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Prada Should Be Prada

Prada is one of the best known and most loved fashion brands in the world. But its sales, profitability and share price have all taken a dive. Luca Solca asks, what can be done?
Prada Spring/Summer 2016 | Source: Indigital
By
  • Luca Solca
BoF PROFESSIONAL

LONDON, United Kingdom — Over the last two years, Prada's sales and profitability have suffered. Its share price has lost more half of its value. All this despite being one of the world's best known and most loved fashion brands. What went wrong and what can be done?

According to our analysis, much of the pain is self-inflicted. Prada sought to emulate Chanel and Hermès, pushing its prices too high and making its offer too narrow and too static, without fully understanding what underpins the success of these brands. The result was a strategy that was overly dependent on very expensive handbags. Think Chanel and Hermès and you think iconic, expensive handbags and classic styles that seldom change. But look closer and one finds that these items are just the pinnacle of a product pyramid that includes a highly developed accessibly-priced offering, comprising fragrances, cosmetics, fashion jewellery, ties, scarves and arts de la table, all of which generate huge profits. Prada, by contrast, pushed its prices too far and found itself stranded with high-priced bags and little else.

What's more, this push upmarket was inconsistent with Prada's DNA and inappropriate given the prevailing market conditions. The company's early success was built on nylon backpacks — and its distribution strategy reflected this. Today, among European luxury brands, Prada is one of the most active in the off-price channel. This hardly chimes with its recent desire to be highly exclusive. At the same time, the handbags category has become very crowded. Coach has been joined by a swathe of accessible luxury brands, from Michael Kors, Tory Burch and Kate Spade to Longchamp and Furla, to name but a few. All have exploited a rising price umbrella created by luxury mega-brands and collectively have taken significant market share. Take these two factors together and it's worth asking whether Prada risks finding itself without a natural market.

Prada's problems have been compounded by the company's race to develop its direct-to-consumer retail presence in the last few years. As of January 31st 2015, the company now has 594 directly operated stores. This expansion has come at enormous expense and created a real estate portfolio whose depreciation will weigh on the books for years to come. It has also weakened productivity in terms of sales per square metre and diluted profitability.

To be sure, Prada can succeed. What is lacking is the will to steer the strategy to its logical conclusion and turn the company into a full-blown mega-brand rather than drift into a ‘me-too’ high-end backwater. This requires two fundamental actions. First, the company must deploy more compelling, high quality and glamorous entry-level products within full-price stores to create a solid base for the company’s high-end offering. Second, which flows from the first point, Prada must step up product innovation and extend the breadth of its handbag shapes and styles. In a market where consumers are spoiled for choice, novelty is critical.

This can be done. Prada has changed direction in the past. For example, in manufacturing, the company changed course from “Made by Prada” to “Made in Italy.” Online, the brand evolved from no digital presence to leveraging the web as marketing tool and embracing e-commerce. Just count the number of Prada products now available for sale online.

A shift seems inevitable. Prada’s senior management must be frustrated with the company’s current performance. But I would be on the lookout for soft signals of change ahead of official declarations — if you want a sneak peek, visit the stores and watch out for new products at entry-level prices.

Luca Solca is the head of luxury goods at Exane BNP Paribas.

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