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- 22 Apr 2011
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The Impact of Global Change on Luxury Manufacturing

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Ceci Guicciardi, contributor to Fashion’s Collective, examines the price increases of major commodities, set to sway the luxury industry


Lately, we have all been witness to economic, political and climatic events unravelling at an alarming pace and changing our landscape, at times quite literally. While these events bear testament to a great deal of human suffering, it cannot be ignored that they are contributing to a dramatically new environment for luxury manufacturers and retailers.

On the one hand, prices of raw materials have soared, due to natural disasters that have stifled supply. Transport costs, which are affected by crude oil prices, have risen as a result of the developing instability in the Middle East. On the other hand, consumer confidence – which was just picking up post-recession – may well be dealt a cruel blow in the wake of the disaster in Japan. To top it all, foreign exchange fluctuations bring uncertainty to manufacturing costs.

Looking at four major commodities that impact luxury manufacturing – cotton, leather, silk and cashmere – we see that there has been a considerable price increase across the board. Cotton prices are at a record high, with cotton futures trading around 200 cents/lb, double from this time last year. A tight supply and higher demand are to blame. Production for 2011 has been scaled back considerably from initial estimates, in order to account for a 1.5 million bale reduction following the floods in China and Pakistan last year. Meanwhile, demand has continued to grow, partly as a result of economic recovery, but also due to strong economic growth in emerging markets.


 it seems inevitable that European luxury goods manufacturers will need to raise prices at some point, despite many being reticent to do so 


Leather prices are also seeing increases as a result of floods, this time in Australia. The consequent squeeze on raw materials has hiked up cattle-hide prices to their highest in nearly a decade, up 24% from last year to $82.00 apiece. Manufacturers are also finding that the prices of exotic skins, such as crocodile, have risen considerably. The big challenge will be supplying demand – particularly that of China’s growing middle class, keen to acquire leather goods.

Silk cocoon prices have fared no better, virtually doubling since 2009, up to $13,570 a tonne. The leading cause has been identified as the recent urbanization of the land around Shanghai, which has traditionally been used for mulberry trees, used to harvest silkworms. Cashmere prices have also been greatly impacted, though in this case as a result of the harsh weather conditions in Mongolia this past winter. With temperatures dropping as low as -45C, many flocks of the special goats bred for their incredibly soft yarn were decimated.

In addition to raw material costs, the price of oil – necessary for transporting both raw materials and finished products across the globe – is also being kept under careful watch. On the whole, this has been climbing steadily since the start of the year, fuelled by uncertainty over contracts in the Middle East as a result of political unrest.


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In 2010, Louis Vuitton raised classic accessory prices in the Eurozone approximately 9% due to rising leather and cotton prices, IBT


For European luxury brands, sustained high oil prices may require a shake-up in supply chain and logistics over the long run. Notably, in order to brace itself for the start of the recession back in 2008, Burberry CEO Angela Ahrends announced cuts of £78 million, which included an overhaul in its supply chain, allowing transport by ship rather than by air in order to cut costs.

Finally, foreign exchange fluctuations, which have a tremendous effect on both ends of the supply chain, have become more volatile.

Looking at the big picture, it seems inevitable that European luxury goods manufacturers will need to raise prices at some point, despite many being reticent to do so. Hermès CEO Patrick Thomas noted the company, which generates 50% of annual turnover from leather goods, is “in a period where we’re trying to not raise prices” but admitted they will nonetheless have to spread price increases over time. The bottom line, then, is the question of whether price increases will deter luxury consumers.


 solidly entrenched brands with a limited range of successful products will suffer less, others may be severely exposed 


Consumption is already shaky, as Europe and the US eek their way out of recession. On Monday, European luxury stocks dropped in the wake of the recent earthquake and tsunami double-whammy that hit Japan. Separate from the issue of European luxury brands’ exposure in the Japanese market, there is the potential of a real psychological dent in global luxury consumption as an “economic after-shock” to the earthquake.

In order to navigate this time of uncertainty, and mitigate such risks, luxury brands may be forced to assume more selective decisions with regard to the existing range of products, inventory handling, availability of product sizes and colors. While solidly entrenched brands with a limited range of successful products will suffer less, others may be severely exposed. Moreover, product lines which require size differentiation (shoes, dresses etc.) will be more affected in this respect, than mono-size goods.

It is clear that a correct branding strategy and positioning of the firm are imperative, as well as making sure that product range, quality and pricing are fully consistent. Mistakes could be painful.


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Fashion’s Collective is a resource focused on digital marketing for the fashion and luxury industry. A team of contributors experienced in global strategy for the industry’s top brands advises on digital brand positioning, social media, mobile marketing, ecommerce and relevant consumer insights.

fashionscollective.com