What do Costco and Carrie Bradshaw have in common? Fendi.
High end designer merchandise has been popping up in the unlikeliest of places. In the past one had to go treasure hunting in discount retailers such as TJ Maxx and Ross for a great luxury find that did not break the bank. These would mainly be discounted items from previous seasons. But now you can find high end merchandise alongside your groceries and cleaning supplies. Target has been collaborating with designers such as Isaac Mizrahi, Prabal Gurung and Missoni. Similarly you can run into Prada and Fendi at Costco. Kohl’s has been selling Vera Wang and Juicy Couture for a while. But is this really a good strategy for these brands? Or is luxury for less, less luxury?
What Works? A sales platform like Costco for instance, gives a designer brand exposure to the company’s 71.2 million cardholders. The average household income of a Costco customer is approximately $96000. For Target customers the median household income is $64,000. Some of these people may not have purchased a full priced high end item from a designer or department store, but may be willing to try it at a lower price point during their usual shopping trip at a mass retailer. So these stores are a gateway to a large, untapped market of higher volumes (although usually lower price points) for the luxury brand. Also for some shoppers exposure to an accessible version of a luxury brand may be the initial hook that pulls them into the world of high end merchandise.
What Hurts? There are two ways in which the move to reach the masses could backfire for some makers of luxury merchandise and lead to a dilution of their brand. Firstly, if they produce lower quality versions (to match the lower price) of their full line merchandise specifically for sale at mass retailers it could hurt the overall reputation of the brand and actually lead customers away.
Secondly, for many people buying a high end item is not just about paying a higher price for great quality. It is also about acquiring a status symbol. If Prada was sold at the same store as peanut butter, that may dampen the “posh factor” for some loyal customers of the brand.
Is it worth it? Among many other factors the success of this strategy depends upon the price and income elasticity of the product being sold. And that depends on the type of product in question.
Luxury goods like high end designer merchandise are defined as products whose demand increases more than proportionately as income increases. But their relationship to movements in price can be interesting.
Usually luxury goods are price elastic, so a change in price leads to a more than proportionate change in demand for the product. Price elasticity can be defined as the percentage change in the volume of a good demanded with a one percentage change in its price, everything else equal. Let’s assume that a luxury handbag is highly price elastic. So for example, a one percentage price cut leads to a ten percentage increase in its sales. In such a case selling more handbags for a reduced price may lead to higher total revenue for the seller. Taking their merchandise to the mass market at a lower price point may be a good bet.
Alternatively, if sales of an item do not respond as greatly to price changes, then selling fewer but more expensive units would generate greater revenue and could be the better way to go. This price indifference could occur in instances where there is a great degree of brand loyalty, or the price of the item is a tiny proportion of the buyer’s budget.
This is just a small piece of a much larger cost benefit analysis that any luxury brand would need to do before making the decision. In the meantime, there are more options in the market for shoppers!
 The source for this figure is a 2012 article in the Washington Post. See here http://www.washingtonpost.com/business/capitalbusiness/costco-drives-deeper-into-washington-area/2012/01/19/gIQAASr6IQ_story.html.