Franchising Dilemma 3: Exclusivity versus Broad Brand Diffusion
The last dilemma that we will consider has to do with the reconciliation of the need to extend the range of high-status products with the need to keep the scarcity that comes with a high-status brand. Let's start with a case study.
The internationalization of a fashion designer's brand
V-Star is a fashion designer brand that was formally founded in 1986 by its main designer George Vallows. His first set of products was "catwalked" in Milan, New York, and Paris with rave reviews. Although many of his initial products had denim as the major fabric, Vallows extended his portfolio in the early 1990s to evening dress for both sexes, and even to designer bath fashions. After his success in the US, Vallows decided, under pressure from domestic market saturation, to go beyond US borders. He bagan wholesaling in Mexico, Canada, and the UK. With the increasing fame that he had gathered, he knew that the brand "V-Star" was the fundamental source of competitive advantage. In order to finance his growth to exploit the international potential of his brand and to build the capability to distribute, Vallows hired Merrill Lynch to help him go public. In 1996 V-Star was floated on the New York Stock Exchange, with Vallows himself retaining a 46 percent share in his company. The injection of capital allowed him to create a network of flagship stores and shops-in-shops within department stores. Before its stock market listing, V-Star did not operate any outlets outside the US and had wholesale arrangements in only four foreign markets. However, within four years of going public, the number of their company-owned stores rose to over 60 in 21 countries, while the number of wholesale markets rose to 40. The company reported that international markets accounted for almost 85 percent of total sales in 1998. This unprecedented growth should be seen in the context of worldwide sales of premium-priced branded clothing, footwear, perfumery, luggage, and other products - valued at $20billion in 1996, up from $16billion in 1992, and with sales of $30 billion in the year 2000.
However the director responsible for international retail operations for V-Star explained how adverse trading reports affected international operations in his company: Change in ownership status and the drive to exploit international opportunities had put what he described as an "unprecedented and intolerable pressure" on many of the companies concerned. With a general recognition that companies, such as Gucci and Donna Karan and V-Star, had entered the stock market with inflated share values and unreasonable performance expectations, it was generally agreed that many fashion houses had to operate under the spotlight of intense media and financial community scrutiny, and that this pressure often had an adverse effect upon international trading. Moreover the fashion market is very well informed. At V-Star the recession that hit the world economy early 2001 prompted an alternative approach so that market share could increase even further.
George Vallows and his management team discussed some alternatives. On the one hand, they could decide to extend the range of products and move into fragrances and other luxury goods to increase revenues in the domestic US and those markets with cultural proximity. On the other hand, the money could be invested to expand further in South America, Eastern Europe, and Southeast Asia. These environments are, however, culturally remote from the domestic market. What do you think they should do?
(You can find out if you were right at the end of the chapter,)
The phases which the international market entry strategy of George Vallows and his company V-Star illustrates are characteristic of the industry. In a very well researched paper Moore, Fernie, and Burt (2000) describe four stages through which an internationalizing retail company quite normally meanders.
In the first stage wholesaling serves as a preliminary method of foreign market entry for fashion designers. Typically selling limited couture collections and ready-to-wear lines to the elite department stores located throughout the world, the internationalizing designers use wholesaling as a low-risk means of generating cash flow, customer loyalty, and market intelligence. Once demand has been established within capital cities and the designer's brand name has become better known within the market, edited versions of the ready-to-wear collections are made available through provincial department stores and other independent fashion retailers. This gives them a base in a market because wholesale is about immediate, focused distribution at low cost. Once this first step has been successfully taken, a second set of activities can be generally observed.
The second stage of market development involves the opening of flagship stores within capital cities. Typically located on premium shopping streets, such as Bond Street in London or Fifth Avenue in New York, these flagship stores have emerged as an important component of the marketing communications strategy of the design houses. Their role and function is vital to the development of the fashion brand's reputation. They are rarely about profit since the costs are very high and the turnovers are modest. But they support the wholesale business by creating allure since they are on the best streets and are beautifully presented. They are key to the marketing communications process.
While the main design houses have sought to maximize the profile of their flagship stores in order to promote their upmarket ready-to-wear collections, the marketing focus of the sector in the past decade has been the development of diffusion ranges. In this third stage of international development, the market expansion strategy adopted has involved the parallel launch of diffusion brands through the opening of diffusion flagships in capital cities, alongside a strategy of maximum brand distribution through wholesale stockists. This third stage is motivated by the recognition that diffusion lines make the designer accessible to the middle retail market, who have money to spend and who want the brand but are not too demanding.
Finally the fourth stage of fashion designers' foreign market expansion focuses upon diffusion ranges. Design houses (such as Armani, Versace, Nicole Farhi, and Donna Karan) have each developed chains of diffusion stores within the major cities of Europe, America, and Asia. And while the flagship stores for their main line, ready-to-wear collections are generally owned and controlled directly by the design house, the majority of diffusion stores within the UK, for example, are operated under franchise agreements. A number of reasons for this approach to foreign market expansion were provided by those design houses involved, not the least of which was the desire to avoid the significant start-up costs and the high levels of risk associated with the management of a national chain of diffusion stores.
It would be virtually impossible for designers to take responsibility for diffusion stores, for most fashion designer houses are relatively small companies and their resources are finite. So they develop a division of labor. Partners run the diffusion chains, and designer companies supply the product and most important of all, create the brand image through advertising, which has a high cost in terms of time and money.
There is a need for the fashion brand to have a clearly defined identity and personality, generated through the images presented as part of their advertising campaigns. Every successful fashion brand is based upon an image. The way that image is made is through advertising. Fashion thrives on advertising; advertising is what creates the identity and the attraction. Flagship stores are often part of a design house's marketing communications activity. While sustaining losses through the operation of many of these stores, the company often charges these against the company communications budget, on the basis that the function of the flagship store is to create awareness and interest, which is ultimately the role of advertising anyway.
In the 1970s fashion designers often chose a product line extension strategy. Companies such as Gucci and Pierre Cardin, through seemingly indiscriminate licensing agreements, allowed their brand name to be associated with a plethora of often non-associated products: by 1980, the Gucci brand was associated with over 22,000 product lines. Such overexposure of the brand has been avoided by those companies that recognize that this undermines the sense of exclusivity and prestige which is fundamental to the image of the fashion design brand. Nevertheless, a tension still remains, in that, through the development of diffusion clothing and lifestyle product ranges, there is the danger that the prestige and allure of the brand is lost whenever the brand becomes more accessible through lower pricing and extension into a variety of product areas.
This tension between the desire to be exclusive, while at the same time maximizing the profit potential of the brand, is perhaps most evident in relation to the fashion houses' distribution policies. As was shown above, many of the retailers have, through the development of extensive wholesale distribution networks, made their brands physically available and economically accessible to an unprecedented number of consumers. This tension has lead some commentators to suggest that the fashion brands that will have longevity will be those, such as Chanel and Dior, which have continued to restrict the availability of their distribution and have also avoided the development of diffusion ranges.
On the one hand, you cannot claim to be exclusive and charge premium prices when you are selling more jeans than, say, Marks & Spencer. The customer catches you out, and American brands in particular have been caught out already. This bubble will burst and the best brands will go back to being exclusive again. Some diffusion stores will certainly close. Exclusivity is not concerned about democracy. It is possible, therefore, to question the longevity of those companies that represent international diffusion store chains.
On the other hand, looking at the demographic trends (discussed earlier in this book) we can see that many young people have chosen to go for designer fashions big time. They are accustomed to diffusion stores and therefore there is a need to diffuse these products on a large scale while still asking for exclusivity.
Levi Strauss has clearly shown what happens if you don't continue to be perceived as a unique, high-status brand. Few young people want to wear Levi's jeans nowadays because they are just too ubiquitous. Reconciliation lies in finding a path where a company seem to be exclusive for all. Brands like Replay, DKNY, and FCUK have done this smartly by combining mass distribution with selective chains and stores. And V-Star decided to go the same way.
Thus franchising across cultures is no longer the one-way export of a single business format, but a continuously looping feedback model that needs constant striving to reconcile the dilemmas which result from cultural differences.