Luxury brands appear to have the most privileged position in the fashion and retail landscape.
The product margins are insanely high and consumers never question them. From a product design POV, these brands can do whatever they want.
Their marketing departments appear to have a blank check–celebrities, international runway shows, campaign shoots in beautiful, remote locations.
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All of this…is actually true. I’ve worked with a number of New York-based contemporary, advanced contemporary and designer brands who want to experience all of these benefits.
But fashion isn’t a synonym for luxury. The fashion consumer and the luxury consumer are two different segments (with some overlap), and neither audience is a monolith.
These are the myths and misconceptions that I’m going to unravel in this edition of Fashion Industry Secrets, because they’ve led many brands down the path to bankruptcy.
Luxury Brands Lose Money For Decades
At its essence, a luxury brand is a partnership between an expert craftsperson and a talented artist. Luxury combines “savoir faire” (literally “to know (how) to make”, or knowledge of production) and creativity that draws from the zeitgeist.
Luxury objects have a deep history that spans back through medieval Europe, ancient Rome, and ancient Egypt. A lot of the functional objects you see in museums like the Met are luxury objects.
To earn your position as a luxury brand, you need to earn that reputation with the people who matter (cultural gatekeepers, wealthy customers). To do that, you need to prove that you’re not some fly-by-night operation attempting to cash in by “selling out” at the first opportunity.
The only way to do that is to make a big, painful, public signal…you must lose money (or break even) for decades. If you go too broad, too early, the core luxury client loses interest.
To maintain a luxury positioning, you need to plant trees today to create shade for your grandchildren. i.e. you need to make decisions that maximize profit in the long term (probably after you’re dead) vs optimizing for quarterly results.
That is why publicly traded companies where index funds are the largest shareholders can never be luxury brands. It’s also why luxury positioning is not a great fit for bootstrapped brands.
There is a lot of confusion on this topic because the marketing community loves to abuse the term “luxury”. It’s used as a synonym for high quality, or premium.
But just because a marketer something is “luxury”, it doesn’t make it so–and it doesn’t unlock the eye-watering product margins that true luxury brands enjoy.
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LVMH Was An Arbitrage Opportunity
Bernard Arnault is the CEO of LVHM, a luxury conglomerate that owns Louis Vuitton, Christian Dior and dozens of other high end brands. He purchased many of these brands out of bankruptcy or distressed situations.
For example, Christian Dior was one of several brand trademarks owned by a bankrupt textile company that Arnault acquired in 1984.
It was founded as a couture house in 1946, then slid into irrelevancy as “ready to wear” fashion became more popular and socially acceptable (and Dior the man passed away).
Many of today’s most sought-after luxury brands can tell a similar story: a rise to prominence when their art form (“savoir faire”) rode a rising cultural wave, then a slide into irrelevance when the brand transitioned to the second or third generation of ownership.
One of Arnault’s many innovations was to sell a broader range of products off the back of the brand’s reputation for exclusivity and production expertise. For example–Louis Vuitton originally made travel trunks. The brand did not sell apparel until 1998.
This is the “product pyramid” strategy. For a brand like Dior, Haute Couture sits at the top of the pyramid–dresses that easily cost six figures for a global audience of (probably) fewer than 1,000 individuals.
Beauty and fragrance sit at the base of the pyramid–accessible to the masses, but still priced higher than most brands in the category.
Hypothetically, this allows luxury brands to achieve mass exposure without creating the perception that the brand is “common” and alienating audiences higher up the pyramid.
All this said: LVMH’s strategy is not replicable, because it was an arbitrage play.
Many of its marquee brands wandered into the wilderness during the chaos of WWII, and Bernard Arnault was wise enough to realize the billions in untapped brand value there. But, at this point, all of these brands have been acquired by someone.
Luxury conglomerates like LVMH and Kering are actually pretty bad at applying the pyramid strategy to brands founded after 1980. Most of LVMH’s divestitures and flops were young brands like Donna Karan, Michael Kors and Stella McCartney.
Luxury Brands =/= Fashion Brands
The fashion strategy and the luxury strategy are two separate things. Fashion brands strive to be “of the moment”, while luxury brands strive to be timeless. Fashion brands develop "seasonal must-haves”, while luxury brands develop core product pillars.
Many luxury brands introduced ready to wear collections and runway shows in the early to mid-1990s as a marketing exercise. Oftentimes these collections were a pure marketing expense; almost none of the product featured on the runway was ever produced.
Pure fashion brands–those that started out selling apparel–often follow the conventions of the “fashion system”, which were established by department stores and print fashion magazines.
This is the world featured in films like “The Devil Wears Prada” (yes, really). In the present era both department stores and print magazines are on life support, but the framework established by this system still dominates the focus of many fashion brands.
Luxury Customer vs Fashion Customer vs People Who Need Clothes
In every product category there are die-hard category enthusiasts and casual buyers.
Think about all of the different customer segments for a DSLR camera:
- Professional photographers
- Hobbyist gear-heads with dozens of lenses and accessories
- Quasi-professionals who shoot bad wedding photos
- Bloggers who are seeking “better” photos but have no idea how to shoot them
- Etc. Etc. Etc.
These segments exist within fashion, and even within more expensive fashion (where you’d expect the price to filter out everyone but “fashionista” types). But it’s complicated by two factors:
- It’s socially unacceptable to walk around naked, so everyone buys clothes
- Choices are a matter of taste to a really granular degree
So you get category enthusiasts like Rachel Tashjian complaining that New York fashion week is boring…but the TriBeCa moms and single and fabulous investment banking VPs who spend six figures a year at these brands like them just fine.
Both of these segments of “heavy users” have more time than money and generally don’t follow the fashion industry. Their concerns are looking cute, signaling status to their immediate social circle, and consistency.
This piece profiled some women who spend more than seven figures a year at various luxury brands–the “very important clients”. What’s left of the “establishment” fashion press would probably mock these women for being tacky…but they keep the lights on at their chosen brands.
Basically, there is a big gap in tastes and preferences between the folks who talk loudest about fashion and the folks who spend the most money on it.
And the market for luxury logo branded goods is a lot larger than the market for apparel priced contemporary and up, because unbranded apparel isn’t a mass status symbol.
So if you’re trying to build a fashion brand, you can’t be designing for the loudest tastemakers, because they don’t represent the real “heavy consumers” of fashion. But you also can’t run too far afoul of the general consensus of the “cultural elite”.
Michael Kors is actually a great example of this balance. The Michael Michael Kors diffusion line was mocked on “And Just Like That” and a TriBeCa mom wouldn’t be caught dead in it, but top fashion editors still attend his runway shows and feature his main collection in editorials.
Let’s be honest though–a big advertising budget helps a lot here.
There is a lot of gray area between Michael Kors and Elena Velez, you just have to pick a lane that aligns with your funding and your end goal.