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Managing a high-margin business – What’s different?

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Have you ever been told to introduce a premium product? “Just add an advanced course and charge a lot more”, ‘”Launch special events for members”, “Make it By invitation only and invite someone famous" you are told. Then you’re given a revenue target that takes your breath away.

Getting people to pay for your executive's perceived status of your organisation or product can be the challenge! When the customer (the person who has the decision or payment authority) is not the consumer, it’s even more difficult. Whose perception and values do you target?

Firstly, a premium product usually means a higher price but that doesn’t guarantee a high margin or profit. It usually means a lot of work.  

Secondly, I’ve learnt the eternal relevance of Professor Michael Porter’s 1982 business model on competitive advantage where he argued that, to be successful, you either position at a low margin OR a high margin – but don’t get caught in the middle because you confuse your market. Current dynamics in the supermarket sector are a good example of this dilemma- discounters trying to move up, Higher-margin operators are competing on price.

                             

If you are introducing or maintaining a high-margin product or service, everything must align; every person involved must deliver on the promise. And, of course, the costs of generating that revenue for a high-margin product or service are much higher too.

Then there is the challenge of managing the expectations of everyone involved  as your executive will expect to see a profit increase ASAP.

Luxury fashion

While most businesses are trying to increase their gross profit margin percent by percent, luxury fashion brands are making interesting changes to their business model in the face of structural changes to the sector, falling revenue and margins, and changing customer preferences. The challenge for established luxury brands is to stay relevant and maintain that margin.

Ralph Lauren has stepped down as CEO to focus on being Creative Director, handing over the business management to a global brand leader. Louis Vuitton – after making its brand widely available in the Asian market – has ‘pulled up the drawbridge’ to try and reclaim its luxury position by rationalising its product range and ending most licensing arrangements. Likewise, Burberry - after licensing worldwide only to see footy fans wearing its scarves - has now found that sales in Hong Kong have dropped structurally (beyond 'LfL" stores and quarters) and cited the reaction of the Chinese Government to overt displays of wealth as part of its backlash against corruption.

Is managing the high-end becoming more difficult? What's changed? Let’s gain a more complete perspective of luxury fashion by looking at the business decisions over time of Australia’s luxury fashion company, OrotonGroup.

Luxury fashion business over time

Oroton was established in 1938 as a fabric importer. Robert Lane joined in 1953 and led it to become a dominant Australian fashion company. The four landmark developments on his watch [1] were:

  1. Developing the Oroton brand and its first range of mesh bags and accessories that, 50 years later, are acclaimed ‘Retro’ fashion items [2]
  2. Establishing a retail presence with the opening of the first Oroton store in 1971
  3. Guiding the company through its listing on the Australian Stock Exchange in 1987 and providing consistent leadership over 32 years as chief executive chairman till 1998
  4. Recognising the appeal of Polo Ralph Lauren and securing the Australian and New Zealand licence.

By 1998, OrotonGroup had two key brands (Oroton and Polo Ralph Lauren) and then purchased Morrissey from local high- profile designers and MARCS in 2002, repositioning itself as a “company of brands”. It defined a three-pronged growth strategy: distribution (channels), brand extensions (associated products) and sub-brands (to create an ‘aura’ from the luxury brands according to the ‘luxury pyramid’ business model).

                                                                

Given what we know about business fashion 12 years later, consider the following statement in the 2003 Annual Report:

                                    

OrotonGroup, however, experienced significant supply chain problems in 2004-2005 and the decision was made to sell MARCS and Morrissey, and licenced footwear business, Aldo. In 2010 the owner of Polo Ralph Lauren indicated its intention to end its 23-year licence and manage the Australian and Asia business itself – leaving a significant financial dent (45% of Group sales and 35% of net profit 50%) that is not desirable for a listed company.

In her 7th year as CEO, widely-respected Sally Macdonald sourced America’s oldest menswear company Brooks Brothers under a 10 year, 51% Joint Venture and a 10 year franchise with GAP, but within 18 months of opening 10 stores nationally in 2014, the new CEO, Mark Newman, ended what the business media called a "rebound" (from the long-term relationship) deal with Brook Brothers, citing setup challenges. Brooks continues to operate independently, offering women’s fashion as well.

Recent market announcements have indicated a drop in earnings because of less frequent discounting, the reduction of group gross profit margin to 60% (due to the lower price of GAP products) and the higher level of sales of GAP merchandise through its discount factory stores.

Its new international luxury full-price store design being introduced to 15 international locations (including China, Malaysia and Singapore) is more spacious and moves the transaction process behind-the-scenes, freeing staff to circulate and focus on its "clientele program". It is hoped that the enhanced visual merchandising, restricted discount times and higher average product price will increase average transaction revenue and "productivity" (sales/m2).

The language of OrotonGroup communications has edged it up from being a “premium” brand to "luxury" and it has followed peers by contracting a Brand Ambassador (international actor Rose Byrne) to reflect its “relaxed glamour and effortless style” message. It has also introduced limited edition products, notably its classic Alpine chain bag, in crocodile skin, pricing it at a mere $7,995, only offering 8 for sale in Australia (also available through the online shop).  

What can we learn from Oroton's experience?


FOR YOUR BUSINESS UNIT OR PROJECT

Five issues (currently challenging luxury fashion) to consider

1.To establish it you need to Own it

An early mistake by new brands has been to use a third party as the delivery mechanism instead of incurring the cost of a retail store. Brand owners often found their products on sale at different times, being deeply discounted or on the ‘last chance’ tables. Commissions – smaller areas managed by the owner – allows control.

Craft beers (outperforming traditional beers in Australia) are being bought by the larger companies for revenue generation. Former Foster’s CEO, O’Hoy [3], now running a craft beer business, advises to avoid supermarkets that control physical positioning and pricing. “'Small and different' doesn’t necessarily generate success as you burn value from Day 1. It’s best to have an independent channel demand or sell on allocation.” O' Hoy says running out of stock can be great for your brand positioning.

2. Know what makes the profit

Luxury items tend not to be profitable on their own. Ralph Lauren used what is called the ‘luxury pyramid structure’ with luxury products at the top, casting an ‘aspirational halo’ over the ‘more accessible’ branded lines (also presented at fashion shows) and factory stores at the base, generating the profit from mass retail.

Female brands often intend to make their profit in the accessory lines (ready-to-wear, makeup and eyewear). Producing these ‘profit-making’ categories requires smart retail managers because you are taking on established businesses and there can be some cynicism and confusion about why a leading designer would produce “more of the same”.

Historic trend setter in "luxury", Gucci is losing its shine, criticised by French consultancy Nelly Rodi [4], of having too many brands, with stores that are too large and a price range that is too wide.

3. Control channels strategically

Integration of [design – manufacture – retail] is key to warding off competition. "Online cannot be allowed to cannibalise store revenue," says retail specialist. Andre Kamel, Bain & Co,[5], argues that control includes “making the experience of visiting signature stores worthwhile”. Burberry’s London flagship store as a VVIP level with a separate entrance. Ralph Lauren offers a ‘by appointment only’, ‘lavish’ members lounge in Milan – because the brand is more popular in Europe than the US [5]. These stores are capital intensive and need regular refurbishment.

4. Ensure you have the right management team

Creative and commercial managers need to work together to avoid complacent in the dazzle of the high margin product. The challenge is to see what the consumer/customer sees and value what the consumer values and keep the brand fresh. Ralph Lauren has recently separated the luxury business and sourced a recognised global luxury manager but is it possible that you start cannibalising your products?

5. Understand your customers and consumers

Research on ‘Meaningful Brands’ by Havas  Group [5] claims that 73 percent of brands could disappear overnight because customers are looking for “real, transparent and purpose values” and few deliver on their promise. Let’s watch how the VW scandal plays out.

Abercrombie and Fitch was caught because its core demographic (‘teens”) that decided to design their own ‘brand statement’ by using layering of unbranded pieces. This undermined A&F’s pricing power as it now will be competing with new hot brands, low margins and faster supply chain.

Two questions to ask

1.  Introducing a premium product

Some suggest that a premium product is necessary for positioning and then any losses tend to be excused as it being "a loss leader". Would you agree?

Being in a professional development business, the premium product was the annual conference. While it was not in my budget (and not a profit earner) - the allure of status and mixing with business leaders - and the touted 'thought leadership" was necessary to support of the core revenue-generating business (the 'accreditation level' that required time and commitment).

2.  Governance is important for long term consistent growth

With new CEOs or managers, there is an inherent pressure to do something different, to "take the business...". Read the current business media - and the OrotonGroup example - and you'll see quite significant changes in concept or in strategic direction. How can a board ensure that it delivers the oversight that produces "consistent" growth without being accused of being conservative and risk-averse? Is our sense of "time-to-profit" accurate? Is there agreement on the investment time? 


A key challenge is explaining to others (upwards to the executive, outwards to stakeholders and downwards to those involved in the day-to-day of delivering their part) a new concept or business initiative. Everyone needs to be on the "same page" to avoid confusions that can compromise delivery and worse, cause you to keep trying to explain your idea. 

I would have loved to be a fly on the wall when the board was told a new business was going to be a 'field hospital for fashion casualties". mmmm

For education purposes only


1. Annual Report 2003

2. Keep checking Op Shops as Oroton mesh bags are often thrown in the "To the Op Shop" bundle when people move house. They last about two hours in the window and they are an Op Shop high-margin product!

3. The Financial Times October 2013

4. Lunch, J: Craft beats commercial in battle of the beers. SMH October 3 2015

5. Tabuchi, H: The New York Times, Oct 2015

6. McIntyre, P: Your brand is dead and no-one cares.

     

  


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