How a sense of fineness can lead Prada to a bright future

Things are said to be looking gloomy for the Italian fashion house, but Miuccia Prada, the youngest granddaughter of Mario Prada and creative head of Prada and Miu Miu is convinced that the company is only going through momentary dip. The price of Prada's stock has been decreasing immensely over the past year, dropping from 44 Hong Kong dollars per share to 25.95 HK dollars per share on December 7, the lowest share price in history and certainly cause for many to ring the alarm bells. The brand's market value also dropped down to 8.9 billion euros as of December 8, down from 10.6 billion euros by the end of August (16 percent decrease in 3 months). And although Prada posted a sales increase of 4.1 percent in its first half year report for 2015, the company lost sales in its home market as well as its Asia-Pacific region.

FashionUnited investigates whether things have really taken a turn for the worst at Prada, or if the brand just going through a temporary impasse.

Why Prada shares hit an all time low

Two reasons can be attributed to Prada share drop. One, the most significant, is that the company's profits are much lower than the previous years. For the first half of 2015, the company reported a profit of 285.7 million euros, which is a vast difference from its 364.1 million euro profit for the same period last year This means that company profit decreased 21.6 percent, with earnings per share dropping 23 percent. Compared to the group's total sales, total profits have decreased to 15.7 percent of the total sales, down from 20.8 percent in 2014.

Secondly, forecasts for Prada's third quarter results, set to be unveiled on December 15th, remain bleak. The main factor behind this outlook can be linked to the financial distress taking place in the Asia-Pacific region, as affluent consumers continue to shop abroad for luxury European brands. In addition, Prada's firm decision to hold steadfast to its exclusivity and brand image, whilst other luxury brands such as Balenciaga, Dior and Lanvin have gone through major transformations this year, spurred by Prada's arch rival Gucci, means that Prada is losing much of its clientèle to its competition.

According to the company's predictions, Prada Group total sales are set to grow by a mere 0.5 percent in 2015. Sales for Europe are likely to decline 2 percent and 2.5 percent in Asia-Pacific, with sales for other countries decreasing 16 percent compared to 2014. Sales for the Prada brand are set to drop 2 percent, with leather goods declining 3 percent. Unfortunately for the company these negative sales trends are likely to continue on towards 2016, if no changes are made in regards to their product line and way of working. It can be said with certainty however, that sales in the Asia Pacific region will continue to decline, even if the group introduces large changes. Sales in this area will probably decrease another 2.5 percent in 2016 and 2 percent in 2017 due to a lack of demand.

Can Prada turn things around, without joining in on the change revolution?

With nearly every luxury fashion label on the market making some sort of change to its brand this year, Prada sticks out by standing by its old morals and ideals. As the company is controlled by Miuccia Prada and Patrizio Bertelli, group CEO, a change in management is unlikely to happen, as is any change to the brand's pricing scheme. "Prada is by far the most expensive of the mega brands," said Luca Solca, a luxury-goods analyst at Paris’s Exane BNP Paribas in a recent interview with the Wall Street Journal. "I’d like to see more canvas and nylon. The name of the game is not to be exclusive, but to appear exclusive."

However, in spite of Solca's opinion, the creative head at Prada remains firmly rooted with her vision of the brand. "Python is the new cotton," she reportedly proclaimed after Prada's recent show. "There’s always a lot of irony in my work," she added, for those still unsure of the brand's future, that she was indeed referring to real python skins. Known for going against the grain, the fact that many luxury brands are working with cheaper fabrics could actually help Prada boost it's exclusivity image. For example, if the company uses its production method and use of premium materials as a marketing tactic, it will be able to own its rights to exclusivity so to speak and reinforce its image in the consumer's mindset, in the same way Hermes does with its handmade handbags.

Prada could also boost its waning popularity amongst today's hot consumers, namely millennials, by becoming more transparent about the brand's supply chain and manufacturing. Although, Mrs. Prada revealed that she may explore options to make her designs bolder and more eye-catching on the outside, by updating Prada's image in a wider sense, such as perhaps making the collection more current and adding in new items which could be linked to its cruise collections, Prada will be able to reach a larger audience of potential customers.

What the future may bring for Prada

Prada Group remains very volatile to market changes, which means that its shareholders are rather sensitive and very alert to any shifts in the stock market. This in turn influences both their trust in the company and share price. Therefore every change made to the company and to Prada, and every new product line Prada releases will be reflected in their share price.

By taking the company's 2015 predictions into consideration and combining this with Prada's vision to move the brand forward without joining the luxury 'change revolution', and the managements team awareness that changes do need to be made, FashionUnited is able to predict a future trajectory for Prada Group to January 2018. This company forecast can be extended to apply to the years ahead, but only if the company proves it can handle the continuous growth. If not, then it is likely Prada's stock price will fall again after three years of growth.

Prada’s refined and exclusive image

Prada's brand image is too strong when it comes to morals and vision to change the materials used or pricing scheme. According to Miuccia Prada, there are enough wealthy people in the world who are able to afford Prada and will continue to buy the brand. Nevertheless in order to remain attractive to the new generation of wealthy, Prada will have to make some changes. Although this does not necessarily mean making any drastic changes or becoming more 'granny chic', it does imply that Prada will have to ensure that consumers in search of a more exclusive brand will think of them first. The quality of garments, accessories and footwear and materials used for them are of vital importance for luxury brands looking to position themselves in the highest end of the market.

Another important aspect to keep in mind is sustainability and transparency in the supply chain, as these are areas of vital interest for well-positioned potential customers. The fact that Prada's leather comes from actual pythons can be seen as a positive point. However these future consumers will want to know exactly where the leather comes from, how the pythons are handled and in what state they are kept in. Following the example of luxury conglomerate Kering, who has made a public stand against the illegal trade of python skins could help boost Prada's ethical and sustainable credentials with millennials.

By showcasing its exclusivity and the origins of its materials, the company will not have to make any big changes to the overall style of the brand, but these steps will improve Prada's perception amongst consumers and elevate the brand at the same time. With these type of marketing, Prada will still remain appealing to its current customers but also be able to speak to new customers who are drawn into the new, distinguished style of the brand. In addition, Prada has the unique quality of being able to continuously keep its consumer pleased by delivering in both quality and refined style.

The appeal of Prada’s ready-to wear, footwear and leather goods range

Although both apparel and footwear are important to Prada, the brand is focusing more on its leather goods and footwear range over its ready-to-wear range. However, as the brand strives for perfection in all areas, FashionUnited predicts that the company will continue to create refined and current ready-to-wear collections that will match its leather goods range. Prada is also likely to start developing its footwear collections around its leather goods. As Prada's clothing line growth remained below average in 2014, if the brand makes the needed changes, then FashionUnited predicts these sales will grow on average 7 percent in 2016. By 2018, clothing sales could be slightly higher than average, at 9.1 percent.

Prada's sales of leather goods has been declining over the past years, but will recuperate as the Prada brand will do so as well. The largest part of the leather goods sales from Prada will continue to come from Prada’s classic range. These will continue to shine, because of the addition of some matching items made from different, yet still exclusive, materials. In order to boost the sales even more, Prada could work with limited edition products, which would bolster the brand's exclusive image again. Therefore the sales of Prada's leather goods are most likely set to start picking up again in 2016, albeit at a slower pace than the brand's other product lines, growing 4.6 percent next year and 8.5 percent by 2017.

If Prada implements all these suggestions, FashionUnited foresees the brand's total sales to start improving again in 2016 and growing in 2017. Brand sales are predicted to grow from an expected 2.8 billion euros in 2015 to 3 billion euros by 2017, a brighter future for the refined brand indeed.

Illustration Credit: Studio Iva (IGM: studio_iva)

This is the thirteenth episode of a new series based on FashionUnited's unique business intelligence Top 100 Index. Stay tuned next week's episode on December 18, which focuses on Next.