NOT BUYING IT

Prada is in trouble

Obsession
Fashion
Obsession
Fashion

Prada is in trouble. On April 8, the Italian luxury group reported results for 2015 (pdf) that were its worst in years. Profit fell a staggering 27%, edging out last year’s dismal results. Today (April 11), the Italian label’s share price is plunging.

Prada, which also makes Miu Miu’s handbags and Church’s shoes, blamed several things, including volatile currency fluctuations and the recent terrorist attack in Paris. But China is the biggest one weighing it down.

Asia Pacific rivals Europe as Prada’s largest market, each separately accounting for 35% of Prada’s total sales, according to its latest figures (pdf). China makes up by far the largest portion of those Asian sales. But in 2015, Asia and China were the only geographies that saw sales drop. In China, the decline was more than 8%. Excluding the effect of changes in exchange rates, it was 22%.

It’s troublesome, as China has long fueled Prada’s business. As China’s GDP growth has slowed to a level it hasn’t seen since 1990, sales that once seemed guaranteed have been dwindling for more than a year. Exacerbating this is the ongoing anti-extravagance campaign launched by Chinese president Xi Jinping, which has curbed the gifting of fancy watches and pricey handbags among Chinese officials.

Prada isn’t the only brand suffering. Bain & Company estimated that China’s luxury market shrank 2% in 2015, an acceleration over the previous year.

But Prada in particular seems to have lost some luster among Chinese luxury shoppers. A report last year by Millward Brown, a brand-strategy consulting group, examined the diminishing cachet held by select brands and found that Prada’s brand value dropped more than any other brand’s from 2014 to 2015. China was the greatest factor. By comparison, Chanel and Louis Vuitton both gained in brand value.

While the clothes in Prada’s recent fashion shows have been lauded as the label’s best in years, Prada is still a business built on handbags, which it made abundantly clear in its last runway show. Yet even Prada fans feel the bags aren’t what they used to be.

Investors may start looking for a new vision from the company’s management, which for decades has been Miuccia Prada, 66 years old, and her husband, CEO Patrizio Bertelli, who turned 70 on April 6. It certainly doesn’t help that the company’s CFO recently resigned after joining the label in 2004.

“What they have to do is basically relaunch the Prada brand,” an analyst at investment firm Sanford C. Bernstein told Bloomberg in response to the latest earnings.

It wouldn’t hurt to find new customers somewhere other than China.

This story was updated with the sales drop in China excluding the effect of changes in exchange rates.

home our picks popular latest obsessions search