TOP CONTRIBUTORS

Jason Mercer

The fashion industry can be divided into five segments: haute couture, luxury, affordable luxury, mainstream, and discount.

• Haute couture is the most expensive and exclusive of all four segments. It is occupied by only a handful of companies that produce custom-made clothing for the world's wealthiest individuals.
• The luxury segment is a step down in terms of quality and price, but still serves a wealthy clientele.
• Affordable luxury targets "aspirational" consumers, those who are not rich enough to afford luxury brands but will accept lower-priced alternatives.
• The goal of mainstream brands is mass appeal; they sacrifice an air of exclusivity for popularity.
• Discount brands cater to low-income consumers.

At the highest levels, the fashion industry is relatively insulated from economic changes. For example, recessionary fears in the United States have done nothing to harm haute couture, which is actually seeing an increase in customers in a time when so many other companies are fighting decreasing sales. The luxury market is doing well compared to mainstream, affordable luxury and discount brands, where its customers have less financial security and thus are not spending as much money on clothes and accessories as they used to.

Industry Breakdown

Haute Couture

The term "haute couture" is thrown around a lot in mainstream fashion circles. However, the term actually means something very specific. Haute couture consists of custom-made clothing made from expensive materials for the world's wealthiest consumers. Prices for a couture piece range from $25,000 to millions of dollars^[1] and though the market is small it has been expanding due to the explosion of new wealth in emerging markets such as India, China and the Middle East.^[2] In France "haute couture" is a protected term and only a handful of companies have the right to call themselves "couture houses." They must fulfill criteria set by the Chambre syndicale de la haute couture(Trade Union of Haute Couture), the governing body of the French fashion industry.^[3] Some couture houses are:

• Giorgio Armani Privé (segment of Giorgio Armani)
• Christian Dior
• Chanel
• Givenchy (owned by LVMH Moet Hennessy L.V. (LVMUY))
• Christian Lacroix
• Emanuel Ungaro

All couture houses produce ready-to-wear as well as couture pieces. Despite its high prices, haute couture is much less profitable than mass-produced ready-to-wear collections. However, haute couture serves to preserve a high-fashion, luxurious image of the brand which fuels sales of its other collections, namely ready-to-wear, accessories and cosmetics.^[4] It is also important to note that couture includes only women's garments. There is no such thing as haute couture menswear.

Ready-to-Wear

Ready-to-Wear is an umbrella term that applies to all clothing and accessories that are not custom-made. The ready-to-wear segment is further separated into different levels according to price, exclusivity, and quality of garments.

Luxury

Luxury goods is a large category and includes all clothing, shoes and accessories from designer names such as:

• Dolce & Gabbana
• Prada
• Gucci(owned by PPR SA (PP-FR))
• Hermès
• Lanvin

Luxury goods are generally regarded by consumers to be of high quality with a price tag to match.

Exclusivity

There are no clear-cut criteria for a brand to be classified as "luxury," however one important factor is the concept of exclusivity. A person who can afford anything does not want to own something anyone can buy; they want something special and unique. As a brand becomes more popular, it is not regarded as highly by the wealthy clientele. For example, around 2002 the trademark Burberry plaid was seen on everything from expensive bags and coats to cheap caps and scarves, becoming affordable to the middle and lower classes as well. Since the plaid was everywhere, it was no longer exclusive or "special," which turned off many of its wealthy customers. Today, in an effort to regain its exclusive status, Burberry has greatly reduced the presence of its trademark plaid.^[5] As a result, Burberry has reported record sales (over $1.5 billion for fiscal year 2007, over three times more than its sales ten years ago)^[6] and its stock price increased by 51% from 2006 to 2007.^[7] Many luxury companies walk a fine line between increasing market share and maintaining the elite image that is so important to rich consumers with a lot of money to spend. Some examples of luxury retailers are: Saks (SKS), LVMH Moet Hennessy L.V. (LVMUY), and Bloomingdale's (owned by Macy's Inc. (M)).

Current State of Luxury Market

The luxury market is growing despite the suffering U.S. economy. In 2006 8 million American households earned more than $150,000 a year, which is a 7% increase since 2002.^[8] Also, in 2006 there were 1.14 million "ultra high net worth households," which are worth at least $5 million. This number is four times more than the number of ultra high net worth households a decade ago.^[9] In addition, due to the devaluing of the U.S. dollar, tourists have been spending more money in American stores. In 2006, 49 million foreign visitors spent a record $104.8 billion in the United States.^[10] Increased foreign spending combined with an increase in the number of wealthy individuals means the luxury market is in a growth phase.

Affordable luxury

Affordable luxury is an industry segment that is focused on providing high-end merchandise at a lower price in order to attract middle-class consumers.

• Coach (COH) takes advantage of the idea of affordable luxury, selling bags that cost $138 and $1,900 side-by-side.^[11]
• Tiffany (TIF) has entered the affordable luxury market by offering a relatively inexpensive collection featuring $200 silver earrings alongside $50,000 brooches.^[12]
• Nordstrom (JWN)
• Hugo Boss AG (HUGSF)
• Chanel (lower-priced items such as sunglasses and cosmetics)

These inexpensive items allow access to a brand and a lifestyle that lower-income consumers aspire to but cannot afford. However, fears of recession, in addition to rising credit card debt and gas prices, have hit middle-class consumers hard. While the wealthy continue shopping as much as ever, these "aspirational" shoppers, people who form the backbone of the affordable luxury market have begun to cut back on non-essential goods such as clothing and accessories, leading to decreased sales.^[13]

Mainstream

Mainstream brands such as:

• Gap (GPS)
• Abercrombie & Fitch Company (ANF)
• Dress Barn (DBRN)
• Macy's Inc. (M)
• Polo Ralph Lauren (RL)

are generally perceived by consumers as being of lower price and quality than affordable luxury goods. These brands market to middle-and-lower-class consumers. Since their prices are much lower than their luxury counterparts, these brands make less money per garment. Thus, they focus on volume, selling as many goods as they can and appealing to a large number of people. In this case the concept of exclusivity no longer applies, as their goods are made (and priced) to appeal to a large number of people.

Discount

Discount brands serve low-income consumers. This category includes not only those stores that sell goods from other stores at a decreased price (i.e. outlet stores), but also those that price their clothing lower than most other brands; such as:

• Old Navy (owned by Gap (GPS))
• Payless Shoesource (owned by Collective Brands, Inc. (PSS))
• Cato (CTR)
• Target (TGT)
• Wal-Mart Stores (WMT)

Although haute couture and luxury have been doing well, the downturn in the United States economy has had an adverse effect on affordable luxury, mainstream and discount brands. Their target demographic is middle-to-lower class individuals who are more susceptible to poor economic conditions than their richer counterparts. These individuals are no longer splurging on clothes and accessories as much as they used to, which is bad news for all three segments.

Demographics

Demographics are important to fashion companies. They need to know what kind of person is buying their products. It heavily influences the kinds of advertisements a company makes, what products they advertise most and where those advertisements appear. Below are brief descriptions of a number of important demographics to fashion companies:

Note: Unless otherwise indicated, these demographics are subsections of the American population.

Affluent Households

An affluent household has an annual income greater than $100,000. They make up only 18% of American households yet spend almost one out of every three dollars in the United States.^[14] Affluent households are the fastest-growing segment of the American population, increasing 12.7% from 19.7 million in 2005 to 22.2 million in 2006.^[15] Affluent Americans tend to be highly educated and work-driven.

^[16]

The above graph ranks the retailers affluent households are most likely to frequent. Affluent households are interested in value: highest quality at the lowest price, meaning that though they can afford luxury retailers such as Saks (SKS), they have no problem shopping elsewhere if they see more bang for their buck. Stores that cater best to affluent households are:

• Saks (SKS)
• Neiman Marcus
• Nordstrom Rack (the outlet store segment of Nordstrom (JWN))
• Costco Wholesale (COST)
• Lord & Taylor

Middle-Income Households

Middle-income households have an annual income between $30,000 and $100,000 and form the primary market for affordable luxury. These are people who cannot afford high-end luxury, but are not so poor that they cannot splurge every once in a while. Brands such as:

• Coach (COH)
• Tiffany (TIF)
• Nordstrom (JWN)
• Polo Ralph Lauren (RL)
• Abercrombie & Fitch Company (ANF)

cater to this demographic by providing lower-priced merchandise in addition to their more expensive products.

Low Income Households

Low-income households have an annual income less than $30,000. A greater proportion of their money goes towards necessities like food and utilities than affluent or middle-income households, leaving much less to spend on clothing and accessories. These households are more likely to be attracted to discount brands such as:

• Wal-Mart Stores (WMT)
• Old Navy (owned by Gap (GPS))
• Payless Shoesource (owned by Collective Brands, Inc. (PSS))
• Target (TGT)
• Kohl's (KSS)

in order to stretch an already tight budget. For that same reason, these households would also be more interested in sales.

Women

Brands that cater to women include:

• Bebe stores (BEBE)
• AnnTaylor Stores (ANN)
• Cato (CTR)
• Jones Apparel Group (JNY)
• Talbots (TLB)
• Mothers Work (MWRK)

Women influence over 80% of consumer purchases in the United States and are even involved in a majority of purchase decisions involving stereotypically "male" products, such as electronics and cars.^[17] The fashion industry is heavily focused on women. Although the brands and products they are most into depend on a number of other factors (such as wealth), there are some general trends in how women perceive fashion products. First and foremost, many women are influenced by trends. Also, women of all ages want clothing that flatters their figure and looks modern.^[18]

Plus-Size Women

An especially important demographic in the United States is plus-size women. 62% of American women are overweight.^[19] Many fashion companies do not make plus-size clothing. Some popular retailers that cater to the plus-size market are:

• Lane Bryant (owned by Charming Shoppes (CHRS))
• Dress Barn (DBRN)
• Cato (CTR)
• Old Navy (owned by Gap (GPS))
• Hot Topic (HOTT)

Men

In the past few years men have begun to have more of an interest in shopping, and thus the male demographic has become even more important for retailers.^[20] Men ages 18-24 are most interested in shopping and brands, whereas older males tend to prefer bargain shopping; in other words to older men a brand is not as important as getting the best deal.^[21] Some retailers that cater to men are:

• J. Crew Group (JCG)
• Hermès
• Casual Male Retail Group (CMRG)
• Men's Wearhouse (MW)
• Jos. A. Bank Clothiers (JOSB)

Note: Both J. Crew and Hermès have opened menswear-only stores in New York City

Young Consumers

Young consumers, especially those aged 15-24, usually have much more time to shop than older consumers^[22]; many of them are students and have more time on their hands, as opposed to older consumers who have many more responsibilities such as full-time jobs and children. In addition, many young shoppers use shopping as a social event, which, combined with their free time, means they are more likely to shop around at many different brands to find the particular item they want.^[23] Brands that cater to young consumers include

• Abercrombie & Fitch Company (ANF)
• Pacific Sunwear of California (PSUN)
• Quiksilver (ZQK)
• True Religion Apparel (TRLG)
• Guess? (GES)

Baby Boomers

Stores that cater to the baby boomer population are:

• Talbots (TLB)
• Chico's FAS (CHS)
• Polo Ralph Lauren (RL)
• Phillips-Van Heusen (PVH)
• Dress Barn (DBRN)

Baby boomers compose about 28% of the American population, have an estimated spending power of about $2 trillion and are currently between 44 and 62 years old.^[24] Boomers are most interested in the "experience" of shopping for clothes, meaning they want to enjoy the shopping process. They want to shop in stores they feel most comfortable in--meaning a store that does not cater to the 18-49 age group, and are most interested in value. Boomers can switch from one brand to another if they see higher value for their purchases somewhere else.^[25]

Trends and Forces in the Fashion Industry

Increasing Focus on Men

Fashion was once seen as almost exclusively a "women's domain." However, in the past few years men as a whole have begun to pay more attention to their appearance^[26] and the fashion industry has responded by focusing more on catering to male clientele. For example, J. Crew Group (JCG)^[27] and Hermès both opened men’s-only stores in New York City.^[28] Although women still do make the majority of clothing purchases, companies are beginning to take advantage of the male demographic and appeal to them in order to increase sales.

Less Affordable Luxury, More "Genuine Luxury"

^[29]

The affordable luxury market, especially in the United States, is facing a problem due to the poor state of the U.S. economy. The middle-class "aspirational" shoppers who are integral to that segment's success are not indulging as much as they used to. In addition, there has been an increase in "extremely high net-worth" individuals in the United States and abroad. In the U.S. alone the number of "ultra high net worth households" increased fivefold from 1996 to 2006, to 1.14 million.^[30] These people are able to afford whatever luxury brand they want and the brands that are able to follow the money. These trends lead to decreased sales of affordable luxury and increased sales of genuine luxury products.

New Markets for Consumers of High Fashion are Emerging Worldwide

Now, more than ever, the nouveau riche in China and Russia are developing a big appetite for high fashion. In China for example, the economy grew more than 10% annually during the last five years, and by the end of 2006 the country had 345,000 U.S. dollar millionaires, 33% of whom were women.^[31] Chinese citizens are becoming increasingly fixated on luxury goods--they are viewed as a status symbol.^[32] China, Russia and the Middle East present large, wealthy markets for luxury goods companies.

Notes

1. ↑ "The Cult of Couture." June 28, 2006.
2. ↑ "Haute Couture Gets Hot." July 2, 2007.
3. ↑ Chambre Syndicale de la Haute Couture.
4. ↑ Chambre Syndicale de la Haute Couture.
5. ↑ "The Business of Luxury: The Return to Exclusivity. February 2007.
6. ↑ "Burberry, Plaid in Check, is Hot Again." BusinessWeek April 16, 2007.
7. ↑ "Burberry, Plaid in Check, is Hot Again." BusinessWeek April 16, 2007.
8. ↑ "Holiday Forecast Calls for Mild Slowdown in Luxury Sales." RetailTraffic. July 24, 2008.
9. ↑ Holiday Forecast Calls for Mild Slowdown in Luxury Sales." RetailTraffic. July 24, 2008.
10. ↑ "Holiday Forecast Calls for Mild Slowdown in Luxury Sales." RetailTraffic. July 24, 2008.
11. ↑ "Selling Luxury to the Masses." BusinessWeek November 29, 2005.
12. ↑ "Selling Luxury to the Masses." BusinessWeek November 29, 2005.
13. ↑ "Holiday Forecast Calls for Mild Slowdown in Luxury Sales." RetailTraffic. July 24, 2008.
14. ↑ "US Affluent Household Aggregate Income to Reach $4.6 Trillion in 2011." Packaged Facts. May 2, 2007.
15. ↑ "‘Abundantly Affluent’ Fastest-Growing Segment of Population." MC Marketing Charts. April 28, 2008.
16. ↑ "A Wealth Market in a Downturn Economy: Capturing a lucrative target."
17. ↑ "The New Women's Market." All Business. February 1, 2005.
18. ↑ "Ripe for the Picking: Apparel retailers look for new ways to woo today’s female Boomer." Cotton Incorporated. June 6, 2002.
19. ↑ Obesity in America-Obesity Demographics.
20. ↑ "Death of the Metrosexual: Mens Fashion Goes Large."
21. ↑ "Men's Clothing - US." Apparel and Textile Market Research Reports.
22. ↑ "Young Shoppers More Likely to View Shopping as a Social Event - Demographics of the Young Consumer 2005." BNET November 17, 2005.
23. ↑ "Young Shoppers More Likely to View Shopping as a Social Event - Demographics of the Young Consumer 2005." BNET November 17, 2005.
24. ↑ American Baby Boomers-Demographic Profile.
25. ↑ "Retailers and Baby Boomers: boom or bust?" NSB's Connected Retailer Magazine.
26. ↑ "Death of the Metrosexual: Mens Fashion Goes Large."
27. ↑ "J. Crew to Open First Men’s Store in Tribeca." DNR.com. March 11, 2008.
28. ↑ "Hermes to Open Men's Store." DNR.com. March 28, 2008.
29. ↑ "A Wealth Market in a Downturn Economy: Capturing a lucrative target."
30. ↑ Holiday Forecast Calls for Mild Slowdown in Luxury Sales." RetailTraffic. July 24, 2008.
31. ↑ "Chinese Nouveau Riche Go Gaga Over Haute Couture." The Star. June 1, 2008.
32. ↑ "Chinese Nouveau Riche Go Gaga Over Haute Couture." The Star. June 1, 2008.