Fashion disaster

By KS

SOME things are just too good to last. China’s seemingly insatiable appetite for luxury—which has been powering the industry’s profits for over a decade—is, it seems, one of those things. Prada, an Italian luxury fashion group that also owns brands such as Miu Miu and Church’s, has become the latest firm to see the country's diminishing appetite reflected in their bottom line.

On March 30th Prada announced that profits for 2014 had dropped by 28% from the previous year, to just €451m ($484m). It is the first time that the firm has reported a drop in annual profits since it was floated on the Hong Kong Stock Exchange in 2011. Sales of leather goods, a category with particularly high profit margins and which accounts for over 60% of net sales, fell 5%.

There were some gains for the group, notably in Prada’s menswear offerings and for the group as a whole in Japan and South Korea. But these were overshadowed by the effects of tough conditions in the Far East, particularly in Hong Kong and Macau.

Officially the Chinese government’s anti-corruption drive began in 2012 when President Xi Jinping took office, but it is only in the past 18 months that the campaign has really begun to hurt the luxury industry. Earlier this year, LVMH, a luxury conglomerate, reported its first fall in operating profits for five years. Gucci, another rival, is also feeling the pain: full-year revenues for 2014 fell by 1.1% from the previous year to €3.5 billion.

To help shore up confidence, Prada's executives have vowed to cut costs, particularly those associated with opening new stores. But a bolder move may be necessary. In a report on China's luxury industry released earlier this year, Bain & Company, a consultancy, argued that the “new normal” will be slower revenue growth for the big labels, due to a tendency for consumers to shop around for less well-known ones. To hold consumers’ attention, bigger brands will therefore need to innovate. Prada had better take note.