MILAN, Italy – Prada has suffered through some tough years after a series of strategic missteps, but has lately taken measures to get back on track. The Italian luxury group recently announced its plans to further reduce wholesale exposure. This follows on a decision to stop promotions within its full-price retail stores. Both are commendable steps to achieve better price discipline, a key requirement for maintaining long-term brand equity.
Prada has also announced that it will stop selling fur. This comes on the back of moves to mend past merchandising mistakes: bringing back nylon and entry price handbags; increasing the number of leather goods styles and re-focusing on newness; and moving sneakers centerstage and relaunching the sporty "Linea Rossa".
Yet Prada remains a step (or two) behind its peers. And a look back at the last five years shows the brand has too often been behind the curve. Prada was opening stores when competitors were already trimming their retail networks. Prada was the last of the Mohicans to recognise digital as a strategic priority. Prada is now sponsoring the America’s Cup sailing competition, after Louis Vuitton concluded that its own sponsorship of the event was no longer effective.
When was the last time that Prada invented something new that competitors stood back and admired? This is all the more striking, as Prada was once perfectly in tune with the zeitgeist and a pioneer in many areas, for example, bringing streetwear and sport to luxury more than 20 years ago; counter-standardising its flagship stores when others were cookie-cutting; embracing minimalism; and the list goes on.
But Prada’s underperformance versus peers has been painfully clear.
But Prada has become a follower and a follower makes no money. Indeed, it is not surprising that the brand’s operating performance has been disappointing. No matter which mature industry one examines: the #1 player has high profit margins; the #2 has decent profit margins; the #3 is breaking even. Luxury is still nascent, fragmented and favoured by strong underlying demand trends, so it is a bit more forgiving. But Prada’s underperformance versus peers has been painfully clear. (The correct decision to reduce wholesale exposure at a time when retail is not in a position to make up for it is causing further downward earnings revisions).
So, what's next for Prada? Organisational development is key. Prada would benefit from a decisive organisational upgrade. A stronger management team to implement the founders’ vision would benefit the business. A stronger merchandising and brand management capability would also help put Prada back on the map.
The accelerating speed and escalating complexity of the luxury industry are challenging traditional management formats. Empowerment, teamwork and risk-taking are vital to staying ahead of competitors. Highly centralised decision-making — while possibly superior when it comes to major strategic steps — risks stifling innovation, delaying action and remove accountability in day-to-day operations.
To be sure, there is a path to a better Prada. We see no obvious structural reasons why the brand couldn’t come back, provided the company creates the right context. Of course, Prada is smaller than Louis Vuitton and Gucci, and scale is important as costs balloon. Yet, Moncler is a powerful example of what a small business can achieve when it is forward-looking and focused the right metrics: space productivity and brand equity enhancement.
We don’t think Prada is likely to be taken over — not because of a lack of suitors, but because its controlling shareholders would not sell at this level. Improvement has to come from within. We believe the most promising signal to the market would be a management upgrade and overhaul.
Luca Solca is head of luxury goods research at Bernstein.