Weddings, Dresses and Diamonds

What is the value of a wedding dress?

In most stores, it is several thousand dollars. H&M, the global Swedish retailer, on the other hand, says it should be worth $99.

Clearly H&M is using a lower quality fabric, since the article cited above quotes fabric cost of $500, and we can be fairly certain H&M is not selling the dresses at negative 80% gross margins. It is also using mass manufacturing - which doesn't necessarily mean lower quality; when is the last time bought bespoke jeans or T shirts? - to reduce the usual $700 of labour costs down to a few dollars.

Even with the much higher unit costs of $1,200 for a "traditional" dress, with a retail price of thousands of dollars, the markup is roughly 200%!

1. What is it that enables a store to sell an item at 200% markup?
2. Even at cost, what is it that drives someone to spend $1,200 on an item of clothing worn for exactly one day?

One could ask similar questions about diamonds. Diamonds are extremely valuable... in industry. There is no naturally-forming material that compares with the hardness and precision of a diamond for many tasks.

Yet, as an adornment, it is very small, very expensive, and has very high markup. Walk the Diamond District on 47th St in New York City. You will see many people moving, but each shop has few customers in at any given moment. Given the low annual transactional volume and high income of many of the dealers, the markups clearly are significant.

As always, when regulation hasn't constrained a market, high prices and gross margins are a sign of demand outstripping supply. Two effects coincide in this market.

First, as long as few retailers are perceived to have the expertise to offer the "perfect" wedding dress, demand for those experts will drive prices upwards. Customer perception drives the concentration towards experts.

Second, not many wedding dresses are sold each year. While men buy or rent tuxedos regularly, and thus everyone from a custom tailor to Men's Wearhouse can sell them, women buy a wedding dress once, perhaps twice in their lives. With much lower volume than men's suits, the contribution margin on each unit sold has to be much higher for a store to break even, let alone make a profit. A store that sells only one dress per business day (and that is a lot), or 250 per year, will not be able to survive with $100-200 of gross margin on each dress. It needs to cover salaries, rent, utilities, taxes, marketing, insurance and all of the other usual costs of doing business.

So who can offer wedding dresses at much lower markup? Only retailers that can do one of two things:

• Sell many more wedding dresses. Unfortunately, in the geographic market of most wedding dress retailers, there simply are not enough weddings to go around. A store that is willing to make only $200 gross margin on each dress instead of $2,000 will need to sell 10 times as many dresses.
• Sell wedding dresses as one part of a larger inventory. In other words, a non-specialty clothing store, e.g. H&M.

H&M is gambling (although they likely have serious market research behind it), that the contrast in price is so severe - $99 vs $3,000 - that sufficient numbers of women will say, "I want a perfect dress, I would even pay a few hundred more for it, but $2,900+? No way! I will take the $99 dress, add $100 in tailoring and $100 in accessories and put money in my pocket." After all, they will wear the dress exactly once.

Could H&M do it for $1,500 per dress? Use the same materials and workmanship as specialty stores, but with much lower gross margins? They could, but they would miss the market. H&M understands that once you are spending $1,500, most women who afford to spend double that to get "perfection" for "that perfect day," will do. A wedding dress, after all, is an emotionally laden purchase.

H&M needs to create such a stark contrast - barely 3% of the price - that it breaks the perception that a $3,000 dress is really worth it.

Key takeaway: if you want to break into a very high margin business by offering somewhat lower quality for lower prices, you can. But you have to create a shock, a break in price so great that the existing providers look absurd by contrast.

What about diamonds? Next time.