Luxury and fashion economics: channels, markdowns, and currency
Compare a handbag sold in an own store and through wholesale, see what markdowns do to fast fashion margins, and separate currency effects from real growth.
Industry brief, with a one-minute summary: Luxury and fashionKey takeaways
- The same product can earn very different profit depending on where it is sold and at what price it finally sells.
- Collections are designed 12 to 18 months ahead; icons (permanent best sellers) are made all year.
- Production is often kept in-house or with long-term workshops to protect quality and control volume.
- Stock is allocated to stores by client demand; brands avoid sending too much to any channel that might discount it.
Key idea
The same product can earn very different profit depending on where it is sold and at what price it finally sells. Luxury brands protect the full price; fashion retailers fight to sell before the markdown.
Worked case
One handbag: own store or department store?
The prompt
An illustrative luxury handbag sells for EUR 2,000 (before sales tax) and costs EUR 500 to make. In the brand's own store, store costs (rent, staff, energy) are 30 percent of sales. Through wholesale, the brand sells to a department store at 45 percent of the retail price and spends 5 percent of its wholesale price on selling costs. What does the brand earn per bag in each channel?
The structure
- Contribution per bag by channel
- Own store: retail price minus product cost minus store costs
- Wholesale: wholesale price minus product cost minus selling costs
Working it through
1. Own store
EUR 2,000 minus 500 minus 30 percent of 2,000.
Own-store contribution per bag (EUR):2,000 - 500 - 2,000 × 0.3 = 9002. Wholesale price
45 percent of EUR 2,000.
Wholesale price (EUR):2,000 × 0.45 = 9003. Wholesale contribution
EUR 900 minus 500 minus 5 percent of 900.
Wholesale contribution per bag (EUR):900 - 500 - 900 × 0.05 = 3554. Ratio
Own store compared with wholesale.
Own store to wholesale ratio:900 ÷ 355 = 2.54
The recommendation
The brand should sell through its own stores where demand is strong, because it earns about EUR 900 per bag there against EUR 355 through wholesale, about 2.5 times more. First, own stores keep the full EUR 2,000 price, while wholesale sells at EUR 900. Second, own stores carry fixed rent and staff whether bags sell or not, which means wholesale is a cheaper way to test new cities. The risk is opening stores where demand is too weak to cover those costs. As a next step, test new cities through department stores and open own stores where sales prove strong.
Worked case
What markdowns do to a fast fashion collection
The prompt
An illustrative fashion retailer in Europe buys 10,000 jackets at EUR 10 each and prices them at EUR 40. It sells 60 percent at full price, 30 percent at half price, and the last 10 percent is donated or recycled (EU rules now ban large companies from destroying unsold clothes). What are revenue and gross margin, compared with selling everything at full price?
The structure
- Gross margin = (revenue minus cost of all units bought) / revenue
- Revenue = full-price units x 40 + markdown units x 20
- Cost = 10,000 x EUR 10, including unsold units
Working it through
1. Revenue
6,000 at EUR 40 plus 3,000 at EUR 20.
Revenue (EUR):6,000 × 40 + 3,000 × 20 = 300,0002. Gross margin
Revenue minus EUR 100,000 of cost, as a share of revenue.
Gross margin (percent):(300,000 - 10,000 × 10) ÷ 300,000 × 100 = 66.673. All at full price
10,000 at EUR 40.
Gross margin at full price (percent):(10,000 × 40 - 10,000 × 10) ÷ (10,000 × 40) × 100 = 75
The recommendation
The retailer should buy less upfront and reorder winners during the season, because markdowns and unsold stock cut revenue from a possible EUR 400,000 to EUR 300,000 and gross margin from 75 percent to about 66.7 percent. First, 30 percent of jackets sell at half price and 10 percent earn nothing. Second, unsold clothes cannot be destroyed under EU rules, so overbuying has no cheap exit. The risk is running out of popular items, since reorders need a fast supply chain. As a next step, test smaller first orders on a few lines and track full-price sell-through.
Currency: reported growth versus real growth
Luxury groups report in euros or Swiss francs but sell in yuan, dollars, yen, and dirhams. When those currencies weaken against the euro, reported sales fall even if clients bought the same amount. That is why companies also report growth at constant exchange rates (organic growth). Hermès, for example, reported 2025 revenue growth of 9 percent at constant exchange rates but 5.5 percent at current rates. Price gaps between countries also drive where people shop: when a currency is weak, clients travel there to buy, which helps travel retail and tourist shopping.
Luxury operations and supply chain
- 1Collections are designed 12 to 18 months ahead; icons (permanent best sellers) are made all year.
- 2Production is often kept in-house or with long-term workshops to protect quality and control volume. Scarcity is planned: some products have waiting lists.
- 3Stock is allocated to stores by client demand; brands avoid sending too much to any channel that might discount it.
- 4Unsold stock is handled through staff sales, private sales, or recycling, rarely public discounts. In the EU, large companies can no longer destroy unsold clothes and shoes (from July 2026).
- 5After-sales service and repairs keep the client relationship alive for years.
A luxury brand sold CNY 1,000 million in China in both 2025 and 2026. The exchange rate moved from 7.8 to 8.2 yuan per euro. By what percent did its reported sales in euros change, to one decimal place?
A jewellery brand raises prices 8 percent and sells 2 percent fewer pieces. By what percent does revenue change, to two decimal places?
A fashion brand in India received 12,000 units of a new line and sold 8,400 at full price before the end-of-season sale. What was its full-price sell-through, in percent?
A luxury group reports sales down 3 percent but organic growth of plus 2 percent. What explains the gap?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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