The devil does not buy marked-down Prada, at least not at its main stores. The Milan-based fashion brand – which has been doubling down on a sweeping revamp that has ranged from a complete reworking of its marketing strategy to its product offerings, themselves (to include some slightly more accessible handbags and the like) – announced that it will do away with end of the season sales in what Reuters calls “a bid to boost margins and protect its brand after achieving revenue growth in 2018 for the first time in four years.”
“We decided to stop doing markdowns from 2019 onwards,” Prada’s chief executive officer Patrizio Bertelli said in a conference call on Friday. “We believe that this decision is actually going to strengthen the brand’s image and in particular, it’s going to guarantee higher margins for us.” And analysts agree. Bernstein’s Luca Solca told Reuters that he “welcomes the move to end the seasonal promotions.”
With sales on their way out of Prada’s 600-plus stores worldwide, one of the immediate questions becomes: what is Prada to do with its unsold wares? While Bertelli did not speak to this point, in all likelihood, it will be business as usual – more-or-less – for unsold nylon bags, footwear, and the house’s “ugly chic” ready-to-wear. The products will shift to different stores, ones that are not listed on the fashion brand’s website alongside its marquee outposts, but instead, come on the form of a smattering of outlets that Prada maintains in different locales across the globe, from its famous SPACE site on the outskirts of Florence to its domestic outpost at New York’s Woodbury Commons.
While brands tend to keep the lucrative closeout aspects of their businesses under wraps, whether it be the operation of outlet stores or their largely unspoken willingness to let products “slip” into the grey market, these activities are significant for brands from a bottom line perspective.
Take Bicester Village in the United Kingdom, for instance. Located near Oxford, the upscale outlet destination boasts a directory of stores that includes Dior, Fendi, Saint Laurent, and Prada, of course, among others. The product of London-based Value Retail, a privately-held company that specializes in the development and operation of luxury outlet shopping “Villages” in Europe and China, Bicester Village welcomes an estimated two-thirds of all Chinese visitors that visit Britain, per SCMP.
These eager bargain-hunting consumers help brands like Prada to offload their unsold, out-of-season wares, sales that translate directly to the brand’s bottom line.
More than that, though, the practice of only offering – and thus, only selling – full-priced items in its main stores enables a brand to boost its margins (the percentage of sales turned into profits) for full-priced items, something that all luxury brands are routinely looking to do.
This is something that Prada, in particular, has struggled with, Manfred Abraham, chief executive of BrandCap, a London management consultancy, told the Financial Times in 2017. Sale items are a quick way to boost revenues, and Prada fell victim to that temptation, “eroding the brand by selling things [in its main brick-and-mortar locations] at a discount that people should still have been paying full price for.”
Meanwhile, he said, “Shoppers were less likely to find Gucci or Louis Vuitton fashions at a discount so soon after the [seasonal runway] shows.” This is set to change now that Prada will move items out of stores before slashing prices.
Beyond the sheer ability to rid themselves of old products in a relatively discreet way, maintaining a network of outlets allows brands to carefully control their image, a critical element of the luxury trade. Last year, on the heels of reported growth in full-priced sales and improved gross margins, The Robin Report theorized that for Prada, especially, “it’s possible that having formidable outlet stores in which to sell overstock gives [the brand the ability to] keep any whiff of promotion out of the full-line boutiques,” which is precisely what Bertelli seemed to be getting at in saying that ousting sale goods will “strengthen the brand’s image.”
While the move away from mark-downs will, in fact, take a toll on Prada’s “total revenue growth in the short term,” according to Solca, in the long-run, a clean and clear separation of full-priced looks and sale items will – ideally – allow Prada to both boost its margins and protect itself from the dilution from which it has been suffering so significantly over the past several years.
As for Bertelli, he “remains confident” that Prada “will see excellent results and performance.”
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