FASHION AND LUXURY GOODS
by Dr. Philippa Malmgren
The world economy is now in the midst of the first supply-side shock since the 1973 Opec crisis. Lack of access to lending and working capital has destroyed many of the marginal additional suppliers in all extractive industries – farming, mining and energy – thus pushing these prices, from cotton and rubber, to iron ore and oil, not only upward but sometimes to record highs. 50% of an emerging market worker’s income is spent on food and energy. So, these price pressures are squeezing incomes and compelling people to demand change. In North Africa and the Middle East, food inflation has sparked broader civil unrest, while in China, India and Bangladesh it has sparked huge wage demands. The combination of record prices for raw materials and double digit wage hikes means the cost of producing textiles, footwear and luxury goods is going to rise in 2011 for the first time since 1985. It also means that the principal target markets for fashion and luxury goods, such as China, are now potentially going to grow less quickly and be less stable. China may be growing at nearly 10% but inflation is now officially running at 6% and unofficially at 10%; this has enormous implications for production costs, sales assumptions and will increasingly shift the location of demand and production to the West. And, increased inflation fears will also continue to drive up the price of hard assets that matter to luxury goods producers and consumers – including gold, diamonds and prime retail property.
Meanwhile, the West has been burdened by record debt, thus causing luxury goods and fashion retailers to turn their attention to emerging markets and to focus on their market niche’s in the West more aggressively. The demand for “Value for Money” has forced high-end luxury into higher pricing points and more exclusive products and forced low-end fashion into lower pricing points and higher quality. This trend is set to persist. In addition, the West is dealing with its debt burden by defaulting on it – The Americans are inflating by throwing free money around (QE2), the Europeans are edging closer to defaults (haircuts on the bonds and abandoning commitments to the taxpayers which include cutting spending on everything from defence to student loans to rubbish collection). As a result, the debt burden will lessen over time. This means demand and sales in the West will continue to pleasantly surprise the fashion and luxury goods industry.
Strong brands will become even more valuable because they can pass on higher prices to their customers without sacrificing market share. Weak brands will come under pressure as higher input costs and changing consumer preferences force them to either innovate or die. Innovation in the arts, as a result, will be a powerful theme for the fashion and luxury goods industry. Just as the financial crisis destroyed Hollywood’s lock on film production and opened the door to a new generation of Indie films, so will fashion and luxury goods find that innovation will come from smaller independent creatives who can appeal to the changing demands of consumers faster than most big companies. The last few years have generated extraordinary pain and loss for workers and consumers worldwide. As they attempt to build a new future it is inevitable they will find hope in creativity, thus giving rise to a new generation of taste, style, price and quality requirements that will inevitably need to be met. Those who can meet this challenge will win.
(First published in March 2011)
