By  on March 3, 2010

The twin perils of growing global competition and decreasing pricing power have been limiting gains in the fashion business as similar products proliferate and “overlap” in a range of prices, according to a new book.

This competitive environment makes the fashion business one of the “most fascinating” to explore, said Richard D’Aveni, author of “Beating the Commodity Trap” (Harvard Business Press, $27.95). The intensifying struggle to distinguish fashion items from competitors’ products held particular significance for the author.

“There are a lot of competitors who don’t look like you at all,” D’Aveni, a professor of strategic management at Dartmouth College’s Tuck School of Business, said in an interview. “Even people you don’t think you’re competing with are actually equally important to your business.”

It’s getting tougher for upscale brands to combat lower-priced look-alikes unless they are making sizable investments in product innovation, noted Michael Silverstein, senior partner and managing director at The Boston Consulting Group.

“At major fashion houses, R&D investments are averaging less than 7 percent of annual revenue,” Silverstein said. “These are $1 billion-plus companies with the ability to change their cost structures. They are making much bigger investments in design and image — which are on the surface — than in product innovation” such as new materials and improved fit.

These dynamics are creating a fashion sector rife with commoditization, said D’Aveni, who devoted most of his book’s second chapter, “The Deterioration Trap,” to the industry. Deterioration, or lowering the cost and reducing the benefits of a product, is one of two commodity traps identified as risks to fashion players. The other is proliferation, in which prices and benefits are either raised or lowered in an effort to boost a brand’s competitiveness. Proliferation could come by offering more in a product at a lower price, such as sharply discounted designer goods.

“You’d think Zara, in Europe, would be in a different market than Armani and have no effect on Armani,” D’Aveni said. “But there’s a ripple effect. The bottom affects the middle; the middle reacts, moving down [in price]; then the upper-middle moves down, and then the top responds to that.” While acknowledging that Armani would probably not think it is affected by Zara, the author contended that “they are.”

Marketers of moderate-price fast-fashion, such as Zara, which can move their runway-inspired takes to stores in just six weeks, “end up forcing higher-end brands to move current season fashion into the discount channels a lot faster,” D’Aveni said. Done regularly, this kind of discounting could pull high-end brands into the proliferation trap and raise questions among shoppers about why items were ever so expensive, he said.

“With prestige players cutting back on R&D, they’ve been on the defense,” Silverstein said.

To counter the deterioration trap, D’Aveni said brands can escape by sidestepping a competitive discounter, destroy by undermining a price undercutter and turn the trap to an advantage by containing and controlling a discounter.

“Many haute couture companies are sidestepping Zara’s market power by moving [beyond] fashion clothing to avoid the deterioration there…investing more of their attention on other very high-end products,” D’Aveni wrote. He cited examples such as hotels and restaurants (Armani, Bulgari, Versace, among others), automobiles (Versace with Lamborghini) and helicopters (Armani and Versace designing the interiors of helicopters for AgustaWestland).

When luxury fashion designers move on via escape, he added, it is “an appeal to the very wealthy, using products so high end and unique they do not compete with Zara, nor can they be imitated by Zara’s mass production and sourcing system.”

With so many fashion products flooding the market that consumers deem acceptable in price, quality and style, D’Aveni said some top-end brands are in danger. “Young people are not looking at the traditional big-level brands for what identifies them,” he said. “They’re looking at style.”

In D’Aveni’s view, America’s problems of competitive power and pricing are unlikely to ease much during the next 50 years, increasing pressure on the high end. He predicted the country’s standard of living will fall and eventually will settle on par with much of the rest of the developed world. The reason: economic shocks from the emerging economies of China and India, a combined 2.5 billion people strong. By comparison, he said, “it took the U.S. and Europe three decades — the Seventies, Eighties and Nineties — to absorb Japan’s 75 million people into the world economy.”

As the owner of a new Lexus, D’Aveni personally experienced commoditization. Upon leaving a restaurant recently, the valet mistook him for the owner of a similar-looking, less luxurious car. “‘You’re the guy who came in a Honda,’” the valet said.

Recalling his shock, D’Aveni said: “Cars are fashion. I was very upset with Lexus for not providing me with something that showed the difference. I started looking at Hondas — and the shape and even the outer-skin colors matched my Lexus.”

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