From milk to ink-jet printers to mobile phones, the loss leader is a common business practice that is frequently successful at stimulating more profitable sales, and at first glance it looks like the strategy has made its way into the world of fast fashion. Swedish clothing chain H&M, for example, is currently featuring a black-and-white mini dress with a $6.95 price tag.
But according to Kaileen Millard-Ruff from the retail and fashion division at GfK Research Dynamics, you can’t assume that just because retailers are charging extremely low prices that they aren’t making a profit.
Over the past 20 years, cheap manufacturing in China has enabled stores such as H&M to make wide margins on their products. It’s possible that this dress just seems cheap because the consumer has gotten used to paying huge markups.
“The simple fact of the matter is that the dress we paid $100 for 10 years ago only cost $5 [to manufacture],” says Millard-Ruff.
Now, the conundrum for retailers is that at the same time as they are cutting prices to attract customers, the cost of manufacturing is increasing. Chinese labour is getting more expensive, and upward pressure on the yuan means foreign companies will pay more for the wage hikes. But Millard-Ruff says even with cost increases retailers don’t have a choice but to keep their prices down.
“The bottom line is we’re not out of a recession yet. And I think people know that in order to be successful they’re going to have to surprise the customer by having an even lower price,” says Millard-Ruff.
Larry Meyer is executive vice-president of the fast-fashion store Forever 21, which offers a three-quarter length knit dress in their fall collection for $15.90. He says prices have been dropping for a couple of years as retailers have adapted to changes in their customers’ expectations. “Value is in right now,” says Meyer, “The customer has shifted.”
Loblaw’s fast-fashion brand Joe Fresh also keeps a handful of popular items at bargain-basement prices. It’s a simple retail strategy: they sell a pair of skinny jeans for $19 instead of the $79.50 the Gap charges for a similar product, in the hope that the customer also picks up a mohair cardigan for $29 and a pair of desert boots for $49 to make it an outfit.
But in spite of the current dip in prices, the rising cost of manufacturing is going to have an impact on retailers. “Yes, costs will rise,” says Meyer. “Will that require us to be more resourceful or to lower margins? We need to be on our toes. Retail is about keeping up with tastes and keeping up with costs.”
The problem for apparel companies is if the customers become conditioned to buying items at bargain-basement prices, they may be unwilling to pay more when prices rise along with the cost of manufacturing.
The genius of Starbucks was getting its customers to pay $5 for a cup of coffee. Now that you can buy a dress for the price of a latte and a muffin, it might be difficult to get consumers to accept the fat margins that ushered in the age of fast fashion in the first place.