other Asian countries. The average

purchasing power is low but the income gaps across socio-economic classes are

wide which then allows the middle and upper income classes to be fashionable.

18 “Dressing Up For Success.” [Online] Available http://www.philexport.ph/garments.html. August 2005.

12

Men’s wear increased by 32.8% in expenditure while the women’s and children’s

wear increased by 47.2%. Men’s and boy’s wear expenditure amounted to about

28.3 billion pesos in 2002 and nearly 33.0 billion soon after, estimating around

37.6 billion pesos in the succeeding years. On the other hand, expenditure on

women’s, girl’s and children’s wear amounted to 32.6 billion pesos in 2002 and

increased to 36.8 billion pesos the following year.

Table 1 | Consumer Expenditure on Clothing and Footwear | 1999 - 2003 (in billion pesos)

     1999 2000 2001 2002 2003

Clothing 53.3 57.1 61.2 65.6 74.4

Men's and Boy's Wear

28.3 30.7 31.6 33 37.6

Women's, Girl's and Children's Wear

25 26.4 29.6 32.6 36.8

   

Footwear 5.8 5.9 6.8 7.7 8.4

   TOTAL 59 63 68 73.3 82.8

A total of 77 billion pesos was the total turnover of clothing and footwear

retailers in 2002, which estimated a total of 86 billion pesos in 2003, an 11.7%

increase. Sales in 2003 increased by 36.5% from the 1999 sales of 63 billion

pesos.

Clothing and footwear specialists are able to hold their ground against mixed

retailers. Majority of this is ready-to-wear which is the major merchandise carried

by department stores and variety stores. Since there is this perception that

these merchandises, especially house brands, are mass-produced, Filipinos

would usually buy from specialty shops for more choices and exclusive styles.

This is because there is a clothing shop that caters to every Filipino’s taste in

fashion, style and age group.

Clothing and footwear specialists also abound in shopping malls and tiangges.

Many of these specialists have concessions in department stores as well for

13

these are proven venues that still attract the most people. They maintain these

concessions even with their existing own separate outlets. Local shops such as

Bench, Penshoppe, and Bayo are able to complete well with foreign brands such

as Giordano, Gap and Guess. Flea markets also abound clothing specialists who

has their own retail outlets at the same time. The Greenhills bargain center,

which started the “tiangge” fad, has stall owners who still operate their

permanent outlets at the same area. Many of them also have their branches in

other shopping malls and strip malls. “Tiangges” allow them to reach to more

clientele who would still prefer to shop in areas near them rather than going to

their outlets.

Specialists considered multiples or private retail companies operating in 10 or

more branches are benefiting from the expansion of shopping malls in Metro

Manila and other key areas nationwide. Sales of multiples have increased by

46.4% over the period, from 7.6 billion pesos in 1999 to 11.2 billion pesos in

2003. Multiples still remain as a minority which constitutes only 13% of the total

retail sales of specialists in this sector. Many multiples enjoy success at present

which all started out as independents.

Small independent shops are expanding their operations through franchising or

forming an informal buying group. These are areas especially those outside the

Metro Manila which contributes to the increase of sales by the affiliated retailers

and franchised retailers. There are still non-affiliated independents that cater to

the Class CDE market and are present in areas which named stores are not able

to reach. Sales of independents have increased by 35% in about five years from

55.4 billion pesos in 1999 to 74.8 billion pesos in 2003.

Table 2 | Retail Sales by Type of Outlet | % Growth (1999-2003)

  1999/2003 2002/2003Clothing and Footwear Specialists Multiples 47.4 12  Independents 35 11.6 TOTAL     82.4 23.6

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Retail Distribution

Department stores and variety stores (Mixed retailers) dominate the sales of

men’s and boy’s wear and children’s wear. This is because there are much fewer

clothing and apparel specialists who cater to their market as compared to the

female wear. In this sense, women have more choices especially when it comes

to apparel specialty shops. About 56.6% of the total sales of women’s and girls’

wear were sold through specialists while around 40.4% were sold through mixed

retailers.19

Still, there are few clothing and footwear specialists that can be considered as

multiples. They contribute to only about 10% of the total sales for this sector.

This means that there is still room for a major chain to enter this retail sector

which could carry the men, women and children’s merchandises.

Table 3 | Retail Distribution of Clothing/Footwear Retailer's Core Product 2003(percentage of value)

   Men's / Boy's

Women's / Girls

Children's FootwearFashion

AccessoriesClothing / Footwear Specialists    Multiple 1.5 7.6 - 8.0 -   Affiliated 21.9 25.3 32.0 18.2 3.8  Independents 18.9 23.7 1.3 26.5 8.7Department Stores 42.0 32.3 52.0 32.0 67.0Variety Stores 13.5 8.1 9.0 12.1 9.5Others 2.2 3.0 2.7 3.2 11.0   TOTAL 100.0 100.0 100.0 100.0 100.0   Source: Eurominotor estimates based on DTI, trade press and industry associations  

In 2002, the six leading specialist retailers (Stores Specialists, Zenco Sales,

Surplus Marketing, Suyen Corp., Golden ABC, & Cinderella Marketing) were

estimated to have a combined market share of 7.5% in the clothing and

footwear sector. Slight increase in 2003 by 7.8% was foreseen. This is because

only three of these will exceed sales by 1 billion pesos. This sector is loosely

19 Euromonitor, Retail Industry in the Philippines. 2003 p.150 Philippine Retail Association (PRA) Library

15

organized by mixed retailers like SM and Robinsons Department Stores.

Although the market shares of mixed retailers and specialists are almost the

same, the large number of specialists from whom customers can choose seems

to prevent any major specialist from becoming dominant in the market.

Table 4 | Leading Clothing and Footwear

Retailers Market Shares 2002 - 2003

   

    2002 2003

Stores Specialist 2.1 2.2

Zenco Sales 1.6 2.0

Surplus Marketing 1.4 1.4

Suyen Corp. 0.8 0.8

Golden ABC 0.8 0.8

Cinderella Marketing 0.7 0.7

Others 92.5 92.2

TOTAL   100.0 100.0

C. PORTER’S FIVE FORCES

Buyers

Clothing 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.20 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

20 A Short History of Denim [Online] Available http://www.levistrauss.com/Downloads/History-Denim.pdf

16

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 1997.21

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.

Suppliers

Denim 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.22

New Entrants

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

21 Cotton Textile and Apparel Products [Online] Available http://www.fas.usda.gov/mos/em-markets/reports.html

22 Philippine Cottons and Products [Online] Available http://www.fas.usda.gov/mos/em-markets/reports.html

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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.23

23 Cotton Textile and Apparel Products [Online] Available http://www.fas.usda.gov/mos/em-markets/reports.html

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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.

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 Products

Ready-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 Competitors

The 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.24

24 Cotton Textile and Apparel Products in Philippines [Online] Available http://www.fas.usda.gov/mos/em-markets/reports.html

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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.25

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.

Competitor Analysis

While there are definitely countless jeans and pants manufacturers in the

market, EALA Inc. has narrowed down its direct competitors to those that offer

customized-pants service offer. Among its closest competitors are stores that

promise comfortable fit and one-of-a-kind trendy designs to their final product.

Indirect competitors are the makers of ready-to-wear pants that offer almost the

same characteristics as described earlier.

25 Behind the Seams http://www.philippinebusiness.com.ph/archives/magazine/vol11-2004/11-/forecast.htm\

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VIKTOR Jeans

The business idea started three years ago, when Victorino Caluza, an aficionado

of designer jeans, prompted in putting up a store that offers customized jeans in

his own unit in Mega Plaza in Ortigas.

“Fashion, in a way, is individualism. You want to be different. You can be trendy

wearing different brands, but you know ‘marami’ kayo may-ari nun. Viktor is

about good fitting jeans that makes you look and feel good. Viktor is about

exclusivity,” the jeans maker points out.

Men and, most especially, women have difficulty finding a pair that fits all over.

An expensive pair does not guarantee the jeans will fit perfectly. Every single

body is unique so it’s almost impossible to buy jeans that have the perfect

combination. This is where Viktor comes in.

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Figure 2 | Competitor Map

Product and Market Strategy

Ino Caluza initially started with 4 collections of designs when he recently opened

his store in the 4th level of Podium in Ortigas. He works on his designs

periodically and offers them at the customer’s request mix of fit, cut, fabric, and

all the way to other jeans elements like zipper, stitches and thread. Viktor

promises to give its customers the perfect pair of jeans, as in his tagline – A good

pair of Viktor can get you laid back.

Customers are primarily members of the high social class society as a greater

proportion of Viktor’s customers are celebrities and young professionals who are

into the trendy and sophisticated themes carried by most of Viktor pants.

To keep its customer go back to his shop, he offers them free alteration for

fitting updates. He also keeps a database of his customers and sends them

letters/notices whenever new designs are available.

By yearend, the company plans to launch brand ‘Vik,’ targeting a younger

market with a budget. A new store at SM’s Mall of Asia will house the new brand.

Customers will have fewer choices though compared to the original Viktor series,

but pay between P2,000 to P3,000 only for a pair.

Toppers Haute Couture

The store was established in the 70’s first promoting service to the working

class. The quality of the end products made serve to be the lasting source of the

business as it kept its operations through the years. Toppers showcases haute

couture servicing for both men and women, ranging for ages 30 and up.

Product and Market Strategy

The shop offers a wide range of tailor servicing from polo, pants to suits. As what

any tailor shop does, it offers their services along with a splash of fabrics and

different cuts as requested by the customer.

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While the shop is primarily for anybody who wants his clothing custom-made,

but because of its store appearance, customers tend to perceive that the shop is

focusing on the older market, the adult and the professionals.

Current Price Profile of Key Competitors

Viktor charges its customers a range of P3,950 to P5,700 for a single pair of

pants. For rush jobs, customers are charged an additional P300. The amount

increases as more details are added on the design and as the fabric becomes

harder to be supplied. He also specializes in offering a one-of-a-kind jean design

ranging from Php7000 and up. On the other hand, the tailor shop located along

Katipunan offers their custom-made pants service at the cost of Php600 a pair.

Table 5 | Competitor Strengths and Weaknesses

COMPETITORS STRENGTHS WEAKNESSES

VIKTOR

has developed a strong brand equity among the aficionados of designer jeans, first to offer the kind of idea in the Philippine clothing industry, offers a wide range of trendy designs to choose from, a guarantee on fit alterations

the price is way up high from the affordability of the target market, it takes seven to 10 days for a pair to be made.

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Figure 3 | Toppers Haute Couture

Toppers Haute Couture

affordable range of price range to students who want their pants tailor-made

has limited design offers as the owner is traditionally oriented in tailor making, cuts and fit are enclosed to a limited number only, perception that the store is focused only in the adult and professional market.

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