Interesting article on the state of the luxury fashion business

Business of Fashion has a great article written by Pierre Mallevays, Founder and Managing Partner of Savigny Partners, a boutique advisory firm focusing on specialty retail and aspirational brands.

You can read the whole article here: http://www.businessoffashion.com/2011/01/bof-exclusive-getting-the-luxury-fashion-business-model-right.html

Some snippets:

How a designer label makes money:

The traditional designer brand business model is not for the faint-hearted. Typically, a design-rich but loss-making main line is invested in with the aim of capitalising on its cachet through a cash-generative diffusion line and, eventually through lucrative licensing deals. This model not only takes years to generate returns, but the ride is also a bumpy one with no guarantee of success. Christian Lacroix is a prime example of a label which, despite heavy investment in its main line/couture business, never saw the more commercial side of its activities take off sufficiently.

Pre-collections, cruise/resort, pre-fall, holiday...

These inter-seasonal collections tend to contain more commercial pieces than the main collections, often have more accessible price points and now account for the bulk of sales of a fashion brand. This is also music to retailers’ ears whose aim it is to get fresh stock into stores, so as to give customers a reason to come back, and shift the stock as quickly as possible.

On the importance of merchandising...

There the model was clearly in need of an urgent fix, but on an ongoing basis the role of the merchandising team, working with the design and product teams on one hand and the marketing and sales teams on the other, harnessing the creative talent and editing down the creative output to what will work or generally help the band, is absolutely critical. This helps to ensure that the market reception of the collection will be as good as possible, but is also true — and increasingly importantly so — in a world where the number of deliveries has increased and where efficient re-ordering and replenishment is where the real money is made.

On how developing a retail business increases the bottom line

Beyond this point, retail presence offers a number of advantages. First and foremost the ability to capture the retail margin – a fully-integrated fashion retail business can generate gross margins up to 80 percent (and sometimes more!), as compared with a wholesale business margin of 40 to 50 percent. Retail presence also allows for more control of the brand image and presentation. This is particularly important as a brand evolves as it can often get stuck in a time warp, with retail buyers ordering variations on what sold well in the last season instead of following with new products/designs, often seen as more risky.

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White elephants such as this previous Jil Sander store never made good retail propositions, but you could understand why some management teams were keen on them: retail really helps drive wholesale. Department store managers will never own up to it, and we are sure Barneys and Bergdorf top brass were horrified when Lanvin announced the opening of its Madison Avenue store in the summer last year, but over time (and more quickly than people think), whatever turnover is temporarily lost for the neighbouring department stores will be made up and more, as the brand benefits from increased awareness, more prestige and a stronger, more complete image as a result of its own retail presentation.