How luxury and fashion make money
Luxury versus mass fashion, the value chain and channels (stores, wholesale, travel retail, franchise partners), and approximate cost structures.
Industry brief, with a one-minute summary: Luxury and fashionFirm processes and online tests change from year to year and differ by office. Use this to prepare, and confirm the exact current steps on the firm's own careers page.
Key takeaways
- A luxury brand sells scarcity and desire, not just a product. Its prices are set far above the cost of making the item, and it protects those prices by controlling where and how the item is sold.
- Organic growth (or growth at constant exchange rates): sales growth without the effect of currency moves and acquisitions.
- Like-for-like store growth and sales per store.
- Channel mix: share of sales from own stores, wholesale, online, and travel retail.
Key idea
A luxury brand sells scarcity and desire, not just a product. Its prices are set far above the cost of making the item, and it protects those prices by controlling where and how the item is sold.
Personal luxury goods include leather goods (handbags), clothing, shoes, jewellery, watches, and premium beauty. Experiential luxury includes high-end hotels, travel, and dining. Mass fashion (including fast fashion such as Inditex's Zara, H&M, and Shein) sells trendy clothes at low prices and wins on speed and volume, not scarcity. Pricing power means the ability to raise prices without losing many buyers. The strongest luxury brands raise prices most years and still sell out of some products.
- From design to client
- Key: Design and brandCreative director, collections, marketing, events, celebrity partners
- MakingOften in own workshops or close partners in France, Italy, and Switzerland; control of quality and supply
- Key: Channels
- Directly operated stores (DOS): the brand runs its own shops and keeps the full price
- Wholesale: department stores and multi-brand shops buy stock and resell it
- E-commerce: the brand's own site or partner platforms
- Travel retail: duty-free shops in airports, cruise ports, and Hainan in China
- Franchise and joint-venture partners, common in the Gulf, such as Chalhoub Group
- Client relationshipSales associates who know each client, private events, repairs and after-sales
| Line | Leading luxury house (approximate) | Fast fashion retailer (approximate) |
|---|---|---|
| Cost of goods sold | 20 to 35 percent | 40 to 50 percent |
| Gross margin | 65 to 80 percent (2025: LVMH 66, Hermès about 71, Prada about 80) | 50 to 60 percent (2025: Inditex 58, H&M 53) |
| Store costs (rent and staff) | 20 to 25 percent | 20 to 30 percent |
| Marketing and communication | 8 to 12 percent | 2 to 5 percent |
| General and administrative | 5 to 8 percent | 5 to 8 percent |
| Operating margin | 20 to 40 percent for the strongest brands | 8 to 20 percent for strong players (2025: H&M about 8, Inditex about 20) |
So-what
Luxury profit depends on price and brand heat; fast fashion profit depends on speed, volume, and selling at full price.
Key metrics
- Organic growth (or growth at constant exchange rates): sales growth without the effect of currency moves and acquisitions.
- Like-for-like store growth and sales per store.
- Channel mix: share of sales from own stores, wholesale, online, and travel retail.
- Full-price sell-through: the share of stock sold before any markdown.
- Markdown rate: the discount given to clear stock, as a share of full-price value.
- Client metrics: number of active clients, spend per client, share from top clients.
Why do luxury brands move from wholesale toward their own stores?
Sources for this lesson (6)
- Recognized public explanations of case-interview concepts and frameworks
- LVMH: key financial figures 2025, including gross margin
- World Footwear: Prada Group full-year 2025 results (2026)
- Hermès International: 2025 full-year results (February 2026)
- Inditex: FY2025 results, 1 February 2025 to 31 January 2026 (March 2026)
- H&M Group: full-year report 2025 (January 2026)
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