Profit margins among clothing retailers don’t vary that much – at the outside, between 5% and 25%. The vast majority are 10%-20%.
I mention this because I’m constantly surprised by consumers’ ideas of how brands are ‘ripping them off’. The fact is, the first 20% of the price you or I pay goes to government (in the UK – VAT), the next 10%-20% goes to the brand as profit, and the remainder is costs.
There seems to be a strange idea among consumers that brands just charge ‘whatever they can get away with’. That luxury brands in particular charge exorbitant prices and reap huge profits as a result.
Luxury brands certainly have higher margins. One of the reasons the industry is so attractive is that margins of 18%-25% are both achievable and sustainable (the latter being by far the most important, as many new launches have discovered in recent years).
But 20% isn’t that high. Last week, commenting on a comparison between some £200 boots and a £1000 pair on this site, a friend commented that ‘the latter is probably mostly profit anyway’. No one has 80% profit margins. In fact, given that production costs (including the manufacturer’s profit) are usually in the range of 25%-30%, the £1000 boots could cost £300 just to be made.
The sensible thing to focus on is costs – the bit between the profit and the production. Luxury brands may spend a large chunk of that on advertising and marketing; a chunk more on store design and branding; and another slice on catwalk shows. Paying for that is the only way in which you are being ‘ripped off’.
As we saw in our analysis of Savile Row costs, a lot more is spent on making a bespoke suit than in most clothing production (at least twice as much). But the difference between a tailor and a luxury brand is far more marked in these marketing and advertising costs. A tailor’s may be zero; a brand’s may be more than anything else.
So if you’re shopping in the sales over the next few days, be assured that once you have a 30% discount, the brand is making no money off your purchase (margin plus the reduction in VAT). It’s the catwalk models and full-page ads you’re paying for now.
– The brands are of course recovering costs, which is why they have the sales. If they don’t sell the stock (more of a pressure in a seasonal business), they make a bigger loss.
– The profit is more complicated if a brand is not selling through its own retail, but it’s hardly worth getting into that.