Strategies and Structure of the Luxury Clothing and Accessories Sector

Diplomarbeit von Mirela Orlovic

Introduction:

The luxury goods industry is a fascinating field. As Jean-Louis Dumas-Hermès, chairman and CEO of Hermès, explains: „Le luxe, c’est créer un rêve qui perdure.” In addition to the dream dimension that defies scientific analysis, the luxury goods companies have kept highly secretive. Alain D. Perrin, President and CEO at Cartier International, elucidates: „One of our strengths is our ability to maintain a certain mystery about the economic entity which is the company. We bring magic and dreams to consumers who don’t want to see their favourite brands discussed in the media, and lacking any sense of the romantic.” Systematic research confines itself mainly to specialised marketing literature, especially that of French scholars.

But recent developments have raised various questions and call for more systematic research in diverse fields. Over the past two decades, luxury companies in particular in the clothing sector have had to face an increasingly turbulent environment. On the supply side, French dominance especially in the haute couture sector has been challenged as competition has increased mainly from Italian and American fashion houses. Furthermore, the traditionally fragmented luxury industry has become more concentrated, a visible sign for the consolidation was the merger of Louis Vuitton and Moët Hennessy in 1987. Finally, as a result of diversification strategies, most fashion houses have extended to more accessible luxury products and as a result, realize now a substantial part of sales in both, clothing and accessories. But also the demand side has been substantially changing. In 1899, the American economist Thorstein Veblen published the first proper study of consumerism, in which he identified and analysed the traditional luxury customer group which he called „leisure class.” It was not until the 1980s that the leisure class was joined by newly rich and occasional customers from the middle class. On the one hand, the luxury industry has expanded to more accessible products and to new geographical markets, and on the other hand, a growth in wealth of the Western industrialized nations has increased purchase of luxury goods. These mostly fundamental changes have challenged and will furthermore challenge the fashion houses and the ability to establish a competitive advantage. The objective of this thesis is gaining a thorough understanding of the luxury clothing and accessories sector, by elaborating on these developments and working out characteristics, competitive forces and main issues. The analysis serves then as a basis for strategy formulation that is aimed creating a long-term competitive advantage.

Porter’s five forces framework has been chosen for conducting the analysis, be-cause it provides a structured approach for examining a particular sector. Michael E. Porter has developed the model of the five forces in his book „Competitive Strategy. Techniques for Analyzing Industries and Competitors” in 1980. With combining the fields of business strategy and industrial organization economics, Porter developed the work of Kenneth Andrews, commonly known as the SWOT analysis, but focused on the structure of the industry. He argues that intensity of competitive rivalry, the bargaining power of suppliers and buyers and the threat of substitutes and new entrants define the structure and thus, profitability and attractive-ness of an industry. Based on the five forces analysis, Porter suggests three generic strategies that companies could implement to establish a competitive advantage: The cost leadership strategy focuses on offering customers a competitively low cost without sacrificing quality and service. A company employing Porter’s strategy of differentiation would offer a product that is unique in regard to competitive products. The essence of the focus strategy is concentration on a particular product or market segment.

However, Porter’s framework of the five forces and the concept of generic strategies is not accepted without reservation, but modified where the analysed sector requires to. Especially, this seems necessary regarding Porter’s advise to pursue one of the three generic strategies. According to the scholar, cost leadership is appropriate in markets with homogenous products and industry-wide standards. However, because a substantial characteristic of luxury goods is its uniqueness, it is assumed that pursuing cost leadership is not an appropriate alternative for companies in the analysed sector. Furthermore, it is questioned if differentiation is adequately formulated in order to achieve a sustainable competitive advantage in the particular luxury sector. Customers relate luxuries to a wealthy lifestyle. They expect exclusive products of premium quality and an original design. It is assumed that the generic strategy of differentiation needs to be reformulated, because it does not reflect sufficiently the high demands on exclusivity.

This thesis consists of two major parts: In the first part (chapters two and three), the luxury clothing and accessories sector and the conceptual framework of this thesis will be introduced. In the second part (chapters four and five), Porter’s concepts will be applied in order to analyse the regarded sector.

The second chapter acquaints the reader with an introduction to the specifics en-countered in the luxury clothing and accessories sector. The sector concerned is the symbiosis of the luxury industry and the clothing industry. For a better understanding, it is thus necessary regarding the characteristics of both, the luxury goods universe and the clothing industry. Subsequently, in the third chapter, the conceptual groundwork for analysing the chosen sector will be laid. Porter’s five forces model, the value chain analysis and the concept of the generic strategies will be discussed.

The fourth chapter is the main part of the thesis. First, an analysis at company level will be conducted by applying Porter’s value chain. This serves as a first pillar of a thorough understanding with illustrating the activities within fashion houses. Then, the five forces model will be applied to detect the structure of the sector and to work out opportunities and threats to incumbent companies and their profitability. This section acquaints the reader with the competitive forces in the luxury clothing and accessories sector and presents the strategies that fashion houses pursue to cope with these forces. Finally, based on the findings of this analysis, in the fifth chapter, the two hypotheses set up in this introductory section will be tested and a generic strategy will be developed that secures a long-term sustainable competitive advantage. The paper will conclude by pointing out future challenges for luxury fashion houses.

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