Merchant Innovation

High Costs And Low Sales Mean Big Changes For Prada

When costs inevitably grow too high and sales fall too low, sooner or later every brand has to take a gamble on either scaling back operations or expanding them to push through the rough patch. And sometimes, as is the case with Prada at the moment, the gamble doesn’t pay off.

The Wall Street Journal reported that Prada’s annual profit for 2015 has fallen to the second-lowest value since 2009. According to data submitted to WSJ by Prada, a combination of rising operating expenses (to the tune of $1.6 billion) and slowing sales (nearly $1 billion lower than 2014) have sent the fashion designer’s net profits tumbling at a year-to-year decline of 28 percent for the first nine months of 2015.

WSJ attributed Prada’s poor financial performance in 2015 to decisions made by CEO Patrizio Bertelli toward the tail end of 2013. With luxury fashion as a whole experiencing a downturn in sales, Bertelli decided it would be better in the long run to have the company power through the dip while hiring 400 new employees and opening new factories in the process. Hindsight is 20/20, though, and in the light of 2015’s financials, it’s difficult to look back at those decisions with anything but a slight hint of incredulity.

What have Prada and Bertelli done to right the ship? In addition to scaling back on physical stores and other obvious means of reducing overhead, Bertelli told WSJ that some of Prada’s handbags have been shifted upward to occupy a price point more in line with the current trends of the luxury fashion world.

“I prefer to give up one point in operating profit but keep the company strong,” Bertelli told WSJ in an interview last week.

Will adjusting prices and eliminating overhead allow Prada to reclaim its prestige in the eyes of luxury fashion shoppers? Or has the age of the handbag passed to the smaller boutiques that can offer high-quality, exclusive goods at price points that don’t include the expenses of a multinational brand?

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