Tuesday, September 27, 2005

When High Fashion Starts Making Goods Overseas

There was an article in the WSJ about how the European luxury-goods firms have started making products in developing countries such as China. The author talked about how significant it was for the companies to reduce the cost amid the rising Euro and the price resistance outside of the Euro zone, and how consumers react to the "Made in Egypt" Valentino suits. After reading the article, I can't help but asking two questions:

  1. How sensitive are the consumers to the tags?
  2. Will and should the European luxury-goods companies reduce their price?

The first question is straightforward and personal. As long as it is well-designed and well-made, I don't care where it was from.

The second question is not that easy to answer, however. Let's look at Furla, the example used in the WSJ article. Furla cut costs by 30% after moving production to China, which means their profit margin goes up by slightly less than 30% assuming other things remain. Did Furla cut their price by 30%? No they didn't. Instead, they increased the price due to the appreciating Euros. You filthy greedy bastards! Some said.

Where does the money go? To better marketing, (hopefully) better design, to the banks that financed the companies, and eventually to the bottom line of their books. Why don’t they reduce the price? Why should they? A $6,000 Kelly bag will no longer be special if it’s only $1,000. Those companies are smart. The luxury-good market is so price inelastic that the demand will not decrease much when the price increases. Plus, the luxury goods will no longer be called “luxury” goods once the price is moderate.

In short, assuming that the companies are good at quality control and they are willing to teach the Chinese seamstress the best technique in clothes making, the profit margin will be increased significantly yet the quality remains. At the same time, the last thing the luxury-goods makers would like to do is to reduce the price. Therefore, the following things will happen:

  1. The profit margin of the company will be higher.
  2. There will be more Dolce & Gabbanas and Ferragamos entering the market due to the lucrative business and the rising demand in the developing countries.
  3. The European seamstress will lose their jobs. The EU is trying to protect their economy but it's doomed to happen as it did in North Carolina's fabric industry. The Chinese seamstress will lose the jobs some day as well once there are even cheaper labors to use.
  4. The consumers keep paying the high price.

As the price stays high, my only hope is that companies such as Prada goes to IPO soon so that I can benefit from the lower cost by becoming a shareholder.

4 comments:

Anonymous said...

"I can't help but asking two questions:..."

oh, please don't say it that way. Too Carrie.

Ultra-Gloss said...

I really like your blog...its really intresting, I came across it from tFS

JR1

Jing said...

Thanks Ultra-gloss! tFS is like my second home and I love it!

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