If you have read some of my other posts and clicked on the page, “About the Site Owner,” you know that one of the reasons for my website is because it is a requirement for my final MBA class, Strategic Management. The website is a means for blogging some of the findings of my final MBA career group project (and to show how smart I am). Please stay with me. I really am not that arrogant; a little witty perhaps. (I divert).
If this is the first blog post of mine you have read, that’s okay, too. This post takes a look back at one of the first areas my team and I researched as we began our final project. (Have I mentioned this is my FINAL class)? One of our first tasks was to gain an understanding of our company’s industry and its market share – both domestically and globally. Additionally, we discovered how to measure the market concentration by using the Herfindahl-Hirschman Index or HHI.
In the U.S. Family Clothing Stores sector (NAICS 44814), our company, The Gap, Inc., ranks among the top four players in the industry. An industry that is defined by the IBISWorld Industry Report dated December 2011 as, “retailers [who] stock a general line of new clothing for men, women, and children without specializing in sales for an individual gender or age group. These establishments may provide basic alterations, such as hemming, taking in or letting out seams, and lengthening or shortening sleeves”. With 13.3% of the $85.8 billion U.S. sales in 2011, The Gap is actually the market leader in the domestic family clothing industry. The other three competitors included in approximately 40% of the market share are TJX Companies with 12.5%, Ross Stores with 9.8%, and Abercrombie & Fitch with 4%. Other companies each make up less than 4% of the remaining 60% of the industry.
Market share, alone, does not paint the whole picture. Named after economists Orris C. Herfindahl and Albert O. Hirschman, the Herfindahl-Hirschman Index measures the size of the companies in relation to the industry to give a better indication as to the competition among them. HHI is also applied in antitrust reviews by the Department of Justice when evaluating mergers. It is calculated by squaring the market share of each competing firm in the industry and then summing the results. The number can range from 0 to 10,000 with HHI’s on the higher end indicating a monopolistic industry and an HHI on the lower end being an indication of a competitive industry. One of the main benefits of the HHI is that it gives more weight to larger firms. The HHI for the U.S. market is as follows:
HHI=(13.3^2) + (12.5^2) + (9.8^2) + (4.0^2)
HHI=176.89 + 156.25 + 96.04 + 16
Hence, the U.S. is a very competitive market.
How does the U.S. market compare to the global market? The global market, according to Datamonitor, consists of North America, South America, Western Europe, Eastern Europe, and Asia-Pacific. The latest report available, 2009 global sales totaled $1,031.5 billion. The four major global competitors in this industry are The TJX Companies, Inc with $19 billion in revenue (1.8%), H & M Hennes & Mauritz AB with $15.49 billion in revenue (1.5%), The Gap, Inc with $14.526 billion in revenue (1.4%), and Levi Strauss & Co with $4.023 billion in revenue (0.39%).
We can see from the chart above that the global market is even more fragmented than the U.S. retail market. The HHI for the global industry is calculated as follows:
HHI= (1.8^2) + (1.5^2) + (1.4^2) + (.39^2)
HHI= 3.24 + 2.25 + 1.96 + .15
In this age of global expansion and becoming an international firm, the retail apparel companies, including The Gap, Inc. have to realize that gaining market share and concentration will be a long and never-ending process. Although competition is strong, “the world is [their] oyster.” (Derived from the quote from Shakespeare’s The Merry Wives of Windsor).
- The Gap between Company’s Domestic and Global Market Positioning (bizebeebuzz.wordpress.com)
- What does Herfindahl have to do to with Gap? (taynaramoraes.com)