Prada: On its Way Out?

The Prada Problem

Prada, as one of the best known and most loved fashion brands in the world, has suffered sales and profitability drops over the last two years. Its share price lost more than half of its value.

The Italian luxury fashion house reported the following in 2015:

– A 28% plunge in profits.

– A 1% fall in revenue to £2.6 billion ($US3.8 billion) for 2014.

– Missed analysts’ estimates of 343 million for net income with £330 million. That was down from £460 million the previous year.

A Little History Lesson

This wasn’t the case in 2012. Back in 2012, Prada proudly announced that net revenues grew by 29%. It made a fortune through retail, the Asian market, and through leather goods. Same-store sales growth also rose by 14%. The previous year it grew 23%.

Prada is learning its lesson the hard way. After analysis, it’s apparent that much of their financial pain is self-inflicted.

Prada: You are Not Chanel or Hermes

When you think of Chanel and Hermès, ‘Boy Bag’ by Chanel, ‘Birkin’ by Hermès, you think iconic, expensive handbags and classic styles that seldom change. However, these brands also have fragrances, cosmetics, jewellery, scarves with the accessibly-priced offering, all of which generate huge profits.

Prada sought to emulate Chanel and Hermès by pushing its prices three times higher than before and making the offerings too narrow, without fully understanding what underpins the success of these brands. The result was a strategy that was overly dependent on very expensive handbags. Yet the new handbags by Prada are too similar to the brand’s previous bestsellers. At the same time, the handbags category has become very crowded. Customers are spoiled with choices – from Michael Kors, Longchamp, and Furla, there are just too many. Novelty is critical.

Pricey, Prada

By contrast, Prada found itself stranded with just overpriced bags in the market. Taking a trip down memory lane, the company’s early success was built on nylon backpacks – and its distribution strategy reflected this and experienced massive success. However this hardly chimes with its recent desire to be highly exclusive. This marketing strategy was inconsistent with Prada’s DNA. It’s just inappropriate, given the market conditions.

This push upmarket strategy does not fit the brand’s natural target market and Prada took a huge risk by doing so. Not only could Prada lose previous loyal customers, but the move might also make it very difficult to attract new customers with super high-priced handbags.

Prada can succeed. It needs a more logical marketing strategy and it might turn into a full-blown mega-brand in the future. The company must deploy more compelling, high quality, and glamorous entry-level products and extend the breadth of its handbag shapes and styles.

Diagnosis:

A shift seems inevitable.