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LVMH, Prada to Replace Luxury Goods with Warrants
April 6, 2014
MILAN--In a move extending last season's alliance between design firms Prada and LVMH, the two announced Monday that significant portions of each of the major lines from the two houses would be replaced this season by warrants for the purchase of designer outfits and furnishings. "It has always been among our deepest convictions that good design should be more widely available," explains LVMH Chief of Initiatives Basil Sprout. "Good design is for the People, for all of the people, and this warrant initiative ensures that great design is within the means of the masses."
The warrants--special certificates entitling the bearer to purchase a specified product at a specified price during a specified season--will be sold at a fraction of the cost of the underlying product, typically between 3% and 7% of the retail price. "The public may not be able to afford to purchase outright a Bobois handbag or a Prada toe-sock," notes Sprout. "But, with our new line of warrants, they can enjoy designer products without all the fuss and expense of owning the base material object."
In addition to expanding the size of the market for high-end designer goods, the warrants are also predicted to cut production costs at both firms. "The Street is bound to recognize the profoundly greater opportunities for scalability in the warrants market," opines SSBPWC analyst Trumpet Graine. "Scale efficiencies are much greater in the production of warrants. While, in general, costs per unit decrease the more handbags you produce, it literally costs almost nothing to produce a new warrant, especially when that warrant isn't really designed to be exercised and hence never requires production of the underlying asset."
Beyond anticipated savings in production costs, the two houses point to the space-saving convenience of owning warrants rather than storage-hogging pants suits and propylene couches. "Besides budget constraints, many of our clients, and potential clients, are space constrained," explains LVMH's Sprout. "You can only fit so many Diesel armchairs in that loft apartment. How many Sander suits can fit in that closet? Well, warrants don't take up any space! They offer the leverage to fit 10, 20, even 30 DK armoires into your bedroom! Luxury!"
Experts point to the warrants as an ideal solution to two challenges facing the industry: "On the one hand increasing income disparities have been eroding the market for elite luxury goods for years, forcing houses to raise prices dramatically just to maintain brand exclusivity," explains Graine. "On the other hand, lowering prices and expanding production dilutes the value of the brands. If you see every Tom, Dick, and Harry wearing that designer watch, it loses its cachet."
Because sale of the proposed warrants does not involve increased production of the underlying goods, the firms expect to gain the revenue benefits of a broader, near mass-market without the deleterious effects of brand dilution. "That's the genius of the warrants," exclaims Graine. "Market-saturating sales without market saturation!"
The initial run of warrants is to include $5,500 warrants for Fall '14 Prada loafers, and a series of subscriber warrants priced between $3,000 and $47,000 covering Fall reissues of classic Gucci bags and wallets. Offered through the firms' traditional outlets, including company stores, independent boutiques, and specialty counters in select department stores, the warrants will also be available on a trial basis in special register-side displays at Circle K and Dean & Deluca convenience stores.
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