MIDDLESEX DUBAI | Luxury Fashion Industry | ALE 3 Alternative Assessment | | Shaista Rehman – M00223578Said Hayat – M00290099Jad Aoun – M00282219 | April 3, 2011 |

A report for MBA4641 – Dr. Cedwyn Fernandes
Word Count: 3629 |

CONTENTS INTRODUCTION 3 PESTEL ANALYSIS AND THE MAIN CHARACTERISTICS OF THE LUXURY FASHION 4 MARKET SEGMENTATION 8 Haute Couture- Luxury Brand 9 High Fashion - High Cost 10 Exclusive Expensive Haute Couture Fabrics 10 Ready-to-Wear (RTM) - Designer Brands: 11 Diffusion / Designer and Premium Brands 11 Upper Bridge / Premium Brands 11 Mass / Retailers: 12 Segment Analysis: Haute Couture & Ready-to-Wear 12 Buyer’s Power - Moderately Weak 13 Supplier’s Power - Weak 13 New Entrants - Moderately Weak 14 Competition from Substitutes - Weak 14 Rivalry Between Establish Brands - Moderately Strong 15 Conclusion 15 References 17

INTRODUCTION
The luxury fashion industry is a global multi-billion dollar business, and employs large numbers of people with different talents and skills to bring luxury style apparel to the customers. The global luxury fashion sector is estimated to be worth US$130 billion and the sector is one of the few industrial segments that have remained a constant world economy contributor with an annual growth rate of approximately 20 per cent (Okonkwo, 2007).
Although the fashion industry developed first in Europe and America, today it is an international and highly globalized industry, with clothing often designed in one country, manufactured in another, and sold world-wide. For instance, an Italian fashion company might source fabric in China and have the clothes manufactured in Thailand, finished in France, and shipped to a warehouse in the Italy for distribution to retail outlets internationally. Luxury fashion is about self-expression, emotion and identity. Luxury fashion is distinguished by their powerful advertising, innovation, global recognition, and with outstanding customer service. In fact, luxury fashion industry is a dynamic and creative business. Fashion reflects culture and social boundaries.
This three-part report will centre on the luxury fashion industry. The first part focuses on macro-environmental analysis and the main characteristics of the luxury fashion industry. The second part will attempt to segment the market while identifying and illustrating each segment. The final part will focus on two of the segments (haute couture and ready-to-wear) to determine their overall attractiveness.
PESTEL ANALYSIS AND THE MAIN CHARACTERISTICS OF THE LUXURY FASHION
The marketing concept is about achieving firms goals which is determined by the target markets wants and needs and satisfying those needs better than competitors can. The marketing aims are more long term than quick sales as it focuses more on customer satisfaction with a view to retaining long term customers who are satisfied. To meet the customer’s demands and wants, it is therefore necessary to get the right marketing mix of product, price, place and promotion. This however cannot be achieved without having knowledge of the external factors which is where the use of the PESTEL analysis of the macro-environment is necessary (Grant, 2008). PESTEL analysis factors are Political, Economic, Sociological, Technological, Legal and Environmental. The PESTLE analysis examines each factor to assess what their potential impact on the firms. The PESTLE technique is straightforward to use. Typically, each element will be considered in turn and any potential issues for that area documented. Once all of the elements have been considered, the factors listed are evaluated in order to identify those most likely to affect the organisation. This results in a list of key external influences that could cause it to take action either to gain from an opportunity that appears to be present, or to ensure that any threats are removed.
This classification distinguishes between: * Political Factors: To what degree a government intervenes in the economy, international trade regulations and restrictions, the political stability of the country. * Economic Factors: These include interest rates, taxation changes, economic growth, and inflation. Generally economic changes can have a major impact on a firm's behaviour. * Sociological Factors: Cultural norms, expectations, lifestyle changes, perception, population growth rate and career attitudes. For instance, it could be demographic issues such as an increase in the number of working mothers, or consumer behaviour patterns such as the rise of disposable fashion. * Technological Factors: New technologies create new products, new processes, manufacturing maturity and capacity. Online shopping, bar coding and computer aided design are all improvements to the way people do business as a result of better technology. * Legal Factors: These are related to the legal environment in which firms operate. Changes to legislation. This may impact employment, access to materials, resources, imports /exports. For instance, animal right activist strongly opposes animals used in clothing industry such as, fur, leather and silk. * Environmental Factors: Concerns for climate change. With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider. For instance, sustainable and recyclable materials, such as organic cotton, which is cotton that has been grown without the use of hazardous chemicals.
Luxury as a concept is defined within the scope of socio-psychology as a result of its connection to a culture, state of being and lifestyle, whether it is personal or collective Okonkwo (2009). Luxury fashion industry is a successful business which can generate substantial returns if it applies the best business strategy. The luxury sector targets its products and services at consumers on the top end of the wealth spectrum. These self-selected elite are price insensitive and choose to spend their time and money on clothes and accessories that are plainly luxury rather than necessities.
Okonkwo (2007) claims that the core characteristics of luxury fashion industries are: brand strength, differentiation, exclusivity, innovation, product craftsmanship and precision, premium prising and high-quality. Today a luxury fashion industry is global in scope, and most major countries have a fashion industry. Five countries have established an international reputation in luxury fashion such as: France, Italy, United Kingdom, United States, and Japan.
Luxury objects are objects of luxury brands, only diamonds are luxury objects appreciated without brand. For everything else, there is no luxury without brands, the luxury brand goes beyond the object, and it is constructed from the reputation made from its objects and its service within the social groups favoured by the elites. According to Millward Brown, a global research agency specializing in advertising, marketing communications, media and brand equity research, the world most powerful luxury brands are Louis Vinton came out value of $25.7 billion, followed by Hermes at $9.6 billion, Gucci and Cartier with the same amount at $9.3 billion, Chanel at $8.7 billion. As shown in graphs the lists of most coveted luxury and fashion brands in the world.
This Most Coveted Luxury and Fashion Brands in the World
Source: AC nielsen
The main characteristics of luxury fashion industries are their very high sensitivity to economic upturns and downturns, generally high profit margins as well as prices, and very tightly controlled brands. Luxury is considered as possessing something that costs a large sum of money and the feeling or experience due to the possession of that item. It is the differentiated quality of the materials, for instance, design and performance of the handbag from Gucci that separates it from a basic functional bag sold at a local supermarket. Gucci can charge a premium price of $2000 and the supermarket $50. Similarly, these luxurious companies can never start a price war. If they do, their brands or products will be reduced to ordinary brands. Once its price is decrease to the level anyone can afford to buy it, the products will become too common. At this point the brand has already exited the luxury brand industry. Certainly, it is not price alone that convinces consumers to buy a product. This idea is well known and clear to brand executives. They will always list other powerful reasons to justify a price point for their products, some of those reasons are: Designs are quite unique in today's fashions industry and their unique designer’s inspirations, for instance, Armani comes from the designer Giorgio Armani. Gucci arose to luxury from Tom Ford. A Unique craftwork, technique, and materials, for instance, Rado watches have a non-scratch surface, unique design, and premium Swiss quality. Respectable consumer, for instance, Tiger Woods is a consumer of TAG Heuer. Besides that, the perception of producer or production location for instance, a product made in Italy compared to one made in China will arouse different associations in people’s minds.
MARKET SEGMENTATION
Behaviour of fashion industry consumers and organizations can be examined with marketing research, marketing segmentation and the marketing mix (Easey. M, 2009). After market research, firms need to identify their target market to offer their products and services.
Bohdamowicz (1994) believes that many luxury fashion companies intend to achieve dominance of a particular market segment by creating a strong brand image. To adhere their marketing plan they use different tools such as product, quality, design, communication strategy and pricing policy to ensure that desired objective is achieved. (Bohdamowicz, J, Clamp. L, 1994)
The luxury fashion industry is a globalised sector working to meet demands for attire and trends. The industry can be divided into five distinct segments which are: 1. Haute Couture-Luxury Brands 2. Ready-to-Wear (RTM) - Designer Brands 3. Diffusion / Designer and Premium Brands 4. Upper Bridge / Premium Brands 5. Mass / Retailers
Haute Couture- Luxury Brand
The luxury fashion industry began in Paris due to seamstresses who made single garments which turned to establishing boutiques that catered desired couture clothing.
Haute Couture is a French phrase for high fashion. Couture means dressmaking, sewing, or needlework and haute means elegant or high, so the combination of both imply excellent artistry with the fashioning of garment and it shows something very specific. Haute Couture consists of custom made clothing from expensive materials for the world’s wealthiest consumers. A model haute couture garment is made specifically for the wearer's measurements and body posture. The made to measure exclusive clothes are virtually made by hand, carefully interlined, stay taped and fitted to perfection for each client.
Although 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. In France, "haute couture" is a protected term and only a handful of companies have the right to call themselves "couture houses." They must fulfil criteria set by the Chambre syndicale de la haute couture (Trade Union of Haute Couture), the governing body of the French fashion industry.
At present there are eighteen houses of haute couture in France today. They are Gorgio Armani, Balmain, Pierre Cardin, Carven, Chanel, Christian Dior, Louis Fé¡ud, Givenchy, Lecoanet Hennt, Christian Lacroix, Lapidus, Guy Laroche, Hanae Mori, Paco Rabanne, Nina Ricci, Yves Saint Laurent, Jean-Louis Scherrer, Torrente, and Emanuel Ungaro.
With high prices, haute couture is much less profitable than mass-produced ready-to-wear collections. However, haute couture aims to preserve a high-fashion, luxurious image of the brand which fuels sales of its other collections, namely ready-to-wear, accessories and cosmetics. Couture includes only women's garments.
High Fashion - High Cost
Haute couture is the most expensive and exclusive of the segments. It is made up of a handful of companies which produce custom-made clothing for the world's wealthiest individuals. (Mercer, J.)
Cost of haute couture designs and its items ranges from about $25,000 to millions of dollars. This high cost is for value added service, workmanship, originality of a unique design and superb materials of the finest quality.
In addition the client would get a perfection of fit only achieved by painstaking methods of cutting and fitting to the client's body. The manual labour needed to produce a garment this way takes between 100-150 hours for a suit and up to 1000 hours for an embellished evening dress.
Exclusive Expensive Haute Couture Fabrics
The fabrics available to the couture house would be very luxurious and include the latest novelty fabrics and expensive silks, fine wools, cashmeres, cottons, linens, leather, suede, other skins or furs. In the case of a famous design house the design and colour of a cloth, may be exclusively reserved for that couture house.
Outside specialists make accessories either by design or inspiration. Hats, trimmings, buttons, belts, costume jewellery, shoes and innovative pieces are finely crafted to complement the fabrics and fashion ideas being created.
Ready-to-Wear (RTM) - Designer Brands: RTM designer brands are a large category and include all clothing, shoes and accessories from different designers such as Valentino, Prada, Giorgio Armani, Louis Vinton, and Dolce & Gabbana in luxury fashion industry (Corbellini, 2011).
Jackson (2006) believes that designer for a leading luxury brand is responsible for overall brand image of their business. Theses designers would be more interested in setting own trends rather than coping from other brands (Jackson, 2006). These goods are generally regarded by consumers to be of high quality with a price tag to match. The luxury segment is a step down in terms of quality and price, but still serves a wealthy clientele (M. Jacon).
Diffusion / Designer and Premium Brands (Hines, 2007) believes that diffusion refers to how an innovation spread among consumers over time whereas adoption refers to individual’s acceptance of new products. The main factors that influence the rate of diffusion are relative advantage, compatibility, possibility of trails, communicability, perceived risk, type of target market and type of decisions (Hines, 2007). D&G, Max Mara, and Ralph Loren are examples of these brands (Corbellini, 2011).
Upper Bridge / Premium Brands
Upper bridge targets "inspirational" consumers, those who are not rich enough to afford luxury brands but will accept lower-priced alternatives. 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. Diesel and Emporio Armani are few examples of it (Corbellini, 2011).
Mass / Retailers: Fashion designers design cloths and footwear while using wide range and combinations of materials to work with and a wide range of colours, patterns and styles. These items can be worn mostly for everyday wear, casual wear, and party wear etc. Some fashion houses and designers create ready to wear lines that are mass produced and industrially manufactured. Their target market serves low income consumers.
This category includes not only those stores that sell goods from other stores at a decreased price but also those that price their clothing lower than most other brands; such as Mango, Zara, H&M and others (Corbellini, 2011).
Advanced manufacturing techniques of ready to wear fashion made apparel more accessible and affordable to a wide consumer group (Okonkwo, 2007). These products are set at a decidedly lower price level than designer clothing. It is marketed to the masses. These ready-to wear apparels vary in quality from one brand to another, but they are decidedly lower in quality than either type of luxury wear (Corbellini, 2011).
Segment Analysis: Haute Couture & Ready-to-Wear
Porter’s five forces is a framework for industry analysis and business strategy development to view the profitability of an industry through three horizontal competition factors (substitutes, new entrants, and established firms) and two vertical factors (the power of each, suppliers and buyers), which proves useful when analyzing market segments (Grant, 2008). The following is a review of two segments of the luxury fashion market: haute couture and ready-to-wear.
Buyer’s Power - Moderately Weak
Two factors determine the bargaining power of buyers: price sensitivity and relative bargaining power (Grant, 2008). In terms of haute couture and ready-to-wear, buyers are generally individuals thus reducing their ability to greatly influence (Corbellini & Saviolo, 2009). However this is where the two segments diverge. Haute couture may deal with individuals however, the size and concentration of the buyers in comparison to ready-to-wear is significantly smaller. Losing a customer within the haute couture segment would prove to be a greater loss due to the fact the segment caters to fewer buyers with bigger purchases in comparison to losing one in ready-to-wear (Grant, 2008).
Brand awareness is generally high in the luxury fashion market thus allowing for the development of brand loyalty, though with high number of choices among ready-to-wear retailers, this could enhance buyer power in contrast to haute couture with few providers available, thus altering the balance towards the industry (Corbellini & Saviolo, 2009). Brand awareness manifests as a lifestyle representation and social status barometer; the need for a specific fashion arises not from its function but from its representation. Customers are willing to pay premium prices for fashion brands, style, exclusivity and quality (Grant, 2008), thus hampering buyer’s power over the industry.
Supplier’s Power - Weak
In most instances, “cartelization” and labour unions provide leverage to suppliers’ bargaining power (Grant, 2008). However, in the case of haute couture and ready-to-wear, international trade has provided companies with access to a wide selection of potential suppliers with the ability to source material from low-wage countries with under-developed labour structures (Corbellini & Saviolo, 2009). It could be deduced that suppliers of the luxury fashion market operate in a highly concentrated market with few barriers to entry while producing homogeneous products. This alignment towards a perfect competition market leads to the overall weakness of suppliers’ influence on the segments and market as a while.
New Entrants - Moderately Weak
Segment profitability attracts new entrants and unless high barriers are in place, profits will fall towards competitive levels (Grant, 2008). The haute couture segment generally provides high barriers to entry thanks in part to product differentiation; brand recognition and customer loyalty are high (Corbellini & Saviolo, 2009). Though product differentiation may provide substantial price premiums, the segment is open to quick imitations (Grant, 2008). Once an item loses its exclusivity, their values to the customer will also substantial diminish, thus posing a significant threat to haute couture firms.
The ready-to-wear segment will also experience significant barriers to entry through product differentiation though customer loyalty may be significantly lower in comparison to the aforementioned segment (Corbellini & Saviolo, 2009). Though generally, the segment experiences very low barriers to entry and exit. Though brand, once again, plays an important factor. Due to the enormous investment required to develop a luxury brand, the threat of new entrants is, ultimately, moderately weak.
Competition from Substitutes - Weak
It is generally accepted that there is no substitute to luxury fashion though self-designed and self-produced clothing and accessories may pose a threat in part due to the ability to avoid conventional distribution channel and selling designed products online. Nevertheless, the most significant threat comes from replica and fake manufacturing (OECD, 1998). Though questions have been raised whether counterfeit products help the industry develop and increase sales (Malik, 2010). Nevertheless, once again, brand awareness maintains a significant role and thus the influence of substitutes is minimal.
Rivalry Between Establish Brands - Moderately Strong
Five factors determine the intensity of competition: concentration of competing firms, diversity of competition, product differentiation, excess capacity and exit barriers, and, cost conditions (Grant, 2008). The haute couture segment consists of a few competing firms offering highly distinguishable (one of a kind) products where as the ready-to-wear segment consists of a higher concentration of competing firms with significantly less distinguishable products (Corbellini & Saviolo, 2009). Rivalry within the ready-to-wear segments is generally stronger in comparison to haute couture additionally; once again, branding and advertising play a significant role for ready-to-wear thus intensifying the rivalry among firms. Exit barriers for both segments are low, thus allowing forms to easily exit a declining market.
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.
Conclusion
As this report has shown, the luxury fashion industry macro-environmental factors do play a significant role in the industry. Additionally, the industry has segmented itself based on the quality and exclusivity of the products on offer as well as the ability to band oneself above the rest. Despite this segmentation, luxury fashion companies insist on developing products and competing at each segment although high profit margins may be inexistant (for instance in haute couture). Ultimatly, the industry’s focus is on trends and styles as well as keeping up with developments in design, thus is all comes down to providing consumers with what they want, be it haute couture or ready-to-wear.

References
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