Profit margins at the world’s twenty biggest luxury goods groups have slid from an average of 24% in 2022 to 13% now*, research from supply chain experts Inverto, part of Boston Consulting Group shows.
Diving deeper into the numbers, ten of the 20 companies have seen their profit margins fall over the last few years and another five businesses are loss making.
Traditionally, luxury goods companies used high price solutions for all aspects of their business, even those that are not directly linked to product quality or brand appearance like IT, logistics, or marketing.
In these areas there is plenty of opportunity to cut cost without undermining brand and customer experience, explains Inverto managing director Daniela Klotz. “In indirect categories, systematic management can unlock 8 to 10 percent or even more savings per category within six to twelve months,” Daniela Klotz says.
This, to mention a specific example, is possible by rightsizing software licences: Companies often pay for dozens of unused or overspecified software licences. “One client we worked with adopted a rightsizing strategy and were able to reduce their software spend by 15%”, notes Daniela Klotz.
In Marketing and Visual Merchandising, to consider another indirect category, luxury businesses often produce seasonal window and physical promotional materials centrally and ship them globally at significant cost. This is driven by the desire to ensure a consistent appearance and controlled quality across markets.
However, enabling qualified suppliers in key regions to produce materials based on centrally defined standards and specifications can significantly reduce logistics and production costs, while maintaining the intended brand look and feel for customers. “With strategies like these, marketing spend for these items can be reduced by up to 30%,” explains Daniela Klotz.
Daniela Klotz suggests that luxury goods companies need a clear, data-driven strategy to identify which parts of their supply chain are truly essential for the business and which are not.
Once that strategic groundwork is in place, artificial intelligence (AI) can be used to help companies identify what specific operations can be streamlined to unlock savings. As an example, AI can help them optimise transportation and logistics by identifying the cheapest, fastest ways and times to ship items.
AI can also be used to help reduce wastage. Typically, fashion companies find it hard to produce the right number of products by size, colours, and other variations. By using AI, companies can better forecast demand and balance manufacturing with demand, reducing waste and expense.
Daniela Klotz points out: “With a clear cost management strategy and focusing on what’s essential and what’s not, fashion and luxury brands can significantly improve their margins.”
Luxury goods companies’ profit margins
*Top 20 luxury fashion companies by market cap. Study covers approximately €100billion in sales per year
