Like most purveyors of high-end goods, Prada Spa depends heavily on China and a handful of other emerging markets for outsized growth and profits. And these days, China isn't co-operating quite the way it once did.
Sales of everything from Prada's $3,000-plus handbags to pricey booze and wine have been slowing since Beijing began tackling rampant corruption, reining in lavish spending by government officials and barring them from offering or receiving luxury gifts. With nearly 40,000 people ensnared in bribery and other corruption probes, it's understandable that many Chinese bureaucrats and executives are nervous about their families even entering the local Prada or Gucci emporium, let alone purchasing anything expensive.
Add this forced austerity among China's elites to weaker consumer demand, over-expansion, increased competition and other pressures faced by the upscale fashion brands and you have a recipe for weaker growth and falling margins. Sales of luxury goods in China expanded by a mere 2 per cent last year. And more of the same is expected this year. That compares with a 7 per cent growth clip in 2012, 8 per cent in 2011 and several years of heady double-digit expansion before that.
Prada itself posted revenue of €3.58-billion ($5.42-billion) in the fiscal year ended Jan. 31, as same-store sales climbed a disappointing 7 per cent. Net income edged up 0.3 percent to €627.8 million, well below the consensus estimate. It looks particularly dreadful when compared with the 45 per cent jump of the previous year. A stronger euro and softer European market contributed to the clouded picture.
The Italian luxury goods brand is forecasting a slightly slower sales pace this year, which means reaching its ambitious target of €5-billion annually by 2017 or 2018 will depend on continued aggressive retail expansion. As operating costs are increasing faster than sales, further erosion of profit margins seems inevitable.
Still, Prada has no plans to scale back its ambitions and insists the outlook is bright for its market segment, "despite possible short-term volatility."
The company intends to open an additional 120 stores worldwide over the next three years. And China remains a critical piece of the retail puzzle. "I don't think that the Chinese market has really reached its full potential," Prada head Patrizio Bertelli told French business daily Les Echos.
Prada is betting that men – specifically style-conscious young urban males, or Yummies, as an HSBC analyst has labelled this underserved part of the luxury goods business – will provide the necessary impetus to get back to double-digit growth. The company intends to double its sales from men's wear over the next three to five years, adding 50 male-only apparel stores to bring its total to 80. But the competition is also eyeing this segment, which currently generates about €800-million annually for Prada.
"Men will be [the] protagonists in our development," Prada's retail director, Guilio Bruni, insists. Presumably these will include the sons and nephews of senior Chinese officials whose fat expense accounts haven't been cut off yet.