(topcatny @ 22 Dec. 2004, 1:16) I will try and explain the cost issue. Â Wholesale cost is the cost to stores, but not to the manufacturer, which in this case is actually the same company. For a Polo suit that is $1000 at retail and sold to Saks Fifth Avenue, the most Saks paid for it was $500, the wholesale price. Â Since Polo doesn't actually produce the goods themselves, they had to get a factory to produce it for them. Â So they designed the suit and Corneliani produced it for them and they more than likely paid them about $250 for it. Â Then Polo sells the goods at the wholesale price to their accounts In my experience with different brands the retail stores operate as a separate entity within the company and the goods are actually sold from the wholesale division to the retail division and in the process go through a similar markup as if they were sold to an outside company. The actual cost for Polo to produce a suit was about $250 and their retail stores are selling it for $1000, the same price as a department store would be selling it for. Â If you find the same item in a full price Ralph Lauren store and Saks, i'll bet they have the same retail price.
So if Saks buys the suits directly from Corneliani under Saks' private label, will it cost Saks the same $250 as it costs Polo? Â In that case, Saks is selling the suit at 4 times its cost?
Doubling the cost to arrive at the price at the next level is starting to distort the example. Let's take a closer look at how a Polo suit (made by Corneliani) makes its way to a Polo shop and to Saks'. Polo buys the fabrics for its suits and creates the patterns for its suit, relieving Corneliani of those two expenses. Using Polo's cloth, patterns, and specifications, Corneliani makes (cuts, makes, and trims) the suits. Except for manufacturing defects or damage causing the loss of cloth, Corneliani's responsibility (liability) for the suits ceases when Polo inspects them and accepts delivery. Now Polo owns the suits. If Corneliani manufactures a suit that it plans to sell under its own label to, for instance, Saks', Corneliani would accept the risk of buying excess cloth. That is, Saks' order may require 4.4 pieces of cloth. Corneliani must buy five pieces, and has .6 piece left after completing Saks' order. To cover that eventuality, Corneliani prices its own suits with some mark-up built into the price of the cloth. (This premium on the cloth is not carried out piecemeal, but over all production for a season. Corneliani's price list for its customers, after all, must be complete before the first store places an order.) There are other risks Corneliani must accept (and pay for) in the course of manufacturing its own line that Polo accepts when it uses Corneliani as its maker. Corneliani accepts the risk of extending credit to its customers. Every year, a certain number of stores go bankrupt or are otherwise unable to pay their bills. When Polo sells the suit, bad credit is Polo's problem, not Corneliani's. Corneliani's customer, Polo, has a good history of paying its bills. When large accounts find themselves with large numbers of Corneliani suits on the racks come sale time, the large accounts are likely to ask Corneliani to "help them out" of some of the excess inventory. Maybe Corneliani will offer to credit 25% of the cost of the remaining suits on the big store's next order so the big store can afford to mark them down further without losing margin. Corneliani planned for that eventuality by building the cost of the refund into all the suits it sold to all its accounts. Again, Polo would accept that risk on the suits it buys from Corneliani to sell under the Polo label. That's how (and why) Polo can afford to buy suits made by Corneliani to sell under its own name at a similar cost. Polo pays Corneliani only for the cut-make-trim services Corneliani provides. Corneliani, of course, prices those services to make a profit. But it does not charge for the risks that it does not take, risks that Polo accepts for itself. Corneliani, with all its experience and technology, can probably make a suit (and a profit) for less than a Polo-owned factory could.