find it everywhere. Each store, wherever it is in the world, has fixed costs—rental, staff salaries, and other costs—before it makes its first sale.
Also, in the world of luxury brands, everything from the production process to the sale has to be of top quality. Service has to be perfect, and wherever they are in the world, customers should leave with a special and distinctive carrier bag (for Bottega Veneta, the handles are of leather) bearing the logo and the color of the brand. Even before going into the bag, the product is often expensively packaged and all of the costly glass molds, carton cases, ribbons, or bags have to be manufactured. And this is an area where cost-cutting can be extremely dangerous, because all of these factors contribute to the sense of luxury and to the individual purchase experience.
A brand's standing is often determined by expenses that rarely generate an equivalent gross margin. For example, a fashion brand must start the process by holding an expensive fashion show, twice a year, where the products that are presented are not identical to those that will be sold in the stores: for a given model, the shoulders are a bit larger, the waist a bit tighter, and the skirt a bit shorter on the runway. The cost of making this particular dress may never be recovered because the dress will probably never be sold. Haute couture, in Paris, is another activity designed to promote the image of the brand and to make it stand out, rather than to make money.
Another very expensive investment is to have flagship stores in the home town of the brand; these are invariably progressively bigger in a bid to outdo competitors. Of course, for large-volume stores, this is not so much of a problem, but for a middle-sized brand, this is a painful and unprofitable activity.
All of this adds to the very high break-even and to the difficulty for a new brand to establish itself and develop credibility before it has built sufficient volume to balance all the upfront investments.
A Limited Cash Need
As soon as a brand achieves sales above break-even, life becomes much easier. Margins are very high, and when all fixed costs are covered, a large part of the margin becomes profit.
In manufacturing, when sales develop it is necessary to invest in new factories. In luxury it is always possible to subcontract the production or the additional production. Accounts receivable are another problem area for most businesses. When the brand operates its own stores, it is paid in cash or other immediately recoverable payment methods.
What about inventory, then? In fact, as the product gross margin is quite high, inventories at cost are not too difficult to finance when the level of sales is satisfactory. The major financial difficulty is to make sure inventory is available everywhere in the world, in all of the brand's own stores or in those of its distributors. This difficulty is, of course, much greater for newly established companies than for those with a very high and growing level of sales.
Another difficulty in the area of fashion products is that of returns: at the end of a season, some items must be either sold or returned. For small brands, this is a major issue because they are obliged to start with a large number of products each season to bring variety to their customers: with a small volume of sales, bargain sales end up very big. For high-volume brands, a fashion distributor will sell 80–85% of the collection at full price and 15–20% at bargain prices. For difficult brands, the financial picture is not the same: up to 65% of total volume will be at bargain prices. So, small companies have to deal with the issue if they want to ensure that their distributors will buy the next season's products. This often entails giving special discounts to distributors if they are to avoid having to take returns, knowing that products that are returned are either sold through factory outlets or even destroyed. This is a major issue for small and medium-sized brands. For large brands, returns are a small part of the volume, and bargain sales to staff or press are usually sufficient to dispose of any outdated merchandise.
The only very important cash need relates to the opening of stores under the brand name. This need does not exist in cosmetics, wines and spirits, and in most watch brands, but it is an essential part in the development of a fashion or accessories brand.
The conclusion is very simple: luxury is a great and very profitable business for those who are successful. It is a very difficult business for the others. And it is also very easy to go from a very profitable situation to major losses as soon as the sales begin to decrease when products are no longer adapted to the consumer and, for some reason, no longer fashionable.
A luxury-goods business can therefore be summed up as either win-all or lose-all. It is great for the top profitable brands. It is difficult for those striving to make an impression. It is a nightmare for those who cannot afford a flagship store in Paris, Milan, New York, Tokyo, and Beijing and who have to keep losing money in some of their activities to maintain the dream and the glitter around their brands.
Time Frame
In the automotive business, everybody is trying to reduce the time it takes to develop a new car so that the product line can be changed more frequently. In many businesses, it is possible to turn a situation around in little more than a year. Sometimes, for fast-moving consumer-goods products, it is possible to launch a product, have an immediate and clear indication of how well it is selling in the stores, and get sales to cover the original investment costs within 6 months.
In the luxury world, launches often take much more time and investment. To launch a new perfume, it is necessary to come up with a complete line, from extracts to eau de toilette, even a “bath line,” and for each item there is a need for a costly glass bottle mold and a plastic cap mold. Such molds can take up to 12 months to make. Then a large quantity of the product has to be manufactured, so that at the time of the launch the new perfume can be immediately available in a large number of countries. The lead time for a launch can be anything from 18 months to 2 years. Then in the first year, for major launches, it is not uncommon to spend an amount equal to the first-year sales forecast on advertising and promotion. It often takes 3 or 4 years to start making money.
In the watch business, too, timing is crucial. The design and manufacturing processes have to be completed in time for the Geneva or Basel watch fairs and now specific group brands jewelry fairs at the end of February or beginning of March each year. If the deadline cannot be met, the launch is delayed until the following year.
Table 2.1 Fashion Cycle for a Fall–Winter Collection
| Exclusive fabric commitments | September–October, year t – 1 |
|---|---|
| Development of prototypes and matching with fabrics | September–October, year t – 1, February, year t |
| Fashion show | February–March, year t |
| Order-taking from multibrand stores | March, year t |
| Delivery to the stores | July, year t |
| Sale at full price | September–December, year t |
| Bargain sale | January–February, year t + 1 |
The Fashion Cycle
In the world of luxury fashion, everything boils down to the fashion cycle, as illustrated in
