Fashion and luxury are high-growth sectors, nobody disputes that. What’s less clear is which are the most profitable businesses in the industry and what structural and strategic features do they possess. In reference to the 2006 financial results, analyzed in Fashion and Luxury Insight compiled by SDA Bocconi School of Management, Altagamma and Ernst & Young, the most profitable firms in terms of return on capital invested are accessories (purses and shoes) and retail.
In particular, firms operating in accessories reported 20% profitability, as compared to the industry average 15%. Fashion retailers immediately follow, with an average Return on Investment (ROI) of 19%. This extraordinary performance is made possible by high operating margins and rates of capital turnover higher than average. Furthermore, since 2001 accessories have grown by 14% and retail fashion by 13%, compared with a global average of 11% in the sample considered.
Accessible luxury and investments in points of sale are the main drivers of this process. In accessories, the most profitable firms are those operating in medium-high end of the market. Conversely, what makes fashion retailing so profitable is focusing on not-so-wealthy consumers, direct sales, strong relations with customers, and high bargaining power vis-à-vis suppliers.
In fact, over the last five years, the biggest fashion brands have expanded into accessories and invested heavily in retail shops. Listed fashion companies have increased the number of their points of sale by 17%. Increasingly, in the fashion industry the emphasis is shifting from production to retailing.
by Barbara Rovetta and Paola Varacca Capello,
Master in Fashion, Experience and Design Management, SDA Bocconi School of Management