Prada loses sight of wow factor in expansion push
Luxury brand needs to boost same-store sales by focusing on new handbags, not new shops
If in fashion, being late on a trend can be lethal, playing catch-up in terms of business strategy can be just as damaging.
Prada is learning that lesson the hard way. The trend in luxury goods is to drum up same-store sales by curbing expansion and wowing customers with new products, yet the firm continues to pay over the odds to open new shops and stock them with handbags little changed from previous bestsellers.
Prada, say analysts, urgently needs to focus less on new stores and more on new handbags.
The group, which also owns the Miu Miu and Church's brands, opened 250 stores in the past three years, far more than rivals. It has finally slowed the pace but still plans 30 to 35 more stores this year, which it says is part of its long-term strategy.
"Prada is starting to focus on same-store sales growth three years later than some of their peers as their priorities were elsewhere, but it is clearly better to do it later rather than never," said Erwan Rambourg, an analyst at HSBC.
Analysts estimate same-store sales at Prada fell year on year by 12 per cent in the third quarter to October and may have dropped as much as 9 per cent in the quarter to January.
Prada's costly retail space, combined with slower growth, has hammered margins and valuation. Its share price nearly halved in the past two years and most analysts still have sell or hold recommendations on the stock.
Its operating margin fell to 15.4 per cent in the third quarter from 21.3 per cent in the first half. Some analysts expect small margin growth this year, mainly thanks to the strong US dollar that will boost reported earnings in euros.
Prada is not alone facing difficulty at a tricky time for luxury goods makers. But concentrating on same-store sales has produced success for some luxury brands. Rival Louis Vuitton revealed last week that it had enjoyed a strong rebound by investing in new products. It also halted the opening of new stores.
When Prada floated in 2011, its ambition was to catch up with bigger rivals by expanding. The firm spared no expense, splurging on "key money" - cash upfront to secure the best locations.
However, some customers say Prada's new shops carry handbags that have not evolved much in recent years, as if the company were afraid to change a product that worked well for so long.
"They've lost their touch," said Sara, on a visit from Kuwait, pointing at handbags in a Prada shop window in Milan as she left the store empty-handed. "They are not keeping up with changing trends as well as other brands like Fendi or Dior."
