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Is it all Gucci for the future of luxury fashion?


Tingnan Li

By

April 18th, 2018


Is this the beginning of the end for the largest luxury fashion houses? What can the likes of Gucci and Chanel do to fight back against the tide of fast fashion and e-commerce? Tingnan Li investigates.


There’s a reason why customers from around the globe gladly fork out around nine thousand dollars for a Chanel 2.55 handbag. It’s not entirely the superb quality of the leather, nor the impeccable craftsmanship. No. You’re not just buying the monogrammed bag, you’re buying a ticket into a world made exclusive by sheer virtue of the fact that it is prohibitively expensive.

Here we will explore the world of luxury fashion in order to get a taste for why people buy these goods. We will then uncover the factors that are eroding luxury fashion’s market share and peek into what the future for this industry is.

What drives people to purchase luxury goods?

There are numerous reasons consumers use to justify surrendering their credit cards over for luxury purchases: perceived status, quality of materials, and personal satisfaction are but a few. The price itself may sound like an inexplicable black sheep but consider this: a study conducted by Caltech and Stanford University scholars, found people rated the same wine more highly when they were told it was pricier. MRI scans taken whilst drinking the wine also suggested enjoyment of the pricier wine was also higher. [1] As inconceivable as it may be for broke university students, the price, along with the status and quality such purchases convey, is not what turns people away, but rather, what attracts them to it. It’s why people consider a Hermès Birkin an investment, why there’s a famed waiting list for this iconic bag, and why they can fetch upwards of $300,000 in the resale market.

Simultaneous growth of the middle class, wealth and demand for luxury goods in China heavily suggest that these actors are highly linked. In 2000, China’s middle class was confined to just 4% of the population, by 2022 that figure is predicted to reach 76%. [2] Interpreting China’s expanding middle class in the context of a general increase in the affluence of Chinese consumers, leaves us with a veritable doubling of the number of Chinese households entering the luxury goods market as they seek out luxury fashion as a means of touting their arrival into the ranks of the wealthy. [3]

With this in mind, this prestige and inaccessibility could arguably be considered just as important, potentially more, than whatever cut of dress is sent down the runway come the whirlwind of fashion week circuits. This inaccessibility, this glass pane that separates the luxury from every day, is something that elevates these fashion houses beyond the rules of everyday consumption decisions. One could perform an online search of the retail price of a Hermès Birkin and come up with rumours and conjecture more befitting of the Loch Ness monster than a luxury handbag. (Hermès doesn’t advertise their prices and if you can’t muster the courage to venture into their freestanding stores rough estimates of prices can only be gleaned from online afficionados).

Despite everything that compels people to buy into luxury fashion, the broader trend reflects a decline in this market. Shares in global luxury fashion makers dropped by 13% throughout 2015 even though the S&P500 increased by 3%. [4] Indeed, in just a year, DKNY’s performance dropped by almost 100% according to Fashionbi’s brand index which tracks their overall performance. [5]

The question is, why is this happening and is it the beginning of the end for luxury fashion?

Does the rise of e-commerce and fast fashion spell the death of the luxury good market?

Chanel’s president of fashion, Bruno Pavlovsky, once emphasised the importance of the brick and mortar shopping experience: “to be able to wear Chanel clothes, you need to try them on.” Perhaps it was this stubborn attachment to traditional brick and mortar boutiques that led Chanel to open its e-commerce site only two years ago whilst much of the fashion world had already moved out of shopping centres and onto the battlefield of the internet. Today, thanks to luxury e-commerce sites such as Net-a-porter and My Theresa, bank account willing, shopping for luxury fashion is as easy as absentmindedly browsing ASOS in the middle of a lecture. Chanel’s move illustrates one of the issues facing luxury fashion houses in this current market climate: embrace a bigger, more diverse market by opening up to billions of people on the internet or fire up the smoke machines, widen the castle moat, and feed the fantasy of traditional boutiques?

Fast fashion is the elephant parked stubbornly in the middle of the room that cannot be ignored. Giants such as Zara and H&M, can replicate trends and hawk them to the masses at accessible price points and confounding speeds (quality and supply chain oversight notwithstanding). Thus, chipping another piece away from the mighty pillars of the once untouchable fashion elite.

Regard must be had for how these seismic shifts could be changing the way luxury fashion heavy-weights operate and how they must now utilise their intangible assets to claw back lost market share and ensure they have a future.

Logically, one response could be to streamline brands, to hone in on what makes them inaccessible. Discontinuing diffusion lines, which branch off of main runway collections and are relatively cheaper and thus tap into the mass market, is one such strategy. Though commercially shrewd at a certain point in the narrative of the fashion industry, the current state of affairs suggests the opportunity cost of diluting one of the primary appeals of luxury fashion outweighs whatever revenue they could bring in. Luca Solca, head of luxury goods research at financial services firm Exane BNP Paribas, observed that those ignoring the signs of the obsolescence of diffusion lines, “risk losing money as sub-brands don’t manage to achieve scale enough to sustain dedicated fixed costs.” Adrian Joffe, president of Comme des Garçons, in fact declared, “we never liked the idea of diffusion because it kind of waters things down. It dilutes the idea.” [6] The announced closure of the Marc by Marc Jacobs diffusion line in 2015 (DKNY, Emporio Armani, Burberry Prorsum, Burberry Brit, and Burberry London were but a few other casualties), signalled a definitive shift towards greater exclusivity in the way brands are presented to the masses.

Indeed, between 2011 and 2014, the price of Piaget’s Altiplano watch jumped up US$6,000 to US$19,000, [7] challenging customers to buy into the narrative that only through great monetary sacrifice can one enter this exclusive world inhabited only by the owners of the most expensive garments and gadgets. In fact, Euromonitor International, a market-research firm, reported a 13% growth in the U.S. price of a basket of luxury goods in 2013, while its consumer-price index counterpart increased by only 1.5% in that same period. [8] This accentuates the idea that more than ever before, luxury fashion must deploy its greatest asset – inaccessibility of price – to survive e-commerce and fast fashion, which seek to collapse the temple of its exclusivity.

The game of luxury fashion is one that may not make complete sense at first glance. The red velvet rope-line in front of a Gucci store, the immediately identifiable shade of turquoise synonymous with Tiffany & Co., and the tantalising peek of the Burberry tartan lining a creamy beige trench… and somehow, in spite of my powers of rational thought… my heartbeat is elevated and my mouth is dry.

This is a world so dizzying, so glamorous that it overrides the ability to make a reasonable cost-benefit analysis of the price versus the benefits one receives from the good itself. I’d hazard that this is the true power of luxury fashion, such feelings of logic-defying awe and exhilaration are precisely what they trade in. In the face of e-commerce, fast fashion and changing demographics, it may be time to weaponise them a little differently.

References

[1] Wen, T. (2017). The psychology behind spending big. Retrieved from http://www.bbc.com/capital/story/20171006-the-psychology-behind-spending-big

[2] Iskyan, K. (2018). China’s middle class is exploding. Retrieved from http://www.businessinsider.com/chinas-middle-class-is-exploding-2016-8

[3] Bu, l., Durand-Servoingt, B., Kim, A., and Yamakawa, N. (2017) Chinese luxury consumers: More global, more demanding, still spending. Retrieved from https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/chinese-luxury-consumers-more-global-more-demanding-still-spending

[4] Pathak, S. (2016). What LVMH’s sale of DKNY tells you about the luxury market. Retrieved from https://www.glossy.co/lux-experience/what-lvmhs-sale-of-dkny-tells-you-about-the-luxury-market?utm_source=digiday.com&utm_medium=referral&utm_campaign=digidaydis&utm_content-pathak-lvmh-dkny-luxury-market

[5] Milnes, H. (2015). As luxury goes digital, ‘diffusion’ brands become obsolete. Retrieved from https://digiday.com/marketing/luxury-goes-digital-diffusion-brands-become-obsolete/

[6] Mellery-Pratt, R. (2014) Do diffusion lines still make sense? Retrieved from https://www.businessoffashion.com/articles/intelligence/diffusion-lines-still-make-sense

[7] Kapner, S. &  Passariello, C. Soaring Luxury-Goods Prices Test Wealthy’s Will to Pay. https://www.wsj.com/articles/soaring-luxury-goods-prices-test-wealthys-will-to-pay-1393803469

[8] Kapner, S. &  Passariello, C. Soaring Luxury-Goods Prices Test Wealthy’s Will to Pay. https://www.wsj.com/articles/soaring-luxury-goods-prices-test-wealthys-will-to-pay-1393803469

Image Source: https://commons.wikimedia.org/wiki/File:Runway-LG_Fashion_Week_(6256103581).jpg

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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