Sales ring the alarm on what defines luxury

Dubai: Inventory-driven business models now rule much of the high street apparel on offer. But the heavily discounted sales across town come to an abrupt end when you stumble upon the highest-end shops.

"What's happening today is too many brands who describe themselves as being in the luxury business are not," said Micheal Burke, CEO of Fendi.

"Their model is not luxury. Their model is: 'I'm going to produce 50,000 of this and I'm going to push it through the system'."

Burke believes the sales ring the alarm on what really is luxury and what is mass produced cheaply.

"If the sales represent more than a certain percentage then you're not in the fashion business, you're in the discount business."

The discounting and inventory issues are intertwined, as business models that create large inventories ahead of time, tend to have much larger mark ups and work to bigger margins. In turn, the brand's image is damaged, some believe, when they discount beyond a certain point.

Barbara Somogyiova, director of foreign sales for LIST fashion group, says LIST has a fairly unique business model for a high street store.

According to her they work to very low margins, enabling them to sell at much less of a discount. With a very fast production process and cycle, they produce clothes closer to the time of showing their collections, and encourage their franchises to buy little and often throughout the season.

"Our most successful franchises do a turnover of their stock by a factor of six in a matter of a season," said Somogyiova. This means they have less of an inventory problem at the end of the season, she added.

"They're always investing their capital in the best sellers at the right time, so their cash flow is much more positive."

This business model differs from many on the high street, and one result is that they work to much smaller margins.

"Our industrial margins are ridiculously small," said Somogiova. "We're a volume business not at the beginning of the season but at the end of the season. We develop lots of volume throughout the season."

As a result, deep discounting is not possible.

"This is something that doesn't allow us to do such aggressive discounting because we automatically would go below cost with 50, 60 or 75 per cent [discounts]. It's unthinkable. Our company would not allow that."

Besides the expense of avoiding mass production well ahead of time, she explained that LIST holds a position in the market that produces clothing lower-priced than designers such as Fendi, but maintain quality high enough to better many mass producers on the high street. They produce their knitwear in China, something Somogyiova defends as necessary as the number of skilled craftsmen in Italy to work with knitwear have fallen, but everything else is produced in Italy.

"Of course, we remain committed to producing in Italy as much as possible whenever possible and the workmanship shows it."

This she says is working well, as shoppers want to cut their spending on expensive designer labels, but are not willing to compromise much on quality. In Italy, where top fashion houses are experiencing slumps in sales, they are recording growth, something she believes is due to traditionally top-end aligned shoppers turning to the higher end of the high street.