Group 5 - Industry Analysis of PNJ: 1. Porter's Five Forces [PDF]

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Group 5 – Industry Analysis of PNJ Different theories and approaches are discussed to analyse and evaluate the jewelry industry that Phu Nhuan Jewelry (PNJ) is operating in, including the following: 1. Porter’s Five Forces. 2. Complementors and Network Effects. 3. Industry Types. 4. Industry Life Cycle. 5. Strategic Groups. 6. Market Segments.

1. Porter’s Five Forces The Porter’s Five Forces focuses on analysing five major factors that have influence upon the organisation, which are: competitive rivalry, threat of entry, threat of substitutes, power of buyers, and power of suppliers. 1.1. Competitive Rivalry The competitive rivalry in the jewelry industry can be assessed by different aspects as follows: Competitors: Based on interview responses of Mr. Le Tri Thong, the general manager of PNJ, there are three companies with the largest scale in the gold sector are PNJ, DOJI and SJC, all of which are over 20 years old. DOJI and SJC are two big competitors, but each side finds its own strengths to develop. But in the jewelry segment, PNJ's notable competitor is the new one-year-old brand Precita, which has nearly 20 stores. [CITATION MrL19 \l 1033 ]. In addition, there are still other firms participating in this industry such as: BTMC; SBJ; and small organisations. This will make the competition more diversity. Industry Growth Rate: According to Ministry of Industry and Commerce Vietnam, with a compound growth rate of 10% per year and the need to accumulate gold bars gradually giving way to gold jewelry, many forecasts suggest that in the future, the Vietnamese gold jewelry market will have a large room for growth. Evaluation of Vietnam's jewelry market, the representative of Rong Viet Securities Joint Stock Company said that the growth room of the Vietnamese gold jewelry market is still very large when the demand for gold bullion is gradually giving way to jewelry. In addition, the middle-rich class is growing rapidly in Vietnam (estimated to account for 1/3 of the

population by 2020), who are modern-minded consumers who need to express high body and target customers of fashion jewelry retail chains. In fact, in the past few years, realizing that the gold jewelry market has grown well, the businesses in this industry have continuously expanded their business networks. For example, Phu Nhuan Jewelry Joint Stock Company (PNJ) has continuously opened more than 30 stores in 2019. By the end of 2019, this business has 353 stores, covering all over the country [CITATION Min20 \l 1033 ]. Fixed Costs: According to gold price list updated daily of Dantri, Agency of the Ministry of Labor, War Invalids and Social Affairs of Vietnam, the fixed price of PNJ compared to all competitors are listed below: Company SJC AJC DOJI PNJ BTMC SBJ

Buy in 55.900 55.950 55.900 55.950 53.360 55.650

Sold out 56.420 56.250 56.300 56.350 54.060 56.450

Location Da Nang Da Nang Da Nang Da Nang Da Nang Da Nang

Table 1: Fixed Costs and Price of PNJ and Competitors [CITATION Min201 \l 1033 ] In general, the fixed costs are high, resulting in the exit barriers are high. Differentiation: There is not too much difference between the qualities of jewelry between companies, however, the fashion designs are different. According to Ho Chi Minh City Securities Corporation (HSC), PNJ does not have a big competitor in branded jewelry retail in Vietnam. In terms of the number of retail stores, exquisite design, ingenious processing, new collections and the popularity of the brand, HSC believes that PNJ beats all other competitors in Vietnam like SJC and Doji [CITATION Anh19 \l 1033 ]. Those factors make PNJ different from other organizations in the market. Therefore, PNJ is facing with a medium level of competitive rivalry. 1.2. Threat of Entry The threat of new entrants can be evaluated through a several of entry barriers and advantages as follows:

Expertise and Capabilities: It takes billions VND to open a gold, silver and gemstone store [ CITATION Lin20 \l 1033 ]. Therefore, new firms may find it very difficult to join to jewels industry as

it requires a lot of investment, capabilities, assets and experiences to compete with other businesses. Access to Supply or Distribution Channels: Government regulations are still tightening the import of gold into the country, so finding a stable gold supply is difficult for new businesses to enter this industry. Legislation: According to Enterprise Law 2014, when opening a gold store, organizations must pay attention to some conditions of government laws such as: 

Have charter capital from 100 billion VND or more.



Experience in gold trading for 2 years or more.

Furthermore, gold and gold-related business are under the management of the State Bank [CITATION law20 \l 1033 ], so that new firms, who want to join to jewelry industry must be controlled by the

State Bank, leading to the problem that they cannot raise their product’s price. Therefore, the threat of new entrants that PNJ may face is quite low. 1.3. Threat of Substitutes The silver, gold and diamond jewels are affordable to upper class and middle class, while lower class tends to wear classic accessories, which are handmade or made by metals, fabric or Feng Shui stone. According to research, the middle-rich class, whom can afford valueable accessories only accounts for 1/3 of Vietnam's population, which means the rest 2/3 population have a tendency to buy inexpensive fixtures and fittings. Moreover, there is one reason they do not have a habit of wearing valueable items because they are afraid of being stolen. In short, the threat of substitutes that PNJ is facing now is very high. 1.4. Power of Buyers PNJ occupies nearly 40% market share in the gold, silver and gem jewelry making and retail market in Vietnam with a production capacity of over 4 million products per year [ CITATION PNJ20 \l 1033 ]. Jewelry products crafted by PNJ have been distributed directly to millions of customers through nearly 400 retail stores, e-commerce channels and indirectly through more than 3,000 wholesale customers nationwide as well as has been exported to 13 countries and regions [CITATION

Placeholder1 \l 1033 ]. Through that, PNJ has clear policies for easy supervision and business.

Specifically, PNJ has a clear exchange policy and warranty policy for their products. For example, for all kinds of jewelry, the repurchase rate is between 50% and 80% and the exchange rate is from 60% to 90% [ CITATION PNJ201 \l 1033 ]. Therefore, customers must comply with PNJ's policy and have no right to deal prices. According to the Association of High Quality Vietnamese Goods in 2019, PNJ won the title of high quality Vietnamese goods for 22 consecutive years [ CITATION PNJ19 \l 1033 ]. From there, it can be seen that the quality of PNJ's products has been recognized by consumers, and PNJ has brought itself a large number of loyal customers. This means that PNJ’s buyers are less price sensitive, making buyers' bargaining power low. 1.5. Power of Suppliers The input materials of PNJ are raw gold, raw silver, gold bars, gemstones and diamonds, imported from domestic and foreign sources. Due to regulations restricting import of gold bars of the State Bank, PNJ's main source of gold is purchased in the domestic market for recycling and jewelry production [ CITATION Bao191 \l 1033 ]. Gold is influenced by the law of supply and demand in the market as well as by the domestic and foreign currencies that buy it, which are mainly USD [ CITATION Inf10 \l 1033 ]. Therefore, the suppliers cannot determine the price of gold in the market.

Due to not being limited in legal terms, PNJ mainly imports raw silver through a number of suppliers in Belgium. Regarding gemstones, PNJ imports mainly from Thailand and Hong Kong. In addition, PNJ imports diamonds from many different sources and is closely tested [ CITATION Tri19 \l 1033 ]. The raw materials supplied by the suppliers are fairly standardized, less differentiated and have low switching costs. This helps PNJ to switch suppliers more easily, making the bargaining power of suppliers weak. Moreover, the industry that PNJ does business is an important customer of suppliers. This means that industry profits are tied to the margins of the suppliers. Therefore, the bargaining of suppliers in the jewelry industry are low.

1.6. Summary In the jewelry industry, PNJ has to deal with the medium competitive rivalry, low threat of entry, high threat of substitutes, low power of customers, and low power of suppliers. Therefore, that is an attractive industry for PNJ to compete in.

2. Complementors and Network Effects Complementors of PNJ can be described as follows: PNJLab: PNJ has stepped up innovation and set high standards in the industry by establishing PNJLab Testing Company [CITATION Placeholder1 \l 1033 ]. PNJLab towards increasing consumers' understanding and trust of PNJ's products as well as protecting consumers through its prestigious quality accreditation certificate. PNJLab has affirmed its reputation with domestic and foreign customers and has become one of the leading inspection companies today. Along with the increasing demand for diamond, gemstone and semi-precious jewelry, having prestigious quality accreditation certificates is more of a concern to consumers [ CITATION PNJ202 \l 1033 ]. Clothing and Fashion: Jewelry is used for human beauty purposes. It is also seen as a highlight for outfits, enhancing the outside beauty of person. For example, when wearing clothes, people often think about which jewelry to match and vice versa. This is the reason why they become complementor for each other.

3. Industry Types As for the domestic jewelry industry, PNJ currently has no competitor in branded jewelry retail in Vietnam. In terms of the number of retail stores, exquisite design, ingenious machining, new collections and the popularity of the brand, HSC (Ho Chi Minh City Securities Corporation) argued that PNJ beats all competitors like SJC or Doji. However, PNJ is competed by small-scale stores in terms of price and customers. PNJ's customers are varied from middle to upper class, so low-class customers will choose more retail stores. But after all, in the fashion jewelry industry in Vietnam at present, PNJ has almost no rivals and is the largest and most popular jewelry brand in Vietnam. In terms of industrial structure, although there are almost no competitors in the brand name, PNJ's products do not have too many differences in material and design compared to other companies or stores, so it can be considered that PNJ is in perfect competition.

4. Industry Life Cycle PNJ is the leading jewelry fashion brand in Vietnam. Although the jewelry fashion industry owes this state of affairs to macro-economic forces like global geopolitical and economic uncertainty because of the COVID-19 pandemic but its strong development over the years is undeniable. [ CITATION Ana17 \l 1033 ]

The jewelry industry is in shake-out and maturity of its industry life cycle. In these stages, managerial and financial is the competitive advantage of different jewelry firms. PNJ has proven how well they manage and have financial potential based on its 2018 earnings report, PNJ's net sales reached 14,573 billion dong - up 33%; Profit after tax is VND 960.2 billion - an increase of 32% compared to the previous year. Gross profit margin also improved sharply from 17.4% in 2017 to 19.1% in 2018 and these are all PNJ's records since its inception. Besides, PNJ is also the most profitable gold, silver, and gemstone trading enterprise in Vietnam, outstripping Doji, SJC.[ CITATION Caf19 \l 1033 ]. Also, PNJ has become a joint-stock company and had its position in the share market,

can be considered as a top leading jewelry fashion brand. Besides, PNJ has improved advantage in the production management capabilities such as optimize the process of production, invest and apply new technology to manufacturing, manage and optimize production cost and improve both productivity and capacity to keep its position in the market.

Figure 1: Profit after Tax of PNJ from 2009 to 2018 [ CITATION Caf19 \l 1033 ] The current fashion and jewellery industry in Vietnam is difficult and struggling for new entrants because they need to invest a lot of money to build a brand to compete with PNJ as well as design and manufacture products related to diamonds, gold, silver and precious stones. For DOJI and SJC, the brand name is their disadvantage to PNJ, thanks to the marketing strategy and brand as well as product promotion, PNJ has become the leading jewellery company in Vietnam but these 2 companies still put pressure on PNJ and require it to continue with its branding strategy. For smaller companies, price and design are the best customer attraction compared to PNJ because they have low production costs, cheap premises... As a result, if PNJ wants to survive and develop in the market, they have to build a stronger brand not only domestically but internationally, in addition to improving production processes, cutting costs, bringing special offers to customers as well as improve the quality of their products and services, PNJ has to have a managerial and financial strategy to enhance its position in the jewellery fashion brand.

5. Strategic Groups Strategic group of PNJ are based on two main dimensions: scope activities and resource commitment. 5.1. Scope Activities The scope activities of PNJ include: 

Product Range: Company has a production capacity of over 4 million products per year, including necklaces, bracelets, rings, watches, earrings, clasps, statues...



Product Materials: Silver, gold, gemstones, diamonds, Feng Shui stones...



Geographical Coverage: PNJ's scope of activities is spreading throughout Vietnam with more than 300 retail stores and will develop stronger in Asian and European markets [CITATION PNJ2020 \l 1033 ].



Distribution Channels: PNJ's retail channels include supermarkets such as Big C, Vincom, and Lotte Mart...; shopping halls; stores located in prime locations, E-commercials...

5.2. Resource Commitment PNJ has strengths in resources such as:



Human Resources: Currently, PNJ has nearly 6000 employees with a professional system and is considered one of the largest jewelry manufacturing factories in Asia with a staff of more than 1,200 employees.



Brand: Over the past 30 years of establishment and development, PNJ has achieved many remarkable achievements: being in the Top 500 leading retailers in Asia Pacific, Asia Pacific Quality Award, National Brand, Top 100 best working environment in Vietnam, the best working environment in Asia...



Product Quality: PNJLab is established to rigorously inspect the quality of products purchased and sold to customers. Therefore, PNJ always commits to put quality standards on top.

6. Market Segments The following graph shows the market segments of the jewelry industry:

Figure 2: Market Segments of Jewelry Industry PNJ's product costs range from a few hundred thousand VND to several tens of billion VND. It can be seen that PNJ has enough presence in all market segments. However, PNJ focuses mainly on segmentation of between bridge and fine jewelry, which brings higher profits to PNJ.