Belgian design force Dries Van Noten reflected last year on the business model of his privately held brand, including the role of the runway show. In an interview for Rolex’s The Talks series, he said: “For me [producing every single look from the runway for retail] is absolutely necessary.” His comment sheds light on the big paradox in the fashion industry: Many brands - especially big name ones - do not really rely on the sale of garments to derive the majority of their profits.
Van Noten's comment is in stark contrast to the model of New York-based designer Thom Browne, who told Vestoj last last: "I create two collections every season: one for the catwalk and one for our showroom. I look at them totally separately. One is for show, and one is for wear."
Why - exactly - do designers show garments on the runway that never make the transition to retail, you ask? There are two relatively straight forward answers for this phenomenon. The first being that runway garments are simply not meant to represent marketable items but instead, serve a different purpose. One could argue that modern day couture and ready-to-wear shows, in many cases, are more akin to large scale marketing events for brands – for the purpose of enabling and/or maintaining lucrative licensing deals – than buying opportunities for clients.
(There are, of course, exceptions to this rule, with shows leading to actual sales of runway garments by way of existing and/or potential clients in attendance, but more commonly, such over-the-top shows serve as an opportunity for brands to market themselves as luxury fashion brands).
The second reason centers on the tactic of putting runway garments on the backburner in favor of brands more strongly pushing runway accessories and derivatives thereof – namely, bags and sometimes, shoes – and watered down garments, as these have proven to be key sources of income for brands. In short: clothes are not what sell. For luxury brands, it is about licensing and handbags with nearly everything else taking the form of marketing. So, why waste time and other resources manufacturing high fashion garments?
THE ROLE OF LICENSING
For the uninitiated, licensing is the practice of contracting with another party to obtain and use certain rights (almost always intellectual property ("IP") rights) in exchange for an agreed payment (a fee or royalty). A IP licensing relationship typically involves an agreement between a trademark owner (the “licensor”) and another party (the “licensee”) in which the licensor permits the licensee to use its trademark in commerce. Simply put, a license grants the licensee rights in property without transferring ownership of the property.
Licensing is of great magnitude for many brands, as it serves as a significant revenue-driver, particularly because designer clothes – both in terms of couture and ready-to-wear – do not tend to sell in any great volume. Designer garments are pricey, for one thing – often much pricier than their accessory counterparts. Moreover, garments are generally more difficult purchases; for instance, consumers must take sizing/fit into account when purchasing clothing more significantly than compared to other luxury items, such as watches and jewelry, and accessories, including bags and shoes.
So, what good is advertising garments if they do not sell nearly as greatly as accessories? Well, it is often indirectly very effective. As many high fashion houses learned early on, couture and over-the-top ready-to-wear collections allow them to not only reach a large audience, but they enable them to establish and/or maintain a reputation for luxury and fashionability. As a result, they can sell more accessible items, such as fragrances for $100+ or lipstick for $40 based on their names and the goodwill associated with their names.
Enter: Licensed goods, which tend to come in the form of branded sunglasses, cosmetics, fragrances, watches, and sometimes, jewelry. Such licensed products – which are manufactured and marketed by third party companies, the licensees – are sold at much lower price points than a designer dress, for instance, and as a result, they serve as an important revenue source for brands, as well as a way to court potential new customers.
To ensure stricter brand protection, brands have moved to significantly reign in their licenses over the past 15 years or so – around which point Tom Ford and Domenico Del Sole worked to clean up Gucci’s license network; Holding di Partecipazioni Industriali did the same for Valentino. Dior was perhaps the most aggressive to cut down on outside revenue sources, reducing its outstanding licenses from 300 to just a handful under the watch of CEO Sidney Toledano.
The practice still serves as an especially effective tool for high fashion houses, albeit in a much more selective and controlled manner. In fact, the licensing model remains tried and true. While the average consumer cannot afford a $4,000+ Chanel dress, many still want to tap into the appeal and status symbol powers of designer goods. This is why $600+ Chanel sunglasses and $90 powder compacts, for instance, sell in relatively high volumes.
It is worth noting that most companies do not and cannot effectively sell everyday commodities, like sunglasses and cosmetics, for such high markups. With this in mind, Chanel and other high fashion brands must rely on their luxury brand ethos, much of which has been established and maintained by way of their runway shows (and red carpet placements) and the resulting press furor surrounding these events.
So, instead of primarily aiming to sell couture by outfitting celebrities in their wares, or ready-to-wear garments by putting them on the runway at least twice annually, luxury fashion houses aim to sell more accessible items, such as their licensed goods or similar goods that are produced in house.
Just how lucrative are such licensing deals and/or the sale of license-type goods (i.e. fragrance, cosmetics, etc.) for brands that have kept such production in-house? In the case of Dior, "you have to look at their business model," Katalina Sharkey de Solis, managing director at ad agency Moving Image and Content, and former digital director at Chanel, told Fashionista. "It's a diffusion business model, so the percentage of revenue that ready-to-wear actually represents is very, very small." Ready-to-wear, she says, is essentially a tool to market a label's other (often lucratively licensed) goods – i.e. sunglasses, makeup, skincare, or fragrance.
Kardashian favored brand Balmain has a similarly extensive licensing network. Operating mainly as a wholesale business, Balmain maintains fewer than 10 flagships stores around the world and much of its revenues – roughly 50% as of 2012 – are derived from licensed goods. This network is largely still in place to date with its licensed products ranging from eyewear and fragrances to its secondary Pierre Balmain collection in its entirety, the license for which is owned by Italian company, Ittierre. (Despite talk of a sale several years ago, it appears that Ittierre still maintains the Pierre Balmain license).
As for Chanel, it is one of the few brands to produce its fragrances and cosmetics in house (note: it does maintain a license deal with Luxottica for eyewear). While it has established a “high position” in apparel and leather goods, according to Bloomberg, it derives the bulk of its 6.5 billion euros of retail equivalent sales from its high-margin fragrances and cosmetics.
In fashion: lower cost/price license goods and license-type goods reign supreme – for consumers and the selling brands alike.
WHAT ABOUT BAGS?
The past few seasons – largely with the help of Vetements, Saint Laurent, and co. – have heralded the most recent rise of “it” items that are not limited to bags. Hoodies, bomber jackets, statement jeans, and other eye-catching garments have taken center stage in street style shots, in Gucci stores, in editorials, and elsewhere. However, this is likely not representative of the larger industry practice, which sees bags – as opposed to garments – making up an enormous portion of houses’ revenue bases.
“Most runway pieces never get produced. They’re marketing exercises. The legacy brands aren’t in the fashion business anymore. They’re selling handbags,” Cameron Silver, founder of Decades, the posh Los Angeles vintage clothing store, told the Daily Beast earlier this year. And he is right.
According to a report released by Exane BNP Paribas, accessories – namely, handbags – dominate in the luxury market. They represent one of the few categories with high sales densities and full-price sell-through rates. As of 2016, they account for almost 30 percent of the total global luxury market, up from just 18 percent in 2003.
For Gucci, Yves Saint Laurent, Bottega Veneta, and Balenciaga’s parent company, Kering, leather goods represent over 50 percent of the €7.9 billion that the conglomerate’s luxury division earned in revenue for the 2015 fiscal year. Ready-to-wear accounted for only 16 percent. (It is worth noting that there are exceptions: Yves Saint Laurent’s ready-to-wear staples, such as biker jackets and ripped-up jeans, sold quite well for the brand. Its Chelsea boots, however, were almost certainly a hotter-selling item).
At Louis Vuitton – by far, LVMH’s most valuable and recognizable brand, accounting for no less than one-third of total group sales and almost half of its profit, per the New York Times – bags play a significant role. This is not surprising, as the brand did not boast a ready-to-wear collection prior to the start of Marc Jacobs’ tenure in 1998. And while the brand’s chief executive Michael Burke maintains that “Louis Vuitton’s ready-to-wear business is bigger than all but a handful of other ready-to-wear houses,” it is significant to note that its current roster of bags and related accessories includes upwards of 850 products.
Compare this to its shoppable womenswear collections, which consist of just over 380 products. Because the brand’s garments and accessories fall within the same division, Fashion & Leather Goods, it is difficult to gauge what the product groups bring in individually.
As for Chanel, the breakdown is even more obscure, as the company is privately held and does not disclose financial performance figures. Having said that, Biz Journals speculatively broke down the brand’s potential earning by category several years ago, finding that its fashion division – which is largely made up of handbags – likely amounted to upwards of 50 percent of the brand’s $2.3 billion and $3 billion annual revenues, with the remaining portion being derived from cosmetics. More recently, MainFirst estimated that Chanel’s 2015 net income amounted to €1.2 billion, or about $1.3 billion, on revenue of €6.5 billion.
We can likely also gauge the significance of Chanel’s handbag business based on its distribution model. For example, the Paris-based design house currently only sells fragrances and other beauty products online. While its President, Bruno Pavlovsky, claims this is a calculated move focused on upholding the integrity of the shopping experience (“Fashion is about clothing, and clothing you need to see, to feel, to understand.”), there is arguably something else at play here. Chanel very well may be limiting its online selection to the most frequently shopped items, meaning: accessories.
This is not to say that the brand’s clothes do not sell. Some clothes do. For instance, when Chanel stocked boutiques this past November with its latest range of 4,000-euro ($5,380) dresses and 3,200-euro quilted handbags for winter getaways to places such as St. Barts, the company wasn’t sure how consumers would react. “We were a bit skeptical about the global environment,” said Bruno Pavlovksy, who heads Chanel’s fashion division. Two months later, “more or less everything … sold out. It was quite a surprise.”
So, to answer the question of why brands show wild runway garments that do not make the transition to retail, it’s simple: with just a few exceptions (most of which include maintaining appearances), they were never meant to.