Xiu.com screenshot | Source: Xiu.com

We continue this week’s focus on e-commerce by turning our attention on how to succeed in the rapidly expanding e-commerce market in China. 

BEIJING, China — According to a recent report by The Boston Consulting Group (BCG), China is set to become the world’s next e-commerce superpower, surpassing the United States to become the largest online commerce market in the world, with an estimated market size of $300 billion. In 2006, less than 10 percent of China’s urban population shopped online. By 2015, that figure is expected to have quadrupled, reaching 44 percent, while the total number of e-commerce shoppers in China will grow to 329 million.

What’s more, according to BCG, China’s massive geography, a middle class that is rapidly expanding beyond the country’s largest cities, and widely accessible, heavily subsidised high-speed internet — broadband in China costs just $10 per month, compared with $30 per month in India — make the country unusually fertile ground for e-commerce, with internet access far outpacing the reach of physical retailers. Indeed, up to a quarter of e-commerce demand in China is for products consumers cannot find in physical stores, with apparel and skincare amongst the fastest-growing online categories.

But for fashion companies aiming to crack the online retail opportunity in China, it’s imperative to understand that the country’s e-commerce market is very different to established markets in the United States and Europe and that online shoppers in China — much younger, on average, than their Western counterparts — have different expectations, preferences and patterns of behaviour.

“Chinese consumers’ recognition and preference for fashion brands is quite different from mature markets,” said George Wenhong Ji, founder and CEO of Shenzhen-based fashion e-tailer Xiu.com, which sells international luxury brands like Gucci and Chanel, and last year raised $100 million in a second round of funding from elite venture capital firm Kleiner Perkins Caufield & Byers and private equity firm Warburg Pincus.

“Fashion brands that are not so popular could be received very well in China and vice versa. [Chinese consumers] are still price-sensitive and have poor loyalty towards brands,” said Ji. “It’s important to study Chinese consumers’ income and expenditure – how much money they earn in different cities of China and how much they would spend on fashion; how much they would spend on fashion online,” he continued.

According to the BCG report, 7 percent of online shoppers are responsible for 40 percent of online spending. For fashion retailers, the importance of these “superheavy spenders,” each of whom complete over 50 transactions a year and have a preference for heavily branded goods, cannot be underscored enough.

To entice superheavy spenders, first and foremost, it’s vital for online retailers to get the product mix right, Morgan Tan, vice-president of e-business at Lane Crawford, told BoF. These high-spending consumers are looking for must-have seasonal items that aren’t available elsewhere, she said, noting a growing demand for niche labels. Indeed, Xiu.com, which last year recorded sales of approximately $150 million, plans to carry more international and Chinese labels that competitors do not offer, while The Corner, a luxury e-tailer owned by the Yoox Group, which operates a China-specific site at thecorner.com.cn, recently launched The Vogue Talents Corner, an initiative promoting less known emerging designers in collaboration with Vogue China.

Compared to their counterparts in the West, affluent consumers in China have a lower baseline knowledge of fashion products and are ravenous for information, an opportunity for retailers to engage them more frequently with content and advice. “It is about engaging her daily,” said Jeff Yurcisin, president of Shopbop.com, which recently launched a site in Chinese. “We send out daily emails to our customers, so she gets her fashion fix every day,” he continued. “The opportunity is for us to be a personal stylist, to spend more time telling stories and introduce her to brands that the American customer already knows.”

But despite their hunger for information, Chinese consumers are distrustful of online retailers. Amongst the world’s most highly social shoppers, Chinese shoppers trust information and recommendations from their peers on blogs, social networks and user review sites far more than official brand communications. In fact, according to BCG, only 19 percent of Chinese consumers even visit official brand sites, as compared to between 41 and 60 percent in Japan, the US and Europe.

“Online shoppers in China are much more wary than the US and UK,” said Fabienne Pellegrin, Asia business development director for Salvatore Ferragamo, who also oversees the brand’s digital development. “They need more information than the average online shopper. There’s so much abuse online, so they are programmed not to trust anything,” she continued, emphasising the importance of peer recommendations and user reviews. In fact, over 40 percent of Chinese shoppers surveyed by BCG had both read and posted online product reviews, nearly double the rate in the US. “Encourage [consumers] to write reviews about your product because so many people read them,” advised Ms. Pellegrin.

As in the West, a high level of customer service is another essential part of a successful China e-commerce strategy. “[Chinese consumers] will become loyal to an e-commerce company because of high quality service,” said Mr. Ji. “It’s about making the online shopping experience as convenient and risk-free as possible with reliable deliveries and free returns,” said Ms. Tan. “Unlike many other online retailers, we offer a multi-channel approach for customers that allows them to collect or return their order to our stores,” she continued.

While shipping costs are low, China has a poor delivery network dominated by local, independent couriers that are neither efficient nor reliable, a major hurdle for online retailers. To address the issue, The Corner has partnered with international shipping service Fedex to provide couriers who wait at customers’ doorsteps while they try on their purchases and facilitate on-the-spot returns. The Corner also leverages sophisticated RFID technology to seal packages with anti-counterfeit microchips (according to the BCG study, 45 percent of shoppers worry that their goods will be swapped for fakes while in transit).

Alongside delivery-related services that lower risk and make shopping more convenient, affluent Chinese consumers also expect rewards for their loyalty. As a result, VIP reward programmes or other special incentives are critical to success. For example, VIP shoppers on Xiu.com can view fashion shows and pre-order next season’s products months in advance of others. “We find that for more high-end customers, they value additional services, such as VIP sales alerts, pre-order, seasonal gifts,” said Mr. Ji.

But for international retailers targeting China’s fashion e-commerce market, consistently delivering a high quality experience that’s localised to the needs, behaviours and expectations of Chinese consumers often means investing in China-based operations. Indeed, while Net-a-Porter has long shipped to China, the company recently announced that it would open a distribution centre in Hong Kong this summer to better serve the Asia-Pacific region.

“Throughout 2010, we set up local operations — an office and logistics centre — in Shanghai to run the business locally,” said Federico Marchetti, founder and CEO of Yoox Group. “A local structure and local team ensures we provide Chinese customers with a unique online shopping experience characterised by completely localised, best-in-class customer service,” he added. “Although e-commerce enables brands to have an international distribution, the online shopping experience still works better at a local level.”

Ultimately, a successful China e-commerce strategy is composed of the same fundamental elements that matter in the West: engaging content, great customer service, dependable deliveries and easy returns are all critical. But in China, these elements count in different ways and weights, with editorial-style content, peer-to-peer persuasion, risk-free deliveries and rewards programmes carrying particular importance.

Divia Harilela is an associate contributor at The Business of Fashion.

Fab.com Screenshot | Source: Fab.com

Yesterday, BoF was first to bring you the news of the recent $18 million investment in Farfetch.com. Today, we continue a week focused on e-commerce by examining the historical challenges faced by online retailers and how recent innovations and infrastructural advances have fundamentally improved the economics of e-commerce, setting the stage for a renaissance in online retail.

SAN FRANCISCO, United States — Following the burst of the dot-com bubble in early 1999, e-commerce suffered from a lack of venture capital investment. The unrealised, over-hyped expectations for e-commerce — at a time when the market, consumer technology and infrastructure were less evolved — and the subsequent burns left venture firms with a nasty aftertaste. Perhaps the most spectacular fashion e-commerce failure was that of Boo.com, which launched in the Autumn of 1999, burned through $135 million in venture capital in just 18 months and was liquidated in 2000.

But on closer inspection, e-commerce has also faced additional complexities and capital inefficiencies that, for years, continued to push investors away.

HISTORICAL CHALLENGES AND FIRST MOVER ADVANTAGE

First, e-commerce lacked defensibility. With software or other internet services, intellectual property or the complexities of build create barriers to market entry for would-be competitors. But e-commerce businesses are essentially selling products. The most important elements of these businesses are the assortment, breadth and variability of the merchandise they offer, along with overall access to this merchandise. Access to inventory is not a sufficient barrier, however, as other stores can carry the same products unless a business has exclusive agreements with vendors, which happens rarely and usually only for a limited time.

In the absence of defensibility, companies needed to demonstrate solid metrics around scale of revenues, registered users and overall profitability in order to secure investment. But for e-commerce companies, this requirement created something of a catch-22. When compared to software or other internet services, start-up costs for e-commerce companies were higher, due to the expense associated with buying physical inventory, setting up a logistics platform for warehousing and fulfilment, and acquiring and retaining customers. Furthermore, since they operated at the wholesale level, their margins were relatively smaller.

In order to work and attract investment, these businesses required scale. But in order to achieve scale, they needed significant investment.

There were a few big success stories, such as e-Bay and Amazon, which gained significant first mover advantages. As Josh Kopelman of First Round Capital has pointed out, from 1999 to the beginning of 2010, the list of top general e-commerce sites in the United States remained almost unchanged. In fashion, online juggernauts like Net-a-Porter, Yoox, Neiman Marcus, and Shopbop maintained their incumbent positions.

IMPROVED ECONOMICS AND REDUCED ENTRY COSTS

In recent years, however, the tides have turned in e-commerce. For one, consumers are now acclimated to the concept of online retail. According to Forrester, the online retail market in the US alone is expected to grow to $279 billion by 2015. But critically, major innovations and infrastructural advances have also fundamentally improved the economics of e-commerce, attracting significant venture capital interest in the sector.

Starting in 2007, US private sales pioneers like Gilt Groupe, Rue La La, Hautelook and Ideeli were able to drive massive consumer adoption in a very short amount of time when compared to traditional e-commerce sites. They offered designer fashion at significant discounts, distributed directly to email inboxes.

With timing and supply constraints to compel immediate action, these members-only sites successfully identified and leveraged key behavioural insights to drive engagement, collect customer data and generate rapid sales. But perhaps most importantly, their ability to move product much more quickly than traditional sites reduced cash flow requirements. Indeed, many flash sales sites buy on consignment, while others do not touch or pay for inventory at all until it is purchased by the end consumer.

In recent cycles, the rise of social media channels like Facebook and Twitter have also enabled e-commerce businesses to acquire customers and accelerate growth far more efficiently. Fab.com, which sells discounted furniture, jewelry and art in 72-hour flash sales, has leveraged social media to great success, attracting a total of 1.65 million registered users in just six months. According to The Wall Street Journal, in November of last year the start-up processed approximately 100,000 orders, double the previous month, and is now averaging $1.4 million in sales per week. The company recently raised a Series B round of $40 million, led by Andreessen Horowitz, valuing Fab.com at more than $200 million. “They’ve leveraged social extremely effectively,” said general partner Jeff Jordan in a blog post on the transaction.

The evolution of e-commerce solutions like Shopify, Magento and BigCommerce, along with the growth of Software-as-a-Service (SaaS) tools like Mailchimp, RJ Metrics and Shipwire and the rise of Amazon Web Services, a cloud computing platform, have also made it significantly easier and cheaper for retailers to build and manage beautifully designed e-commerce storefronts. Additionally, leveraging APIs (application programming interfaces that make it easy for software programs to talk to each other) has made integration much more time- and cost-efficient, not only for the consumer-facing storefront, but also in terms of the back-end workflow.

Innovation across the supply chain is also making development easier, improving scalability and easing integration, while also decreasing capital requirements for e-commerce businesses. Web-based point of sale systems, wholesale marketplaces, ordering and invoicing software, enterprise resource planning systems, and shipping and fulfilment systems are becoming simpler, cheaper and more flexible. In fact, companies can now use highly efficient software-as-a-service (SaaS) tools across the entire supply chain, paying periodically to access hosted software, without having to incur the costs and complexities of hosting and managing back-end infrastructure.

NEW OPPORTUNITIES AND ECOSYSTEMS

In the context of these improved economics, there are a number of problems to be solved that provide interesting opportunities in e-commerce. Traditionally, retailers have faced difficulties in turning customer data into actionable insight. This is beginning to change. SaaS tools let retailers more easily access and make sense of data, opening up opportunities for businesses to leverage the inadvertent “buyer profiles” that consumers are now creating as they express themselves on social media. Particularly interesting are the taste and behavioural data that consumers share on social curation sites like Svpply, Pinterest, Lyst and The Fancy.

While brands and retailers are scratching their heads solving their data issues, consumers are frustrated with the process of discovering products. It’s easy browse through a physical store, but searching millions of items online is overwhelming. Even if you know you want to buy a black pair of shoes, you still end up with thousands of options. Discovering products that are right for you remains challenging.

The growth of new technology channels and ecosystems created and supported by large players is also providing fertile ground for e-commerce innovation. Alongside the growth of social channels like Facebook, which offers retailers new ways to achieve viral distribution and offer social discovery, the mobile commerce market is expected to reach $31 billion in the US alone by 2016, up from $3 billion in 2010. But while these new channels create new opportunities for e-commerce companies, they also present a major challenge: multi-channel integration. Historically, merchants have been forced to cobble tools together to create a seamless, multi-channel workflow.

EBay’s new X.commerce initiative aims to address this problem, offering retailers a single platform that lets them easily add, customise and integrate tools from the X.commerce marketplace, making it easier for young companies to capitalise on the multi-channel opportunity. The stated vision of the X.Commerce initiative is to “help merchants and businesses of all sizes to compete and thrive in the fast-changing world of social, mobile, local and digital driven e-commerce.”

Indeed, with improved economics, new opportunities and goliaths like eBay supporting the ecosystem, the stage is set for a renaissance in online retail and the growth of disruptive business models built around new ways of buying, selling and engaging with goods.

Tomorrow, we explore the recent explosion of new business models in online retail, including personal subscription, social merchandising, mass customisation and collaborative consumption.

Elizabeth Knopf is a former investment associate and the co-founder of Sorced, an online showroom.

Mr Porter Screenshot | Source: Mr Porter

NEW YORK, United States — What began as a trickle is now starting to look more like a mass exodus. Jeremy Langmead, formerly of Esquire, is now at Mr. Porter. Andrea Linett, formerly of Lucky magazine, is now at eBay. Dennis Freedman, formerly of W, is now at Barneys. Fiona McIntosh, formerly of Grazia, is now at My Wardrobe. And the list goes on. It seems that there are almost weekly reports announcing that yet another magazine veteran has fled a traditional publishing company to take up a position at a brand or retailer. Recently, it was British Vogue that was in the headlines, when creative director Robin Derrick and fashion director Kate Phelan both announced within days of each other that they were leaving the magazine. Phelan is set to become creative director of Topshop, while Derrick’s plans have yet to be revealed.

By now, it’s a well-known fact that times are tough for traditional, ad-supported editorial outlets. For example, from 2007 through 2009, Condé Nast — publisher of Vogue, Vanity Fair and others — saw about $500 million in revenue disappear, a decline from which it has yet to recover. In fact, Condé Nast CEO Chuck Townshend recently admitted to the Wall Street Journal, “My eyes are wide open. I don’t consider [the traditional ad-revenue model] to be a perennially sustainable stream of revenue.”

While the Great Recession cut traditional advertising spending dramatically, the internet has also given brands and retailers a cost-effective Clway to circumvent publishers and engage consumers directly with their own editorial content. Back in January, David Carr nailed the implications of this trend in a piece entitled “Publishing, Without Publishers.”

But while there’s been a great deal of discussion about the death of old business models, and the emergence of new ones, there has been relatively little said about the impact of this evolution on the actual content itself. In what ways — positively or negatively — will the rise of content created by brands and retailers transform what we call editorial?

Perhaps no fashion business is better known for integrating editorial and retail than Net-a-Porter. “Merging magazine reading and shopping creates the ultimate playground for fashion lovers — an entirely shopable magazine,” said Claudia Plant, Net-a-Porter’s editorial director, who left Tatler ten years ago, becoming one of the first members of Natalie Massenet’s team, pioneering this new editorial model.

But where previous editorial models relied on content to attract readers who might then feel an affinity for the brands being advertised, this new model puts commerce at the centre, with editorial content working to reinforce consumer engagement and make the website more “sticky.” In other words, it’s less about consumers coming to these sites for the content and then deciding to shop, and more about people coming to shop and lingering to explore some content, which helps to drive sales.

“The retail aspect serves as the foundation and lays the groundwork in conceptualising the editorial content on the site,” said Jeremy Langmead, editor-in-chief of Net-a-Porter’s menswear site Mr. Porter. “It’s very much editorial being harnessed to drive retail,” agreed Fiona MacIntosh, consultant creative director at My Wardrobe. “We are starting to track reader’s responses to our editorial. If a certain story didn’t generate more sales, then we’ll bin that and find a new way of engaging the consumer.”

But should sales be the only barometer of editorial success? What about the amount of time spent with a piece of content, the number of social media shares it gets, or the seemingly old-fashioned concepts of providing value to the reader or furthering an editorial point of view? And what about editorial independence and integrity?

Despite the fact that traditional publishing companies have ‘church and state’ policies that officially separate advertising and editorial, it’s a barely-kept secret that editors at major magazines routinely engage in behind the scenes favour-trading, ensuring editorial placement for their advertisers.

But at least in principle, maintaining editorial independence and integrity is more than ethically important. It’s also a practical selling tool. That’s because, for readers, an important part of a traditional magazine’s appeal is the promise of honest, uncompromised opinions. For marketers, the appeal of advertising with these publications is, ironically, somewhat the same: the opportunity to be affiliated with the opinions of an editorial outlet without, ultimately, being responsible for those opinions. If the editorial ever wanders into uncomfortable territory (for example, the December 2010 issue of French Vogue, which featured heavily made-up children in luxury womenswear) the advertiser can disown the media outlet and walk away relatively untouched.

For this new breed of retail sites, where content is built around commerce, establishing an independent editorial identity, without impinging on the brands that drive a significant portion of the revenues that ultimately pay the bills, is a significant challenge. It’s a conflict that’s familiar to veterans of traditional ad-supported editorial, with one important distinction: at the end of the day, an advertiser is far more passive than a retail partner. This makes the balancing act of driving the bottom line while creating the kind of independent editorial content that consumers want to spend time with (and not just thinly-veiled advertorials) all the more difficult.

Alongside retailers, a number of brands are also creating and publishing their own editorial-style content. In a much-cited quote, Joanna Shields, EMEA Vice President at Facebook, pointed to British luxury brand Burberry as leading this trend. “Burberry is producing its own original content,” she said. “Burberry is no longer just a fashion company — today they are a thriving media enterprise.”

But for brands, the challenge of creating their own content is both simpler and more intractable, as there is even less opportunity to credibly negotiate an independent space between seller and consumer. Nevertheless, the approach comes with clear advantages: the message being delivered is their message, without mediation. But for this very same reason, branded content also comes with limitations and risks. In addition to offering plausible deniability if the message goes off track, traditional editorial outlets perform the function of interpreting and translating brands for their specific readerships. When Love magazine, for example, includes Louis Vuitton in a piece of fashion editorial, the result is quite different to the way a Vogue story might communicate the same brand. But when brands become media outlets themselves, though they may vary their approach to suit specific geographies and media channels, the results are more uniform. And if brands take a misstep, it’s much harder to backtrack or disown the message.

Emerging brands such as Acne have had great success creating their own smart, opinionated editorial content with Acne Paper. But most brands prefer to partner with agencies like Vice Media Group’s Virtue Worldwide or Condé Nast’s newly launched Ideactive, for two main reasons: despite the brain drain going on at publishers, brands often lack the full range of skill sets they need to create their own content and because they still prefer to establish a buffer between themselves and any opinions put forth in the content they publish. Still, when compared to the aggressive sloganeering of traditional advertising campaigns, the timidity of most brand content is notable.

This timidity has lead most brands to maintain a clear division between their brand content and their core messaging. But American denim giant Levi’s is proving to be an exception to this rule. In recent campaigns, the brand has experimented with transforming its advertising into something that feels closer to editorial content, with opinionated spots shot by art house directors such as M Blash and Cary Fukunaga. “[Our advertising] has got a point of view, that’s for sure,” said Joshua Katz, senior manager of global engagement marketing for Levi’s.

Over the last year, the brand has also turned itself into a platform for content creation, establishing a series of content-rich creative workshops in New York, San Francisco and Los Angeles and commissioning original content like Outside In, a documentary film by director Alex Stapleton. “The workshop project started with the idea that, instead of just talking about the people we admired, we could create a platform to actually work with them. What is different about our project is that we’re not dictating what happens. We have to have a certain amount of trust and let these things live and be what they should be,” said Katz.

“Editorial content, in all its forms, is an engaging and effective way of articulating who you are and what you stand for to users who are increasingly interested in the narratives surrounding a brand,” said Horacio Silva, who recently departed his position as online director of New York Times style magazine T to join brand marketing and entertainment agency All Day Every Day as director of content.

But despite the risks, for both brands who create their own editorial and retailers who editorialise their inventory, it’s worth remembering that content only establishes affinity if it expresses a clear and confident point of view. In the end, that continues to be what separates bland content from intriguing editorial. As Langmead says, “The editorial content provides us with a voice.”

The trick is making sure you have something to say.

Ken Miller is creative director at All Day Every Day and the editor of three books, SHOOT, Revisionaries and a forthcoming fashion volume for Rizzoli International.

“I feel like they’re adding a real dose of freshness and reality to the fashion world online.”

Rumi Neely of Fashion Toast, amongst several other bloggers, speaking to Net-a-Porter TV as part of Net-a-Porter’s special bloggers issue, which includes their first ever Blog Power List, ranking Tommy Ton at Number 1, Susie Bubble at Number 5, and The Business of Fashion at Number 7.

Tina Craig and Kelly Cook of Bag Snob | Source: Bag Snob

DALLAS, United States — When Kelly Cook and Tina Craig discovered their shared passion for handbags as business undergraduates at the University of Southern California, it was the beginning of a journey which led them to create one of the most compelling businesses BoF has come across in our popular series profiling the fashion blogosphere’s superstars.

“We’ve had this ongoing conversation about bags since college, and when we moved far from each other, we thought it would be fun to keep a journal of our mutual bag obsession,” says Craig of the idea for communicating through their highly influential blog, Bag Snob. “It was never meant to be anything more than amusement for each other,” explains Craig, echoing what so many of the best bloggers say: that they started their blogs out of pure passion.

From those humble beginnings in the summer of 2005, Bag Snob has quickly grown into a bonafide business with more than 250,000 unique visitors across six different web properties covering apparel, beauty, jewelry, children’s clothing, and most recently, shoes. The business has fifteen different income streams which deliver revenues in the mid six figures — much of that heading straight to the bottom line due to the very low cost base of operating what is largely a virtual business with little in the way of physical infrastructure and fixed costs.

Craig explains that after setting up the blog it was instantly clear that they were on to something. “We started Bag Snob with literally $20. Within half a year, we realised a 6-figure income was plausible and our business backgrounds kicked into gear,” she recalls. “We incorporated Bag Snob LLC and registered Bag Snob as a trademark with the money we earned and still have not put in another cent into the company.”

So how did they make this happen?

The magic of Bag Snob lies in offering analytical advice, as opposed to simply reproducing the endless press releases that are blasted to bloggers en masse by PRs looking to push product. Craig and Cook have honed a simple but powerful formula for dissecting every possible variable around a handbag to create trusted, no holds barred reviews that help their readers to make purchasing decisions.  Bag Snob reviews often spark lively conversations amongst their loyal readership.

Of course, this kind of editorial content is also powerful as a commercial tool. Many of the photos of handbags on Bag Snob are linked to retailers where featured products can be purchased instantly. 60 percent of Snob Media’s revenue comes from commissions collected when readers click over to any one of more than 40 online affiliate partners — including Barneys, Topshop, Nordstrom and Browns Fashion — and make a purchase. Affiliate commissions are generally applied to any purchase made within 30 days, not just those of the products that may have led the reader there in the first place.

By far, Bag Snob’s most successful partnership has been with pioneering online retailer Net-a-Porter. “Last year our sales for Net-a-Porter were in the high six figures, though we are not at liberty to say what our terms and percentages are,” says Cook. “ShopBop is our second biggest affiliate partner.”

Affiliate partnerships continue to grow in importance as retailers like Net-a-Porter look to harvest consumer desire created by blogs and independent websites. Standard affiliate commissions range between 5 and 15 percent of a product’s retail price. “Each program is different and the terms are negotiable; since our conversion rates are really high we are able to get better percentages,” says Craig.

But while Cook and Craig often wax poetic about handbags and keep close relationships with their affiliate partners, they are not afraid to critique bags as well. “It makes no sense to try to tailor your content to fit with affiliate partners,” advises Craig. “That would be the beginning of the end.”

In a recent post in their On the Rag series, Cook took a Roberto Cavalli bag stocked at Net-a-Porter to task. “Unless you’re a mummy, you’re going to look ridiculous,” she wrote. “This bag looks so dusty and dingy, I want to shake all the junk off of it. Even the shoulder strap has fringe, so you look like you’re sporting some sort of sad, mop-like cape when you carry it. The gray hue looks more like a filthy white, so it just adds to the macabre effect of this ghostly, ghastly creation.”

Interestingly, the Roberto Cavalli bag appears to have sold out as it is now listed as “no longer available” on the Net-a-Porter website.

Still, the honest approach doesn’t always come without its own problems. “We’ve been ‘chastised’ by various retailers and PR people for negative reviews but that has not deterred us. Providing good content is our priority and readers who’ve been with us for 6 years know this,” Craig points out when asked how they maintain the balance between earning commissions and maintaining editorial integrity. “Our readers buy everything from $2,000 trendy bags to $30,000 investment crocodile bags based purely on our recommendation. They wouldn’t do so if they didn’t trust our reviews.”

But there are other revenue streams as well. Income from ads, sponsorship and ad networks make another 35 percent of sales. Consultancy and sponsorships bring in five percent of sales and are bound to grow following the announcement last week of a collaboration between Bag Snob and DKNY.

“We approached DKNY with the idea of designing a tightly edited line of bags,” says Craig. “We came up with the Five Essentials after studying how our friends and readers were shopping. We wanted to help women collect snob-worthy bag wardrobes without wasting their money on endless parades of black totes and trendy bags. They loved the idea and we agreed on a flat design consultancy fee.”

These kinds of collaborations loom large in Bag Snob’s future. “Without a bag-buying strategy, you end up with a collection of bags you never carry and one that gets worn to death, says Craig. “We would love to get into product. We have spent so much time analysing, we feel we are in the position to contribute some of that knowledge to products that fit with all the standards we use when reviewing.”

And, like all great collaborations, Craig and Cook also learned from the experience, extracting value above and beyond the consultancy fees. “This has been an incredibly humbling experience and we learned so much about designing and production of bags. I think it has made us better bag reviewers, as well. If we are given the opportunity to do more collaborations, it would be amazing.”

As they look to the future, and their business continues to grow, the one thing that will always remain at the core of the Bag Snob strategy is unbridled passion for fashion products. “We all are more professional and organized now, but the passion is still the same and you can’t feign that,” says Craig. “As we always say, if it doesn’t make you crazy like teenage love, don’t blog about it.”

Imran Amed is Founder and Editor of The Business of Fashion

The Business of Blogging is a new series on the rarely discussed business side of fashion blogging. Previous articles are listed below:

LONDON, United Kingdom — This season, fashion brands embraced fashion film like never before, integrating digital videos more meaningfully into a wide spectrum of communications strategies, from Nicola Formichetti’s formidable social media machine for the House of Mugler to Tom Ford’s contrarian approach that defied the industry trend towards greater access and immediacy.

In past seasons, fashion films have often been geared at editors, buyers and other industry insiders, accompanying — and sometimes even replacing — runway shows and presentations. But as brands grappled with the tug-of-war between digitally-enabled consumers with real-time expectations and the challenging realities of syncing the physical atoms of their supply chains with the virtual bits of their digital communications, momentum swung in the direction of consumer-facing fashion films designed to coincide with the retail schedule and build intrigue around new collections, just as they hit stores.

Chanel launched a robot animation with terrific viral appeal to support its Spring 2011 makeup line, while Tom Ford synced the arrival of his first womenswear collection in stores with the debut of a film that captured his ultra-exclusive fashion show held last September. But our top honours go to Prada, which released an irresistible fashion film with just the right energy to match the stripes and monkeys of Miuccia Prada’s current collection and accompanying ad campaign.

The following is a BoF selection of what we think were the most compelling fashion films of the Spring 2011 season. As you sit back and enjoy the films, let us know which ones you like best.

1. Prada S/S 2011

In a highly addictive film that almost pops off the screen with infectious charm and masterfully executed quick edits, Tati Cotliar, Kinga Razjak, Arizona Muse, Mariacarla Boscono and Zuzanna Bijoch show off their monkey moves in the stripes and banana prints of Prada’s Spring 2011 collection to the glitchy sounds of Ratatat’s Mirando. “This is just BEGGING for gifs,” added an enthusiastic Tavi Gevinson, referring to simple user-generated animations often based on a few frames of a film, as she reblogged the video on her Tumblr. Indeed, with hundreds of thousands of views on YouTube, there is something about the film’s quick bursts of colour and body movements that both resonates with today’s remix culture and triggers instant desire, making the video and the collection it displays, completely irresistible.

2. Tom Ford Spring 2011 Fashion Show

While Tom Ford has taken a strong stand against fashion immediacy, preventing the media from photographing or tweeting his ultra-exclusive shows, it would be wrong to conclude that he has rejected the internet entirely. With a stylishly edited film that nicely captures the extraordinary glamour of his Spring show, Mr. Ford has skillfully embraced digital video on his own terms. The film, whose launch was timed to coincide with the arrival of his clothes in store, features an utterly fabulous cast including Julianne Moore, Beyoncé Knowles, Lauren Hutton, Rachel Feinstein, Daphne Guinness, Julia Restoin-Roitfeld and more. Capturing the special ambiance of a very small and glamorous fashion show — we catch glimpses of Anna Wintour, Grace Coddington, Hamish Bowles, Joe Zee, Stefano Tonchi, Cathy Horyn, Carla Sozzani and Jefferson Hack, amongst the 100 top editors in attendance — Mr. Ford’s film may have proven that in the internet age, one thing that people crave even more than immediacy is a feeling of intimacy.

3. Here Comes The Beauty Pack by Chanel

Peter Philip, Chanel’s terrifically talented global creative director for makeup, conceived this fabulously fun animation featuring robots made of Chanel’s iconic packaging. Released to coincide with the launch of the brand’s latest beauty line and drive interest around Chanel Makeup Confidential, a new website featuring exclusive video content, backstage beauty looks from Chanel shows and how-to guides, the video was a runaway success that spread like wildfire across thousands of fashion blogs.

4. Gareth Pugh Pitti 2011

Gareth Pugh made his Italian fashion debut at Pitti Immagine with a visual tour de force by Ruth Hogben. Projected on the ceiling of the 14th-century Orsanmichele church in Florence, the film perfectly complemented a collection that was inspired by Christian iconography and Florentine opulence. But the overall communication transcended reference, colliding the ancient and the hyper-modern to form one powerful vision. With immaculate styling by Katie Shillingford and a dramatic soundtrack by Matthew Stone, this was a fashion film that verged on religious experience.

5. Seven Henrietta Street by Kate Spade New York

Shot by music video director Kinga Burza in a Georgian townhouse in Covent Garden and featuring English actress Anna Brewster and a soundtrack by the disarming chanteuse and MySpace phenomenon SoKo, this film beautifully tells the story of the Kate Spade girl — and brand. Unconventional, curious and imaginative, she “laughs out loud, sings off key and believes in taking chances,” says a text that accompanies the film on the brand’s official YouTube channel.

6. Anatomy of Change for House of Mugler Menswear

House of Mugler creative director Nicola Formichetti launched a captivating web film to build online anticipation and post-show buzz around the creative director’s debut for the brand, using a powerful trinity of fashion, film and music (supplied by Formichetti’s friend and creative co-conspirator Lady Gaga) to transform both his menswear and womenswear runway outings into real-time fashion entertainment. We think integrating the film into the show (a version of the film appeared as a backdrop to the catwalk, while the online edit featured video from the runway) was a smart move, striking a chord with a broader public, but also helping to extend the show’s impact online, giving  fans of Lady Gaga and Mugler a piece of digital content they quickly shared with their friends and followers, carrying Mugler’s new image across the internet.

7. Vanessa Bruno “Miracle”

Directed by Stephanie di Giust, this fantastical film beautifully communicates the colour and prints of Vanessa Bruno’s Spring collection. Featuring actresses Lou Doillon (the brand’s muse) and Jessica Joffe on a mysterious island, the film has a impetuous, tribal tempo that brings new energy to a brand that’s better known for its gentle romanticism. Indeed, the clashing soundtrack, reality-defying camera effects and cascade of colours make this film feel like a rite of liberation.

8. Spying on Kate Moss

Released in early January on NOWNESS, we thought this surreal and charming video of Kate Moss, shot by Inez van Lamsweerde and Vinoodh Matadin on the set of the Fall 2010 Balmain campaign, was a refreshing take on the traditionally dull behind-the-scenes video. We especially love the soulful Antony and the Johnsons soundtrack and the “half horror, half Disney” animations by Jo Ratcliffe.

9. Miu Miu “The Powder Room”

The first installment of “The Miu Miu Women’s Tales,” a series commissioned by the Italian brand to celebrate female directors and “explore the feminine love affair with Miu Miu,” this short film by Zoe Cassavetes revolves around the ritual of the power room. Starring redheaded beauty Audrey Marney and set at London’s Claridges Hotel, the film has a visually lush and dreamy quality that nicely shows off this season’s colourful Miu Miu dresses. The Power Room will soon be followed by a new Miu Miu film from another female director, so stay tuned.

10. Net-a-Porter Bag Guide

While not a new concept, Net-a-Porter’s “Bag Guide” uses the sounds of zips and clasps to terrific effect in this fun ode to the season’s hottest arm candy. With the recently launched Net-a-Porter TV, streaming online and on Google TV, we’re looking forward to more fashion videos from this pioneer of shopable content.

Did we miss anything? Which fashion films captured your imagination this season? Let the BoF community know which films you liked best.

John Galliano | Source: The Creator Blog

PARIS, France – The process of writing this season’s wrap-up left a somewhat bitter taste in my mouth. Looking back, several of the most salient themes from this round of fashion weeks involve unsavoury behaviour, gossip and highly unprofessional comments from some of the industry’s most important figures.

Whether it was John Galliano’s inexcusable anti-Semitic rant captured on video for the whole world to watch, the scrum of increasingly aggressive street style photographers hunting editors down like game before the shows, or the distasteful comments made by Patrick Thomas, chief executive of Hermès, regarding the stake built up in its business by LVMH, it seemed everywhere you looked this fashion week members of the industry were behaving badly.

With all the whispering, gossiping and backbiting going on, it’s surprising that anyone even noticed the clothes. So, let’s start with the clothes then!

1. OUTERWEAR EVERYWHERE AND A FEW FASHION PRINTS

Click here to view the embedded video.

Outerwear was everywhere this season, reflecting a growing understanding amongst designers that coats, jackets, parkas and ponchos get lots of wear and are the first statement of individual style, and therefore deliver a big bang for the consumer buck. Joseph Altuzarra, Alexander Wang, and Burberry’s Christopher Bailey were amongst the designers at the vanguard of this outerwear moment.

Thakoon showed one of the best collections of the season in a gilded hall at New York’s Plaza Hotel, with stunning contrasts of mismatched prints inspired by Masai tribes. It felt like we were in Paris, which I guess was the point as the collection also looked to French aristocracy for visual cues. The offsite location stood out from the increasingly chaotic spaces at Lincoln Center and Milk Studios. Ambience and atmosphere count for a lot when you’re trying to create a mood and put on a real show. Bravo Mr. Panichgul.

Rodarte and Proenza Schouler also delivered stellar collections, demonstrating the continued evolution of their own special design signatures. Proenza Schouler’s Navajo knits and prints were a knock-out, while Rodarte showed their second consecutive highly creative collection which one could actually envision hanging on a retail rail – and selling.

Although there were some great fashion moments in London, overall, the week was not as strong as usual. One notable exception was Mary Katrantzou, whose signature digital prints delivered massive runway impact in a tightly focused collection that for the first time expanded to new categories like knitwear, a smart way to expand her offering beyond dresses.

Jonathan Saunders’ collection of colour-blocking (and the surprise introduction of menswear!) proved he is definitely now back on firm footing in London after a hiccup during the seasons he spent in New York. And, Giles Deacon put out a focused fetishist collection that showed his more serious, sombre side. Indeed, for many an editor, his was the best show of London Fashion Week, and that hasn’t been something we’ve heard for awhile.

Ann Demeulemeester’s show in Paris was a beautiful vision of primal female warriors. Lanvin was gorgeous, as usual. Céline showed off the on-going evolution of Phoebe Philo’s “new minimalism,” with a more graphic and colourful show. And Rick Owens brought a kind of couture quality to his singular dark aesthetic of carefully constructed clothes.

2. THINK BEFORE WE TWEET

Derek Blasberg Tweet | Source: Twitter

It seemed like just another fashion month, and then, with the high-profile meltdown of John Galliano, everything changed in a matter of hours. Soon, the fashion gossip mill was in a frenzy, turbocharged by Twitter which made the whole situation more ugly as the days went by and speculation about Galliano’s successor intensified after he was first suspended, and ultimately dismissed by LVMH.

A tweet by Derek Blasberg from backstage at the Katy Perry concert in Paris, citing an anonymous source which ‘confirmed’ the widespread rumour that Riccardo Tisci would be named Galliano’s successor set off further speculation on websites and blogs, who sometimes took Mr. Blasberg’s comments as though they had come straight from an official Dior press release. I found at least one website that took the Tisci rumour and reported it as fact, without any mention of the source at all.

But Mr. Galliano wasn’t alone. Rumours about the futures of Stefano Pilati, Hannah McGibbon, and Christophe Decarnin dogged designers and lit up the internet throughout Paris Fashion Week, creating a virtual feeding frenzy of immense proportions. We were an industry feeding on ourselves.

So dear fellow members of the fashion Twitterati, let’s think before we tweet. Careers and businesses can be impacted by what may seem like an innocent bit of speculation on Twitter, but can quickly turn into boldfaced headlines on major fashion websites, a hugely destabilising force at the most critical moments during the fashion calendar. We are all still learning how to use this powerful tool responsibly.

3. STREETSTYLE PAPARAZZI

Click here to view the embedded video.

Over the past few seasons, the number of photographers outside the shows has ballooned as interest in street style photography (and street style stardom) has soared. It’s been an amazing phenomenon to observe as many previously behind-the-scenes women such as Yasmin Sewell, Caroline Issa and Taylor Tomasi now provide inspiration to hundreds of thousands of fashion lovers around the world, appearing in outfits that are often more interesting than what is on the runway.

But the rapid rise of street photography also has a darker side. The ‘bloggers walk’ in the Jardin des Tuileries, site of many major Paris shows, is now completely out of control. Indeed, it’s become increasingly difficult to tell the difference between the aggressive paparazzi who stalk Hollywood celebrities outside bars and clubs and a few of the bad apples amongst the hordes of photographers that accost editors as they come in and out of shows.

Several street style bloggers told me confidentially that the competition is extremely fierce for getting the best photographs, which can then be sold on to global editions of Vogue and Harper’s Bazaar each for as little as $200, but up to $1000 or more.

Word to the wise: if you build a relationship with the women you’d like to photograph, and treat them with a bit of respect, you’ll be much more likely to get a great shot where they look their best and aren’t running to avoid you. Chasing them around, getting in their way, and coaxing them to come out of their cars is a sure fire way of alienating the objects of your fancy.

The best streetstyle photographers are streetsmart and dashing figures who build passionate online followings for these fashion personalities through the power of their photos. They compose beautiful shots that are flattering to their subjects and still interesting enough to spark a conversation, reflected in the hundreds and hundreds of people who chime in to say what they think. And most of all, they are gentlemen (or gentlewomen.)

4. CONSUMER PARTICIPATION

New York Fashion Week | Source: Fabsugar

While there has been a general trend towards smaller shows and presentations, PR professionals tell me they have been dealing with unprecedented demand for seats, making allocations more and more difficult. At Céline, many senior editors from the UK were forced to stand and more than one front-row blogger complained to me about not having access to Givenchy or YSL.

But alongside the growing number of requests from traditional media, major retail outlets, boutiques, online retailers, bloggers, and social media managers, more and more consumers are no longer content to simply watch the livestream at home. They too want to attend the shows in person and be part of the action, a trend which was most apparent in New York.

For several seasons, American Express has been inviting its cardmembers to attend shows in its Skybox at the tents, but these attendees have been somewhat removed from view: observing as opposed to participating in the show environment.

In contrast, at the Jason Wu show, I was seated next to a section allocated to Nordstrom, which had chosen to give away most of its seats to top clients who had flown in specially for the event from across the country. Indeed, department store buyers told me the pressure to find seats for top consumers is “enormous.” If a woman spends more than $1m in a store, she has come to expect VIP treatment.

The enthusiastic ladies at the Jason Wu show asked me questions about what I did and were eager to learn about the fashion personalities in the front row. It was a refreshing conversation with people who were truly curious about fashion as a culture. That the clothes on the runway weren’t available to buy for several months was apparently not a concern.

5. IMMEDIACY VS. EXCLUSIVITY

Moda Operandi screenshot | Source: Moda Operandi

Other businesses were attempting to satisfy growing consumer interest in fashion week through pre-orders. Burberry and Proenza Schouler have been offering direct buying from the runway for a few seasons now. But this time around, there was a lot of buzz about Moda Operandi, the new fashion e-commerce business founded by Lauren Santo Domingo and my friend and former McKinsey colleague Aslaug Magnusdottir.

Their offering of high-profile flash sales of the latest runway collections from some of the industry’s most celebrated designers certainly had people talking. Having coined the term “pretail,” the Moda Operandi founders have also cleverly suggested that the insights gleaned from their sales will help brands to merchandise their stores and work with other wholesalers, knowing what styles are most popular based on real consumer data. And, because they take a 50 percent deposit on all purchases in advance, the business operates with a positive cash flow model similar to the one that made Michael Dell’s company famously successful. In the approximately 6 months between payment and delivery, Moda Operandi can use the deposits paid by consumers to finance the working capital costs of running its business, and also giving a much-needed deposit to designers, who can also benefit from upfront cashflow to finance production.

But relying on this kind of financial model also creates other restrictions. When a consumer pays for things on Moda Operandi, they can never get their cash back. According to the terms and conditions, returns are only possible for apparel and footwear products, and even then, only for store credit. Everything else is not returnable. Some women I spoke to weren’t deterred by this, and had already excitedly logged on to the website to shop, but others were bothered by having to take all the financial risk to buy clothes on Moda Operandi. Why not wait, they asked, for the clothes to arrive in store if they would have to wait 6 months for delivery anyway?

Meanwhile Tom Ford, in his usual contrarian approach, has defied the trend towards fashion immediacy and severely limited access to his collections, going so far as to having journalists sworn to secrecy and sign non-disclosure agreements about his presentation in London. Is Mr. Ford taking fashion a bit too seriously? Or, has he found a brilliant way to drum up even more interest in his clothes as they hit stores in a few months time by orchestrating a fashion media crescendo at the same time. Only time will tell.

One other website of note this season is my-wardrobe.com which has just had its first major facelift under former Grazia editor Fiona Mcintosh who joined as creative director in February. Naturally, there are flourishes of Grazia in the yellow highlighted design and snappy copy, a smart way to deliver on the company’s new everyday luxury strategy, fueled by a recent £6m investment injection from Balderton Capital.

Grazia of course is one of the most powerful sales tools for women’s fashion of the moment. Designers frequently tell me that if their designs are featured in Grazia, they sell out everywhere. As a weekly magazine featuring things that are in store now, I’ve always wondered why Bauer Media has not created an online version of its magazine to at least earn affiliate revenue for all the products it manages to sell, if not set up a full-fledged e-commerce site. It seems like a very big missed opportunity that my-wardrobe.com is now going after.

6. JUST NATALIE

Natalie Massenet and Jeremy Langmead | Source: Net a Porter

In an industry that has been named and shamed this season, there is at least one individual that is setting a good example.

Since our Fashion Pioneers interview last summer, Natalie Massenet has continued her ascent to the top of fashion’s tech elite, not by acting like a grand poobah but by focusing on building her business. Whereas so many in our industry can get complacent or become tyrants (or both!) once they are firmly ensconced in the front row, Natalie is the kind of leader who cancels a trip to New York Fashion Week to hunker down with the Mr Porter team in the days leading up to its widely anticipated launch.

The results show in her team. When they are in public, they show a stylish united front and in private they don’t backbite about each other. At work, they are professional and responsive, and show up when they say they will. If they are going to be late, they send an apology. They say thank you, and they care about the details too.

Net-a-Porter’s success is often attributed to its high quality content. But as the company builds new businesses, it is the seamless back-end operations which pick, pack and ship hundreds of thousands of fashion products and deliver them to 170 countries around the world that make a big difference. This has enabled the company to quickly launch two new businesses – The Outnet and Mr Porter –  in less than 24 months.

The lynchpin for all of this is the positive role model and force for innovation that Natalie represents in our industry. It’s no wonder that to many in the industry, she is now just ‘Natalie’ and that she has become a positive face for the fashion business to the rest of the business community and the wider world at a time when the industry has been tainted. Hers is an example we can all follow.

Imran Amed is founder and editor of The Business of Fashion

McQ video, posted on Vimeo, shared on Tumblr | Source: McQ

Why Fashion’s Top Brands Are Flocking to Tumblr (Mashable)
“According to Tumblr… approximately 180 of the top 1,000 Tumblr blogs are fashion-related. And fashion-related Tumblr posts are reblogged on a much greater scale than general Tumblr posts… suggesting that ‘there’s a huge capacity for fashion content to go viral on Tumblr.’”

Manish Arora Confirmed as Paco Rabanne Creative Director (Fashionologie)
“Manish Arora is the new creative director of Paco Rabanne, and will show his first collection for the label in October during Paris Fashion Week — for Spring 2012. He will also continue his colorful signature collection, which is also shown in Paris but sells mostly in his native India.”

Barneys’ New Chief Explains Those Changes (On the Runway)
“Mr. Lee stressed that his mission for the luxury retailer was to make it surprising and dynamic. ‘But,’ he added, ‘there’s never going to be a day when we say ‘ta-da’ and drop the curtain.’ The changes will be a work-in-progress over the next few years, he said.”

Arnault offers olive branch to Hermès (Reuters)
“Arnault struck a conciliatory note on Friday, arguing LVMH was best positioned to ensure the long-term survival of Hermès’ culture and business. ‘We can bring them a number of advantages both strategically and operationally without anything in return other than our presence as a shareholder.’”

Lunch with Natalie Massenet (FT)
“Net-a-Porter looks a lot like a glossy online fashion magazine but Mr Porter is largely black and white; more tabloid in tone; more vertically oriented; and features real men, role models who can also be style models, such as actor Steve McQueen and hotelier Andre Balazs, as well as lists of “essentials” every man needs.”

Burberry Mens A/W Show 2011 in Milan | Source: Oki-ni CultureShoq

Today, BoF exclusively brings you Savigny Partners’ blow-by-blow analysis of the rapidly shifting luxury fashion business model which is undergoing transformation due to underlying shifts in consumer values, technology and globalisation

LONDON, United Kingdom — Luxury fashion is a very exciting business which can generate substantial returns if you get the formula right. Not only is there the ability to charge up to ten times the cost of manufacturing a garment and the potential to build a global business; apparel can be the beginning of a page-turning blockbuster, accessories and leather goods are the next chapter, fragrances and eyewear licenses the well-oiled plot. The story can have a happy ending with the promise of many sequels to come.

Success stories in this field are mouth-watering: Burberry’s share price climbed from 175p in November 2008 to 1,116p at the beginning of this year as the brand went from strength to strength and reportedly attracted the attention of a number of acquirers. Lanvin has embarked on a stellar growth trajectory with plenty of potential yet to come. However, not all blockbusters have a happy ending. The latest crisis has claimed a number of victims: Christian Lacroix, Gianfranco Ferré, Yohji Yamamoto, Luella Bartley to name a few.

In this article we will examine how the traditional designer business model has come under threat and what key factors we believe are necessary to ensure the success of a luxury fashion label today. Finally we will take a look at what lies ahead for the luxury fashion sector.

Is the designer brand becoming redundant?

The traditional designer brand business model is not for the faint-hearted. Typically, a design-rich but loss-making main line is invested in with the aim of capitalising on its cachet through a cash-generative diffusion line and, eventually through lucrative licensing deals. This model not only takes years to generate returns, but the ride is also a bumpy one with no guarantee of success. Christian Lacroix is a prime example of a label which, despite heavy investment in its main line/couture business, never saw the more commercial side of its activities take off sufficiently.

Life has also been made more difficult for designer brands, initially by the proliferation of fast fashion brands with a credible fashion offering. Zara, Mango and H&M have been extremely successful at attracting the fashion conscious consumer by interpreting catwalk trends with a time to market that would make Philip Green’s head spin. H&M took this one step further by pioneering designer collaborations, which created veritable stampedes in its stores and brought new customers to the brand. Top Shop has also been a trailblazer in this category: the brand showcases its Unique collection at London Fashion Week, its collaboration with Kate Moss has given it an edge and its recent opening of a flagship opposite Harrods demonstrates that it is looking beyond its traditional high street pasture.

And finally, traditional designer labels have been challenged by — and sometimes losing ground to, contemporary brands which offer a more accessibly-priced, less fussy fashion product. In this category both a Phillip Lim, who designs his eponymous line to a price point whilst still being able to fully express himself, and a Tory Burch, with a very-well merchandised line sourced mainly out of China, have found their audience in a relatively short time and have created thriving, financially successful businesses.

It is telling that Narciso Rodriguez and Hussein Chalayan both saw their brand being returned to them by their investors, and that such a star designer as Hedi Slimane is still without a major job in the industry. What lies ahead for top designers?

Managing seasonality

Designer labels have taken major steps to reduce seasonality risk by complementing their Spring/Summer and Autumn/Winter collections with pre-collections, cruise and pre-Fall collections, thus increasing the number of collections from two to up to six per year. These inter-seasonal collections tend to contain more commercial pieces than the main collections, often have more accessible price points and now account for the bulk of sales of a fashion brand. This is also music to retailers’ ears whose aim it is to get fresh stock into stores, so as to give customers a reason to come back, and shift the stock as quickly as possible. Some luxury brands have taken a leaf out of the book of leading fast fashion players such as Inditex, introducing flash collections in their stores.

Harnessing creative talent – the increasing importance of the merchandiser

The well-publicised demise of the Gianfranco Ferré fashion house exemplifies the need for a strong merchandising function: during the early noughties development costs for its main line collection escalated to 5m euros per season, and the number of pieces produced for market stretched as far as the eye could see. The first actions of the newly-appointed CEO upon taking over the troubled company was to control collection development costs by significantly reducing the number of SKUs, the number of styles produced and of prints ordered, and to make sure that each style was able to generate profits on relatively small sales volumes.

There the model was clearly in need of an urgent fix, but on an ongoing basis the role of the merchandising team, working with the design and product teams on one hand and the marketing and sales teams on the other, harnessing the creative talent and editing down the creative output to what will work or generally help the band, is absolutely critical. This helps to ensure that the market reception of the collection will be as good as possible, but is also true — and increasingly importantly so — in a world where the number of deliveries has increased and where efficient re-ordering and replenishment is where the real money is made.

Create a bestseller but know when to let go

Whilst every management team in the industry dreams about creating that iconic product or series of products which will become a cash cow, over-dependency can prove a curse if you push this too far and the market turns on you. This famously happened to French Connection, which rode the FCUK bike from 2001 until the wheels came off, resulting in the company dipping into loss for the first time in fourteen years in the first half of 2007 (the group is now rapidly recovering under the watchful eye of its Chairman & CEO, Stephen Marks).

One interesting path is that of Burberry, which initially had to rely too much on the dual deities of trench and check but made a considerable effort to diversify its product portfolio so as to avoid being branded as a one-horse pony, and on top of that successfully fended off the chav issue (to be reviewed in detail in a forthcoming issue of our newsletter).

Invest in retail but focus on the detail!

The last crisis claimed a lot of casualties as a result of over-dependence on the wholesale channel. Pain was felt in two areas: small boutiques not paying up on their orders, or proving to be too much of a credit risk going forward, and department stores panicking and batting down the hatches. Many fashion wholesale businesses were thus caught with their pants down and had nowhere to shift their rapidly devaluing stock. At the other end, whilst the experience for retail-led fashion brands was not by any means pleasant, the effects of the crisis were less hard felt. In this respect wholesale activities played for the fashion industry the same role as leverage did relative to the financial world: it can significantly enhance returns and offers easy growth, but when the market turns, the ground is taken away from under your feet.

Beyond this point, retail presence offers a number of advantages. First and foremost the ability to capture the retail margin – a fully-integrated fashion retail business can generate gross margins up to 80 percent (and sometimes more!), as compared with a wholesale business margin of 40 to 50 percent. Retail presence also allows for more control of the brand image and presentation. This is particularly important as a brand evolves as it can often get stuck in a time warp, with retail buyers ordering variations on what sold well in the last season instead of following with new products/designs, often seen as more risky.

Whilst location is key, store size is also vital to driving store economics. The late 1990’s saw the proliferation of mega-stores as shrines to brands. Many of these were loss-making: those of you who spend time in London will remember the monolithic Jil Sander store on Burlington Gardens, intimidating by its emptiness. When Change Capital Partners took over the company, its losses were well into double-digit millions. One of the first steps the new owners took was to close a few of its most unprofitable stores – the infamous London flagship for instance was relocated to a smaller premise on Bond Street. Losses were drastically reduced, and within a year the company was profitable.

White elephants such as this previous Jil Sander store never made good retail propositions, but you could understand why some management teams were keen on them: retail really helps drive wholesale. Department store managers will never own up to it, and we are sure Barneys and Bergdorf top brass were horrified when Lanvin announced the opening of its Madison Avenue store in the summer last year, but over time (and more quickly than people think), whatever turnover is temporarily lost for the neighbouring department stores will be made up and more, as the brand benefits from increased awareness, more prestige and a stronger, more complete image as a result of its own retail presentation.

So, own retail is most definitely good — as long as you can properly evaluate its cost/reward assumptions and avoid the white elephant trap.

A dynamic supply chain can drive profitable growth

Fashion is a uniquely complex business. The supplier base is increasingly global and increasingly specialised: there is therefore no guarantee a brand will be sourcing its product from the same country, let alone the same supplier, season after season. Distribution can be equally complex, the challenge of a global distribution network being compounded by an often fragmented customer base. The fashion business model is also very sensitive to production volumes; thus the supply chain has to be continually revisited during the growth phase of a brand.

One of the cornerstones of Burberry’s success has been the investment in its supply chain. Project Atlas, an overhaul of the company’s supply chain and IT systems, was launched in 2006, culminating in the roll-out of global SAP systems in 2010. This has given it a much improved granular understanding of every phase from design to the consumer, allowing the company to react rapidly to sales trends and capitalise on bestsellers. Burberry completely re-engineered its supply chain, cutting the number of distribution centres, freight carriers and suppliers and, through improved production planning, significantly reduced the use of air freight in favour of cheaper sea freight. These measures were estimated to deliver approximately £25m in annual savings, or 14 percent of operating profit. As a result of these measures the company can now also give fast fashion a run for its money through dramatically shortened times to market.

A future dominated by men and computers?

Besides the well-documented potential in China and other emerging markets, two areas of growth merit our attention: menswear and the internet.

Despite continuing success stories such as Lanvin’s, womenswear is pretty much a saturated segment in developed markets and therefore very competitive. On the other hand the men’s market accounts for a relatively much bigger slice of the luxury pie in emerging markets. Men are notoriously difficult to attract to a brand, but as a result also tend to be very brand loyal. There are also less cultural/sartorial differences across borders in menswear than there are in womenswear. All of these characteristics make this segment worth the chase, even if traditional menswear players have to alter their offering to give more room to sportswear and casual styles, away from suiting (suits are simply worn less in emerging markets). The potential of the internet has yet to be fully harnessed by luxury fashion players.

Richemont’s recent investment in Net-a-Porter (and the valuation the investment commanded) confirms the perceived potential of this medium. Burberry is ahead of the curve in this category — its Facebook page has the largest following of any luxury brand, its social media website www.artofthetrench.com is streets ahead of competition and it was the first brand to sell runway items from its Autumn/Winter 2010 show direct from the webcast to consumers. The potential for volume and margin in this area is huge — the only cloud on the horizon being the high level of returns (around 40 percent) creating a working capital headache.

Let fashion do what fashion does best….re-invent itself

The designer brand model in its purest sense has probably had its heyday. However, just as we thought we’d never see shoulder pads again when Joan Collins’ flamboyant character Alexis Colby left our screens, with a few alterations here and there they are back with vengeance. We should expect no less from the designer fashion business.

Pierre Mallevays is Founder and Managing Partner and William Plane is Director of Savigny Partners, a boutique advisory firm focusing on specialty retail and aspirational brands

Stephanie Phair, Director, TheOutnet.com | Source: The Outnet

LONDON, United Kingdom — Nineteen months ago at the time of its launch, The Outnet was better known as Net-a-Porter’s cheap and cheerful younger sister. Now, it seems, the discount fashion retailer is all grown up, and getting an extreme makeover.

Each month, The Outnet receives over one million unique visitors, less than ten percent of which overlap with the existing Net-a-Porter customer base. The United States, where The Outnet has experienced year on year growth of over 90 percent, now constitutes its biggest market. And, 70 percent of the product on The Outnet does not come from Net-a-Porter, so The Outnet has its own buying teams and relationships with brand partners. All of this seems to be working wonders, leading to an estimated annual turnover of more than $50 million, something that took more than 5 years for Net-a-Porter to achieve.

But like a teenager coming-of-age (nineteen months is a long time in the digital world), the Outnet is carving a new path to move out of its big sister’s shadow. On Thursday, the company will unveil a new brand identity and website design which, according to the Outnet, gives “a wink to French Vogue.” Gone is the ubiquitous pink circle and in is a new minimalist, streamlined look that has a much more upscale feel. It seems that The Outnet wants to show that just because you shop at a discount doesn’t mean you can’t look and feel like a million bucks.

BoF got the exclusive interview with Stephanie Phair, Director of TheOutnet.com, to learn more about the website’s new branding strategy, its plans for mobile commerce and the state of online discount fashion retailing in general.

BoF: It’s only been 19 months since The Outnet first launched and you have had tremendous success in that short space of time. What have been your most important learnings in that first year? What’s the secret to your success?

Stephanie Phair: To scale the business this quickly it really helped to be a part of Net-a-Porter. We were able to leverage their existing infrastructure and learnings. Because brands have confidence in Net-a-Porter, that inspired confidence in The Outnet from the start.

We also launched at time when there is a greater acceptance of online shopping. During the economic downturn, the concept of discount shopping was front and centre. From a customer standpoint, there was a search for value and from a brand side, a necessity to clear stock that made The Outnet a very appealing solution. It is important to note that The Outnet was not launched in response to the recession but rather the idea was conceived well before and we’ve built it as a sustainable, long-term business.

Up until recently, discount luxury fashion was hidden away in out-of-town outlets, but the Internet changed all that. It’s now visible and is becoming an accepted form of retail with its own audience and expectations. I think part of our success to date is that we never underestimated that. From day one we wanted to turn discount on its head and offer a luxury experience just like the full price world. We achieve this through our brands, our edit, our merchandising, our editorial and our customer service – all things that were once neglected by virtue of getting a discount. We treat discount product exactly the same way as full price merchandise when it comes to the customer experience. Like any other retailer we continue to invest in the things that really matter to our customer. For example, we always knew that as part of Net-a-Porter we would have an editorial approach, but we’ve really ramped it up over the last 6 months.

BoF: If you could do one thing differently from the first 19 months, what would that be?

SP: I think we underestimated how vocal our customer is in the social space. For example, The Outnet’s first birthday yielded fantastic results for us as a business, however we underestimated the reams of comments we would receive – both positive from someone securing an item for the giveaway price of £1 or negative due to an inability to access our website. We were literally glued to our Facebook page talking live to customers who were frustrated about not getting into the site and snapping up something for £1 – and being delighted for those that did. It was great because we know our customer is engaged, but it definitely caught us by surprise and we now have a robust social media strategy in place for large scale events.

BoF: Tell us about your new look, and why you decided to refresh the branding and aesthetic of The Outnet now.

The Outnet Holiday Shopping Website | Source: The Outnet

SP: First of all, one of the benefits of being an online retailer is that you can adapt and change your look. In a way, The Outnet was built from the viewpoint of a full priced business [Net-a-Porter] looking at a discount business and establishing who that customer might be. We’ve since learnt a lot about our customer. For example, before launch we envisioned that she would be young, aspirational and trend-driven – and she is certainly a part of our customer base. But for the larger part, she is an older, affluent professional with the means to indulge in luxury fashion, but who limits her expenditure (on fashion). At launch we emphasised the cheap and cheerful aspect of discount shopping when in fact we are about the fashion offering and our customers are turning to us for great fashion. In a crowded market, we notice that being a fashionable outlet – one with the best brands and a unique editorial approach – is what sets us apart and this is what we are emphasising in our new look.

BoF: There has been much discussion about the broken fashion cycle. Tell us about your strategy for combating this.

SP: The broken fashion cycle is a conversation that is going on in the full price retail world but it has actually benefited us because we capture a customer that is not an “early adopter” – in other words, she is happy to buy full price but doesn’t plan her season ahead. By the time she is ready to buy bathing suits/coats, they are no longer available. We capture her on The Outnet by having a ‘buy now, wear now’ approach. We’ve also made a conscious decision not to name-check seasons. For us, it’s about emphasising how great and relevant the product is irrespective of when it walked the runway. This approach gives us so much more freedom – we’re able to mix and match and focus on making season-appropriate, on-trend product available for our customers around the world. On our site there is always something for everyone because we are a global business servicing all corners of the world from Australian and South American customers to those based in mainland Europe or the Far East. But, our merchandised approach means our product offer is always relevant to the customer.

The Outnet Mobile Enabled Website | Source: The Outnet

BoF: You are about to pursue a new mobile strategy. What does it take to be successful in mobile fashion commerce these days? What are the core planks of your strategy and what can we expect to see?

SP: Mobile commerce lends itself particularly well to the discount world because there is an element of scarcity and items sell out fast. Customers want to see products when they want and not just when they’re at their computer – otherwise they might miss out. With this in mind, we’ve decided to launch a mobile-enabled website and an app for the iPhone which will be available next year. Both complement one another nicely but we’ve made the decision to optimise our website for mobile first because we’re a growth business and it has a broader reach and covers more bases which for a young business is key. The most successful apps usually offer something unique in addition to an e-commerce offering and are, generally speaking, downloaded first by your most-engaged customer. However, you don’t really have control when it comes to distribution and you have to rely on rankings. With a mobile-enabled website, you can piggyback off your marketing activity for the website, whereas an app does require its own marketing – we felt we could do a better job given more time and resources.

Our app is still in development so we can’t give too much away but it takes one of the most popular features on our website – the outfits on “Dress Me” – and combines it with community.

BoF: What are your thoughts on the rise of a new kind of discount retailing, pre-sale trunk shows? Any plans for trying out pre-sale at The Outnet in the same way you have experimented with flash sales?

SP: We’ve seen it happen before with the shows – the idea of taking something that was traditionally for a chosen few and making it more widely available via the Internet. I think it’s an interesting move post-recession because it means brands can gauge the level of interest in their products and adjust inventory accordingly. For brands it can seem attractive as it cuts out the middleman.

I think brands need to be cautious though. There is a danger when relying on the “wisdom of the crowds” and delivering only what your customer wants. The job of a designer is to pave the way creatively and to push boundaries and convince us to try something new that defines trends. There could be a risk of making fashion bland. I’m not discounting the use of pre-selling for us – particularly when we create our own capsule collections with designers. There are definite benefits like crowd-sourcing and getting the customer’s point of view but it’s not something we’re thinking about right now.

BoF: Looking ahead, what do you think will be the long-term impact of flash sales and deep discounting on the consumer’s willingness to spend at full price? Is there a danger that widespread discounting will alter the consumer’s perception of luxury fashion brands like those sold on The Outnet?

SP: Discount is an integral part of retail but very few brands actually acknowledge it. This is slowly changing. The secondary market, whether its discount or pre-owned, is very important for brands to support in order to enhance their full price business and enhance the value of their brand in their customer’s mind. The solution is to start engaging with that new audience. If a brand’s approach is simply about liquidation then this is a risky move in the day of the Internet. They need to consider the discount market because the Internet is making everything so much more transparent. The discount world can support the full price model by educating the customer about what a great brand they are buying. The danger lies when brands think discount can just exist in a quiet corner of the Internet – away from prying eyes. Everything online is visible – so it is better to have control over your image and put the product into the right context.

Imran Amed is Founder and Editor of The Business of Fashion

CEO Talk is an ongoing series of discussions with fashion entrepreneurs and business leaders. Previous interviews are listed below:

• Natalie Massenet, Chairman and Founder, Net-a-Porter
• Camilla Skovgaard, Shoe designer and Entrepreneur
• Susan Lyne, Chief Executive Officer, Gilt Groupe
• Priya Kishore, Founder and Creative Director, Bombay Electric
• Alex Bolen, Chief Executive Officer, Oscar de la Renta
• Jeffrey Kapelman, Chief Executive Officer, Hilldun Corporation
• Bonnie Takhar, Chief Executive Officer and President, Halston
• Sara Ferrero, Chief Executive Officer, Joseph Group
• Paolo Fontanelli, Chief Executive Officer, Furla
• Stella Iishi, President and Founder, The News Inc.
• Greg Furman, Founder and Chairman, Luxury Marketing Council
• Sarah Curran, Founder and Chief Executive Officer, my-wardrobe.com
• Brian Hill, Chief Executive Officer, Aritzia
• José Neves, Founder and Chief Executive Officer, farfetch.com
• Federico Marchetti, Founder and Chief Executive Officer, YOOX Group
• Sojin Lee, Co-Founder, Fashionair.com
• Harold Tillman, Chairman, The British Fashion Council
• Christopher Colfer, Chief Executive Officer, Alfred Dunhill
• Pierre Mallevays, Founder and Managing Partner, Savigny Partners
• Robert Duffy, President, Marc Jacobs International
• James Gardner, Founder and Chief Executive Officer, CreateThe Group