Prada’s annual results came out on Friday and they didn’t make happy reading. “What they have to do is basically relaunch the Prada brand,” is a comment I read from one analyst over the weekend. Really? Has it actually got so bad that people are suggesting one of fashion’s key influencer brands needs to be rebuilt from the ground up?
OK, let’s look at what’s been happening. On one hand Prada isn’t quite the must-have brand it once was. For a start it’s fallen behind that other influencer brand Gucci in terms of general buzz. Based on analysis of social media traffic before and during fashion weeks late last year and early this, Gucci won hands down. The Alessandro Michele effect really has been a tonic for the Gucci brand. But Prada has just been, well, Prada and it has a lot more competition these days when it comes to shaking things up and driving the conversation trend-wise.
The China syndrome
But Prada’s biggest problem isn’t the fact that it’s not the top luxury brand on Instagram. Instead it’s what it hoped would be its biggest plus point. China and the wider Asian market. On Friday, the company reported its lowest profit figures in five whole years and refused to forecast how this year would pan out because Asia isn’t living up to expectations. It’s a huge problem because sales in its biggest market Asia-Pacific make up a third of the group’s global total and it’s where the company has focused much of its investment in recent years.
Yes, it still sold a lot of product (annual sales were broadly flat at €3.55bn), but its net profit fell a massive 27% to €330.9m in the year to January. In the final quarter net profit dropped to €95.8m from €131.4m as sales struggled even more following the Paris terror atacks. That’s less than it made for several years, less than analysts had expected (yet again) and less than investors (don’t forget, it’s a listed company now so there are non-family shareholders to please) had hoped for.
The suggestion that Prada needs to relaunch itself came from respected Sanford C Bernstein analyst Mario Ortelli and it’s perhaps no surprise given that Prada is proving to be one of the biggest luxury sector casualties of the new normal in the global economy.
It’s been badly hurt by sliding demand in China but it couldn’t look to other markets to completely make up for falling sales. Why not? The strong dollar has affected sales of European goods in the US and the usually strong European market has been dented by terrorist attacks. Sales in Europe and the US are still up, but not by enough to rescue the bottom line.
All of that resulted in a real mixed bag of figures across regions and brands: the retail store network saw sales edging up only 2.6%, wholesale fell 16.5% and sales fell 16% in Asia. The Chinese market alone also fell by 4.4%. Europe still managed a 5.9% sales rise, aided by the weak euro during the first half of the year, Japanese sales rose 10.7% and the US rose 5%. Meanwhile the Prada brand saw sales down 6.7% currency-neutral while Miu Miu saw its revenue rising 10.3% last year. It’s always useful to look at currency-neutral sales rather than actual sales as they factor-out the sometimes-wild fluctuations in exchange rates that can distort the business picture.
What’s to blame for the overall downward figure though? China’s crackdown on conspicuous consumption is part of it, of course, as is the overall economic slowdown there, as well as a shift to more affordable luxury brands. If there’s one thing Prada isn’t, it’s affordable, and its bag and shoe prices have risen way beyond inflation in recent years. That’s perhaps why leathergoods sales fell last year as shoppers switched to expensive-but-not-scarily-so brands like Furla, Longchamp and Kate Spade. Perhaps that’s also why the company’s own slightly-more-affordable Miu Miu brand is doing so much better than its big sister.
Yet if the picture across regions is patchy, it’s equally up and down across categories. Footwear, which despite being expensive is the group’s most affordable directly-operated category, saw sales rising 10.6% currency-neutral last year. Clothing, something that’s out of the reach of almost everyone’s budgets, fell 2.5% and leathergoods (which mixes affordable small items like keyfobs and purses with luxe bags priced somewhere in the stratosphere) fell 9.8%. Licensing revenue was positive with a 13.5% increase for eyewear and fragrances, largely due to the Miu Miu perfume launch.
But if Prada is finding it a tough call to increase sales of some products, isn’t everyone in the luxury sector also suffering? Well, no. And that’s the biggest problem. While luxury has its challenges and many are doing less well than they wwre, some of Prada’s high-end peers are still doing very nicely thank you. At least nicely enough to avoid suggestions of the need for a brand reboot. Burberry has seen a Chinese recovery after a bit of a blip, Versace is on a roll, LVMH’s brands remain in growth mode (even though Louis Vuitton has slowed) and Gucci – well, we all know that the brand is enjoying a positive renaissance since Alessandro Michele took the design helm.
Prada is going to host a conference call on Monday. I can’t wait to here what it’s got planned to kick-start the growth it so badly needs.