Recycling luxe raw materials

Every supply chain has waste reduction and recycling as a major area of focus. The recycling of finished goods returns, either due to end of life or due to dissatisfaction with the product has been well established with sophisticated returns and reverse logistics value chains in place. However in this blog post we will look at how waste raw material is managed. Raw material or Work in Progress (WIP) stocks are generally marked out for removal due to:

·         End of life or obsolete items

·         Non-moving stock which has to make way for newer fast moving inventory

·         Waste generated from the manufacturing process (left over pieces or by-products of the process which are not required in the end-product)

The methods used to manage this waste are similar to that of finished goods and in order of priority are:

·         Reduce the production of waste: Either by better manufacturing processes (eg. Make the leather cut outs for handbags designed to cover maximum area of the leather swathe through software programs) or simply better inventory management (again maybe through the use of demand and supply forecasting tools and technologies – inventory optimization software such as MEIO or Multi-Echelon Inventory Optimization tools such as SmartOpps, Toolsgroup, etc. are becoming increasingly popular in the luxury goods manufacturing process)

·         Re-Use: By ensuring raw material is utilized across product ranges, the reuse %s can be increased and obsolete inventory reduced. Delayed production and mass customization are some of the strategies which are used to increase re-use of material

·         Recover: Either recover raw material through refurbishment of the material or recover energy from the product. Luxury goods industries regularly refurbish material or use raw material to convert to energy

·         Dispose: the last option will always be the landfill and luxury goods supply chain is more prone to use this option to ensure the twin ideals of SCMluxe – Quality and Brand image are not sacrificed at the altar of frugality

 

Recycled leather at petit h

The house of Hermes has bucked this trend and come up with an interesting alternative to the above – in the creation of the Petit h atelier. The basic premise of Petit h is to create beautiful objects (just as desirables as Hermes products) out of the waste and leftovers of its parent company/ateliers or in its own words “The Petit h project sees discarded Hermès materials 'upcycled' into new objects of desire, building on the Japanese concept of wabi-sabi – were imperfections of nature are viewed as assets of beauty”. Pascale Mussard (a sixth generation member of the Hermes founding family) starts off by inviting artists to the Petit h workshop at Pantin (Paris) where all Hermes discarded products are piled up for the artists to indulge their creative spirits. The outcomes are as diverse as porcelain cups are refashioned into light fittings, mirrors finished with silk ties, crystal bowls becoming lamp shades and leather scraps (from Birkin bags?) forming patterns on blouses. Thus typical Hermes waste such as discarded animal skins from the "Kelly" and "Birkin" bags, other leather wear, and various elements, such as handles, hardware, and discarded ceramics, are being recycled into highly desirable products for sale under the Petit h metier.

Flying high - luxury sales at airport duty free outlets

Harrods at Heathrow

Luxury sales are flying high at most airport duty free outlets…but are these at the cost of margins? The short answer is “No”. The costs of maintaining airport outlets are usually set off by the savings in allied costs. Heathrow for instance charges nominal rent but takes a percentage of revenue generated at its outlets - with 70 million well-heeled passengers passing through every year with cash and time to spare, it’s betting big on its ability to drive sales. This is borne out by the staggering GBP 2,782 it generates in sales per every square foot of retail area. Compared with the GBP 1000 that Harrods generates at its Knightsbridge Store in Central London, this confidence in its ability to convert footfalls to sales is well justified. It works perfectly well for the retailers as well – most luxury outlets in major cities would need to fork out big money to keep up the high levels of security and store fronts 24/7. Security and round the clock store timings are far easier to achieve in a highly secure airport setting and yet achieve high average spends per shopper (average of GBP 38 per shopper at Heathrow)

Besides being able to attract busy travelers with money but no time and last minute shoppers, airport outlets provides two major benefits to luxury retailers over the high street:
1. Access to an international clientele – from BRICS and other emerging economies who might not regularly be able to shop at European high streets but can still say “I bought this in Europe”
2. Avoid issues with excess baggage, packing and security for items like premium wines, jewelry and food (Paris CDG offers special travel packaging for their more “smelly” cheeses)
All of the above are contributing to sales at airport outlets growing at 14% p.a while high street sales are struggling to achieve single digit growth rates

Luxottica...an eye for vertical integration

Luxottica HQ in Italy

While the debate on disbursed supply chain and contract manufacturers rages on...a small lux company from Italy has emerged as the champion of vertical integration and retaining key SCMluxe elements in-house. Luxottica is a $8billion eyewear company almost monopolising the eyewear market with a 80% market share. What is interesting about Luxottica apart from its impressive market share and growth rates of about 20% yoy is that it retains full control over the supply chain of its iconic in-house brands like Ray-Ban, Oakleys and Vogue and licensed ones like Burberry, Chanel, Dolce & Gabbana and others.  It has retained production in-house with six manufacturing facilities in Italy, as well as one plant in the United States and Brazil, and two in China. The China facilities again cater to the exploding Asian markets. Distribution is also kept in-house with 2 distinct segments - wholesale and Retail. In the Wholesale distribution segment the Company's products are mostly retailers of mid- to premium-priced eyewear, such as independent opticians, optical retail chains, speciality sun retailers and duty-free shops and are sold under the brand Oakley. The retail distribution operations are carried out through such brands as LensCrafters, Pearle Vision, OPSM and Sunglasses Hut and is again a prominent landmark in most duty free sections of airports. Obviously this strategy has helped Luxottica rake up business and keep the growth engine well-oiled (20% growth expected this year). But will it lead to improved perceptions amongst customers and brand equity or will the entire eyewear market be seen as a luxottica world with no differentiation?

Fake or Counterfeit - Whats the difference?

Both fakes and counterfeits are a huge concern in the luxury industry, but is there a difference between them? Yes, and knowing the difference can make a huge difference to how a lux company would deal with the problem at hand.

Fake: These are products which have the brand name on it but no attempt is made to hide that it is not the "real thing". Either the product is not a part of the lux brand (say a Rolex perfume or suit) or is made with a different design or made with such inferior raw materials that customers are in no doubt to the product being not the real McCoy. Fakes are also sold as such very openly to customers in designated markets (albeit shady ones) as a fake or replica at a much lower price. Customers go to these markets with the intention of buying a fake.

Counterfeit: These are products that are made and sold as the genuine product on unsuspecting customers. The product quality is maintained (mostly) and sold in regular lux retail outlets. The price is also not discounted as in Fakes. The customer also has no knowledge that the product is not geneuine.


A market of Fake Chanel bags

Obviously for the luxury industry, the overiding concern are the counterfeits. Lux industry is generally not too concerned with fakes since sales are generally not lost due to it. Customers who buy fakes have no intention of buying the real product and are not the lux industry's customer base. But every counterfeit sold is a direct hit on the lux company's topline and a blow to customer satisfaction in the long run due to inferior material or lack of branding due to loss of exclusivity caused by flooding of the market. Lux company's now take counterfeiting seriously and have taken several measures to put a stop to it. Since counterfeiting involves a larger and more sophisticated facilities for manufacture, the industry is teeming up with local governments to tackle the same.


The new Chanel store

On an interesting side note, Michele Norsa, the CEO of Ferragamo states that the Chinese customers are the most astutue customers when coming to identifying counterfeits. The level of awareness and much more than American customers. The average Chinese consumer typically investigates each purchase and takes an informed buying decision  only after being completely satisfied with the genueiness of the product.