According to an article featured on Jing Daily, Mulberry (MUL:LN) has announced that “customers – no matter where they shop in the world – will pay the same price”.
For decades now, geographic arbitrage has played an important role in the profit margins of luxury brands and has enabled those businesses operating in the grey market to set up significant arbitrage opportunities for themselves. What this entails is them purchasing in Europe at lower price tags and then reselling in China, where they offer merchandise at local, competitive prices, and still manage to grab a big piece of the pie.
However, a novel strategy is being introduced, and Mulberry is one of the first luxury fashion companies to opt for this route.
What are the implications of a global price alignment?
- Grey market operators will no longer have the upper hand. They will be cut off, and their orders will be reduced to zero. Wholesale volume will decrease proportionately, leaving only genuine wholesalers on the market.
- Decreased availability on multi-brand markets, as a result of the elimination of the grey market operators, will increase direct-to-consumer business, and related higher margins for Mulberry.
- Legit wholesalers are more likely to respect recommended retail prices, as their margin is reduced. This will boost the attractiveness of the direct-to-consumer (DTC) channel (especially online).
What does this mean in terms of constant market demand?
In short: negative impact on wholesale volumes (with lower margins), higher sales on the DTC channel with higher margins (retail margin) BUT at lower price points. According to our alternative dataset, Raw Price Stream, we calculated that the price drop in the USA will be in the 5-8% range, while the price decrease in China will be in the 15-25% range. This is positive, as it could help reduce prices (in a post COVID-19 world) without brands having to discount: in the case of Mulberry, there would be a 20% reduction on Mulberry bags as a result of price alignment, and customers will likely welcome the move.
The chart below shows the current price gaps registered for the same product across different geographic locations:
