Chanel Sold-Out Dresses Show That Scarcity Counts

When Chanel SAS stocked boutiques in November with its latest range of 4,000-euro ($5,380) dresses and 3,200-euro quilted handbags for winter getaways to places such as St. Barts, the company wasn’t sure how consumers would react.

“We were a bit skeptical about the global environment,” said Bruno Pavlovksy, who heads closely held Chanel’s fashion division. Two months later, “more or less everything is sold out. It was quite a surprise.”

Chanel, owned by France’s Wertheimer brothers, is surpassing its own expectations as rivals from bag maker Coach Inc. to Cartier-owner Cie. Financiere Richemont SA report flagging sales that disappoint investors. Burberry Group Plc, the U.K.’s largest luxury-goods maker, said this month that fewer clients are visiting stores, while Chinese and Brazilians on whom brands increasingly rely for growth are becoming harder to please, according to men’s clothier Ermenegildo Zegna SpA.

Strong demand for Paris-based Chanel’s collections and those of Hermes International SCA shows that consumers are still splurging at the top end of the 212 billion-euro market for personal luxury goods even as the industry faces its weakest growth this year since the global financial crisis. Chanel’s products range from 30-euro lipstick to 25,000-euro embroidered coats to compete in the so-called absolute luxury segment, which Bain & Co. predicts will grow the fastest until at least 2014.

“When you get the right product, everything is going very quickly, perhaps more quickly than what we have seen in the past,” Pavlovsky said in an interview last week in his office, a short walk from where Chanel opened its first store in Paris. Fragrance and watch sales are “doing very well,” he said.

Coveted Coco

Chanel has developed into one of the most coveted labels since it was founded more than a century ago by French designer Gabrielle Chanel, known as Coco. At $6.68 billion, the maker of the No. 5 perfume and tweed jacket-and-skirt-suit is the world’s fourth most-valuable luxury brand after Louis Vuitton, Hermes and Rolex, Millward Brown Optimor estimated in its 2012 BrandZ study. Chanel doesn’t disclose sales.

The company’s apparent success owes much to how it has managed its image, according to Luca Solca, head of luxury-goods research at Exane BNP Paribas in London.

While Chanel has established a “high position” in apparel and leather goods, it gets the bulk of its 6.5 billion euros of retail equivalent sales from high-margin fragrances and cosmetics, estimates Solca. That allows Chanel to be generous when building its brand, he said.

’Media Muscle’

“They have a huge muscle, given scale, in communication,” said Solca. “Their brand deployment has been spotless.”

Chanel generated hundreds of millions of dollars in free advertising after last year’s hiring of actor Brad Pitt as the face of its No. 5 fragrance earned commentary in the media, Jessica Matthias, an account director at PR consultant Wordville Ltd., estimated in October.

Once the mainstay of Chanel’s business, haute couture -- custom-made clothes such as the white gown worn by “Les Miserables” star Anne Hathaway at the 2013 Golden Globe Awards -- now accounts for only a small part of revenue, according to Pavlovksy. Yet it remains key to the company’s image, he said, calling it “a creative poster.”

Before the global financial crisis, couture customers who can pay as much as 40,000 euros for a short dress came mainly from Europe and the U.S. with a few from the Middle East, Pavlovksy said. Demand is increasing in China and Japan so much that Chanel couturiers now visit both countries twice a year, he said. Chanel is the most desired luxury label by Chinese women, according to a December study by Bain.

Karl Lagerfeld

The onset of fast-fashion retailers like the Inditex SA- owned Zara has caused luxury houses also to be more nimble in changing their products. Karl Lagerfeld, who was named artistic director in 1983, designs eight Chanel clothing collections annually, including couture, each of which takes four to six weeks to develop, said Pavlovksy. Ready-to-wear ranges are in store for only two months, he said.

“If you want to be considered a fashion actor, you have to be quite agile,” said the executive, adding that stock rotation is key to keeping clients interested. “The level of expectation from our customers has become much higher than in the past.”

Where Chanel differs from many of its peers is in how it distributes products. The company doesn’t sell clothing and accessories online as it detracts from the in-store experience which includes sartorial advice and alterations, said Pavlovksy.

Selling Online

“Fashion is about clothing, and clothing you need to see, to feel, to understand,” he said. Digital initiatives such as online magazine Chanel News are “more to bring the customers to the boutique than to sell instead of the boutique.”

Still, that may change as customer shopping habits evolve and technology advances sufficiently, said Pavlovsky.

“It’s not because it’s manageable today that it will be manageable tomorrow,” he said of not distributing clothing and accessories via the Web. “If, at the end of the day, our customers are happier, it’s fine. If not, it’ll be a mistake.”

Chanel currently only sells fragrances and other beauty products online.

The close attention to managing exclusivity extends to the company’s retail network, which is much smaller than those of Vuitton, owned by LVMH Moet Hennessy Louis Vuitton SA, or PPR SA-owned Gucci, according to Pavlovsky, who declined to disclose Chanel’s store count. Vuitton has 472 outlets, while Gucci has 421 points of sale, according to Solca.

“We don’t like big boutiques,” Pavlovksy said. “We don’t like too many boutiques.”

Even so, Chanel is expanding in China, Brazil, Dubai and St. Petersburg, Russia as demand grows, the executive said.

“We have to find the right balance for our customers” between availability and scarcity, he said. “What they want is to feel unique.”

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