New Luxury

Headlines on retailers are worrying but I think that there is a wider issue related to manufacturing. The premium you used to be able to charge on branded products in textiles, plastics and even electronics are evaporating because the high barriers of entry for manufacturers are evaporating. This increased supply of goods is driving stores out of business because they depend on taking a cut of these premiums. Online retailers have less fixed costs and can adjust to lower premiums, and they  no longer suffer from product diversity like in early days of online retailing.

While I don’t think stores will go out of relevance, this trend will have wider implications on what has been a relatively stable industry, luxury goods. While Sin Goods are not as effected by increased manufacturing entry because they are often protected by large amounts of regulation and long development processes, luxury goods retailers whose products can be quickly manufactured to a high quality by machines could face declines in demand.

These brands face multiple disruptive pressures.

  1. Increased market shares of small producers of high quality products which charge comparable premiums. (Warby-Parker)
  2. Increase in market shares of large retailers with high design credibility but low input costs. (H&M, Zara)
  3. Increased quality and distribution channels for counterfeit goods. (eBay, Alibaba, OpenBazaar)

A rise in consumer confidence may turn things around, but it will not eliminate the rise of boutique competitors, online brand building, and the ease of replication of these goods. While it not impossible to generate high premiums in a modern age, it is evidently becoming more difficult, even for products as complicated as smartphones.

These problems are similar to headwinds in entertainment industries, but entertainment industries have been able to embrace online platforms because the end goal is mass consumption. Luxury brands don’t have the ability to throw money onto these platforms because the goal is opposite of mass consumption.

Possible actions in the future may include mergers, acquisitions of small boutiques, contracting talent that would otherwise be independent, and moves towards the mass market using brand as leverage, similar to the more casual Armani retail lines.

 

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