Understanding the business of fashion - Essay Example

? The Fashion Industry and Supernormal Profit OVERVIEW OF THE MARKET AND MAJOR RETAILERS Heading into retaliating industries will face a greater challenge. With the economic market decreasing, people have less and less spending money. This means that individuals are not purchasing items that are viewed as “extra,” and clothes, unless bought for a growing child, generally fit into this market. Individuals are at the point where they will not buy clothes unless they absolutely need to. Therefore, the clothing retailers may need to focus on how they can make individuals feel as if they need more clothes, and also focus on making purchasing power easier. Many retailers are using the concept of Internet retailing to increase purchasing power. For most of human history, clothes were handmade, often by the woman of the household, or by female servants. Those who could afford nice material and expensive designs typically indulged those desires; however, most individuals did not put much consideration into their wardrobe. The emergence of a middle class in Europe and the United States made it possible for people to take more of an interest in how they presented themselves in clothes, and patterns of popular clothes were introduced for people to copy. With the industrial revolution, it became possible for clothes to be mass?produced, but there was still a desire among many individuals to have clothes that were considered fashionable and even unique in an era when mass production was increasingly the norm. Today, with advanced technologies, manufacturers are able to offer mass customization in fashion ("New Technologies" 1). Haute couture, which continues to be regulated in France, often sets the design guidelines for a particular season. Major couture houses, including Christian Lacroix, use their haute couture not only for its own sake, but also to promote ready?to?wear designs, as well. In addition, many major design houses today sell multiple brands and also multiple product lines, so that a haute couture show may also be a showcase for perfume and accessories (Waddell 21). Competitors of Haute Culture include major retailers like the Gap, which sells clothes worldwide, and Avicsar, CatWalk Enterprises, and First Impressions. All of these companies are European based and First Impressions is situated in London. All of these companies are showing the same trends—a decrease in sales relevant to the decrease in economic status. Therefore, heading into 2012, all companies are going to need to consider new ways of selling, and the Internet could certainly open up many avenues for them. Out of the companies listed above, Gap is currently most prevalent on the Internet, and this may be the reason they are performing better than the other companies, although economic issues have hurt them. The fashion industry is a global industry (Movius n.p.). Textiles may be produced in a country such as Thailand and transported to a low-cost labor market such as China to manufacture designs that were created in Europe or the United States for sale in retailers around the world. This globalization works to keep costs low on the manufacturing side, which increases the normal profit. However, not all of the companies listed above work in this global context, Gap again being the only one listed that does. The use of outsourcing may be a consideration for these other companies in order to increase sales. At the same time, the various fashion collections and their shows can increase demand for a particular designer's goods. As designers become better-known, customers may be willing to pay more in order to have the distinction of owning a piece by that particular designer. In this way, the price of high fashion can be driven up not by value-added, but by customer valuation of a particular brand. While some might argue that this does, indeed, constitute value-added from a marketing standpoint in the sense that branding adds value, others would suggest that this is an artificial component that does not have intrinsic economic value (Interbrand n.p.). Gap is well known for this type of approach, and the other companies would do well to also demonstrate this knowledge. The Economic Concept of Profit In accounting, profit is equal to revenue less cost ("The Concept" 34.). Companies can increase their profits by increasing their revenues at a higher rate than their costs increase. Companies can also increase their profits by decreasing their costs when their revenues are remaining steady over a given period of time. Companies that are not profitable cannot remain operational for long periods of time (Lackner 32.). When considering profit from an economic point of view, the definition changes from the definition used in an accounting environment. In economics, "normal" profit is the opportunity costs of the resources used by the owners of a company, including the owners' time. Normal profit must be greater than zero over the long-term or the company will lose money. Opportunity cost is used because the opportunity cost indicates other ways in which the resources could have been used and the cost of foregoing that use. In this sense, "normal" profit is similar to accounting profit with the difference that "normal" profit uses opportunity costs while accounting profit uses explicit costs (Salemi 4). Supernormal profit, also called economic profit, is the residual of accounting profit (total revenue less total explicit costs) minus normal profit (Griffiths & Ison 33). This assumes that there is greater profit than the normal profit; hence the term "supernormal." Supernormal profit is thus an indicator that a company's opportunity costs are relatively low. As with accounting profit, supernormal profit can be increased by increasing revenues more rapidly than costs, or decreasing costs, and are particularly associated with monopolies (Jain et al 415). It is important to consider the issue of economic rent, as well, when considering supernormal profit. Economic rent is the residual from a payment when the amount of the payment exceeds the owner's reservation price. This is used in conjunction with factors of production. In this way, when demand increases for a good but there is no economic cost associated with that increase, such as when a reviewer writes a favorable review of a wine and demand increases, the price for the wine can also increase. This would result in economic rent, not supernormal profit (Salemi 4). Ultimately, what constitutes supernormal profit, or windfall profits, or extraordinary profits may well be highly subjective. Some analysts consider that supernormal profit accrues when there is not value added to a product by those who realize the profit. Financial instruments can thus generate supernormal profits in that those who buy stocks, for example, often have no direct influence on the actual performance of the company, yet may well realize profit from their investment. Even when there is value added, the question of whether or not profits are supernormal can be decided by some according to the magnitude of the profit without relationship to how that profit was generated or the value added by the participants (Gudeman 105). Analysis of the Fashion Industry from an Economic Perspective There are certain financial costs that are associated with the fashion industry. There is the cost of the design itself and manufacturing that design. Companies can manufacture in low-cost countries which will reduce the actual cost of the process, and then transport the goods to the retail market. The manufacturing, transportation and even promotional activities associated with the fashion industry are all explicit costs which contribute to the normal profit of the goods. On the revenue side, the company can increase the price at which it sells its goods if the market will bear such an increase. If a designer has had success in previous collections, the company may be able to increase the price. If a collection is considered to be in short supply, the price may also increase. In these situations, the company is not adding value to the good, and the increase in price is not necessarily related to the direct activity of the company. Thus it is not really opportunity cost that is being expressed. Instead, the company is realizing increased revenues by virtue of selling these particular goods at this particular time. Rather than realizing supernormal profit, it may well be more accurate to say that the fashion industry can realize economic rent (Salemi 4). The Internet is an important item to consider when talking about where the fashion industry is heading. Haute Culture, Gap, Avicsar, CatWalk Enterprises, and First Impressions are all leaning toward using the Internet for a marketing campaign. Once again, here Gap appears to be the leader, as they are already famous for their marketing on the Internet. Furthermore, their website is easy to use, which is an important buying point. Conclusion The fashion industry is highly competitive and subject to the vagaries of ever-changing tastes in style. Many designers strive to create collections that showcase their capabilities, but which are also used to sell ancillary products or brand extensions. While there can be extraordinary profits in the fashion industry, they are more properly classified as economic rent rather than supernormal profit in that they do not accrue from opportunity cost, but instead from the rent over and above the reservation cost of the company. Haute Culture, Gap, Avicsar, CatWalk Enterprises, and First Impressions are all suffering from economic downturn. However, the clear winner in this discussion is Gap, which continues to use marketing campaigns on the Internet, modeling campaigns, and is able to increase customer satisfaction by their easy purchase demands on the Internet and in their stores. Because they are a worldwide change, they also have a clear advantage over their competitors. Gap’s competitors could clearly learn something by following Gap’s examples. Works Cited "The Concept of Profit." Recklies Management Project: themanager.org, 24 November 2007. Retrieved 26 Nov 2007: . Griffiths, Alan & Stephen Ison. Business Economics. Heinemann Publishing, 2001. Retrieved 26 Nov 2007: . Gudeman, Stephen. The Anthropology of Economy. Blackwell Publishers, 2001. Retrieved 26 Nov 2007: . Interbrand. "Brand Valuation", brandchannel.com. Retrieved 26 Nov 2007: . Jain, T.R., Anil Malhotra, J.S. Kumar, & Ashok Gupta. Micro Economics. VK Publications. Retrieved 26 Nov 2007: . Lackner, Ray. "Alternatives to Bankruptcy Liquidation", Agency Sales, February 1, 2005. Retrieved 26 Nov 2007: . Movius, Lisa. "Textile Forum Reveals Trade Tensions", WWD, June 26, 2007. Retrieved 26 Nov 2007: . "New Technologies Bring New Life to Mass Customization", AT&T, November 18, 2005. Retrieved 26 Nov 2007: . Salemi, M. "Economic Profit." University of North Carolina. Retrieved 26 Nov 2007: . Waddell, Gavin. How Fashion Works. Blackwell Publishers, 2004. Retrieved 26 Nov 2007: . Read More