by Marino Caliterna

As manufacturing agents and brokers of brand name fashion goods in Italy we can offer the following analysis of the current situation with regards to the distribution of luxury fashion goods.
Our sources of information are primarily the luxury brands themselves with which we have an insider relationship both regarding manufacturing and distribution as well as distributors proper.
A number of “our” brands are among the world’s top 20 in terms of brand recognition and/or sales volume.

  1. Growth of the luxury segment of the market
    The trend in recent years has been that of an increased growth in both the low cost and luxury fashion goods. What has suffered the most are the intermediate level products as consumers have evolved to be either too cost conscious or too sophisticated for mid-level brands.
    Also, the increased demand hence supply, of luxury goods has generated competition in what has been for decades a relatively calm niche of the market.
    As society has evolved placing more emphasis on visual communication, luxury accessories are increasingly being sought after by consumers who wish to visually convey to others hints about their personality, status, cultural background, upbringing, style. Also, the purchase of a well designed, hand made, long-lasting, beautiful accessory is being increasingly recognised as a better buy than that of a dozen cheap and ephemeral Asian-made objects. Luxury accessories are therefore no longer confined to the elites but, while scarcely more affordable than before, have become a necessary purchase also for countless mid-income individuals who are willing to “stretch” their financial means in order to acquire luxury goods. The trend has been caught quickly even by the lesser brands and Asian manufacturers who have swamped the market with look-alikes and imitation luxury goods. True luxury goods however are still the realm of a few fine brands as all the steps from manufacturing to distribution and customer care require thorough management and quality at all levels.
    The luxury goods market is very appealing as it allows significant profit margins while keeping merchandise volumes and logistics low. It is also less susceptible to trends than the lower market segments. Conversely, the sale of luxury goods requires more effort and investments to provide adequate retail settings and promote the products and brand through the media.
  2. Emerging markets
    While the traditional market countries for luxury goods are far from being saturated, due to the above mentioned growth of the market among mid-income consumers, there are also a number of emerging countries which represent completely new markets which have not yet been tapped and which hold a formidable potential. Among these are most Asian countries but particularly China and India, whose phenomenal economic growth and population have determined the rise of an upper middle class which numbers in the tens of millions individuals and who are hungry for luxury goods from the west.
    As it is often the case, these new markets are promptly being prospected by the larger brand names in luxury who have opened stores in the main centers of wealth of the emerging countries. It is our experience that luxury brands which fare well in these emerging markets, do well to add some products which keep the local culture and fashions in mind and who even partner with local talented designers to develop such products.
  3. Distribution through own channels (boutiques, outlets, web)
    Modern distribution offers a wide array of retail channels. A number of luxury brands have even ventured in the large retail distribution such as department stores and Internet portals. While this strategy has paid in a few particular countries such as Japan, in general it has proved to lessen the value and image of the brand in the perception of consumers.
    True luxury brands who are in sound financial health, nowadays still see the boutique as the most important type of retail outlet. The boutique, located within upscale environments in the world’s key locations is in fact still perceived by the consumer as the proper place where to experience the pleasure of seeing, trying and purchasing luxury goods; normally while being guided and attended by experienced and polite personnel.
    Direct ownership of retail boutiques by the brand allows also significant strategic advantages in planning and pricing. In fact, particularly where several retail stores are owned, it is never a problem to meet the minimum quantity requirements imposed by manufacturing, without having to risk eccessive inventory as it will be spreaded across a number of stores which will very likely be able to move the relatively low quantities of high value goods involved in this business.
    Ownership of the retail outlet also allows to efficiently control pricing. In fact, traditional distribution through wholesale necessarily causes retail prices to increase six to tenfold of the manufacturing cost. This causes profit margins to be relatively thin for the brand and prices to be so high to limit sales of the goods significantly.
    Brand-owned boutiques instead, by doing away with wholesale dealers, distributors and other middlemen, enable the brand to have better profit margins and flexibility in pricing, while sales soar as retail prices can also be kept more affordable for the consumer. This is precisely the reason which has caused the spreading of brand-owned boutiques across the world and the shrinking of luxury multibrand boutiques.
    Further to retail boutiques many luxury brands also had success by opening so called factory outlets, which allow the direct sale of also their previous season/s inventory at lower but profitable prices whereas previously these were sold to stock dealers for single-digit percentages of the original retial price. Factory outlets also allow “protected” testing environments for new or more commercial type of products as well as lower operating costs compared to prime location flagship stores. Care must be excercised to limit factory outlets to a very few points, typically in the country of origin of the goods and well away from the regular boutiques.
    Lastly, most brands have profited by opening and operating “boutiques” on the Internet. This type of distribution enables a brand to reach the global market with an initial investment and operating costs comparable to those of just a single retail store! Web distribution poses difficulty for the lesser known luxury brands however, as much effort has to be put into conveying product quality and the brand’s reliability. Most consmers are in fact wary of making big purchases over the Internet.
  4. Global crisis and Europe
    The global financial and economic crisis of the last two years, has affected most sectors of the economy, including luxury goods. While in the fashion industry sales of low cost and intermediate quality goods have plummeted, luxury goods have “held” much better. This has to do particularly with the traditional target market which is one less sensitive to economic slowdowns than the general population. It is also true that the slowdown of the luxury goods market during the crisis has been helped by the parallel increase of demand in emerging countries. Speaking with our clients however we can unmistakeably conclude that those who weathered the crisis the best are all those who own retail stores. Their revenues fell by only 10-25% versus over 40-50% for those brands relying heavily on wholesale-type of distribution. The larger distributors in fact, require a critical mass of sales in order to keep their business profitable; it has happened therefore that during the crisis several distributors and department stores have cancelled orders altogether as they were unable to just reduce them. On the contrary, boutiques, in time of crisis are able to reduce inventory, operating costs, reduce prices while still staying viable and often profitable during a time of reduced sales. All in all, it is also noticeable that European countries have not experienced such a decrease in sales as North America. This is probably due to American consumers’ psychology which made many shun luxury purchases even though most were not really lacking the means to effect those purchases. Europeans have been less psychologically involved in the crisis or perhaps just more careless; this has historically been the case in Europe, for fashion in general and luxury goods in particular. It must also be said that the American market is also more resilient and quicker to recover from a slump than most European countries.

About the author

Marino Caliterna is a manufacturing agent and fashion broker in Florence, Italy.
His firm Italia Consultant manages product development and quantity manufacturing in Italy for a number of International fashion brands with a focus on leather goods.