09/07/2009 05:12 am ET | Updated May 25, 2011

The Party's Over

Fashion, it seems, has gone out of fashion. Companies are reporting record losses for the first half of 2009, several are filing bankruptcy -- the most high profile being the French couture house of Christian Lacroix, and fashion magazines are in a panic over the drop in ad page sales. So Diane von Furstenberg, the president of the Council of Fashion Designers of America, held a summit of sorts in New York last week with leaders of the industry, including Vogue editor Anna Wintour, to rethink Fashion Week, the semi-annual trade-show-like event to present new offerings and drum up hype. Instead, the meeting turned into a strategy session to figure out how to stop plummeting sales and profits during the current economic recession.

There were several conclusions. Von Furstenberg argued that the period between the fashion shows and when the clothes reach the stores was too long and wants to reform the show system. Fashion designer Donna Karan declared that the practice of early delivery to retailers was the problem. Who wants to by a bikini in March or a mink in July? As a result, Karan said, consumers wait until sales to shop, and companies and retailers lose the huge mark-up that equals bigger profits. Wintour suggested following the French model of having a government-fixed day when retailers can start price reductions, but this was quickly shot down as price-fixing and illegal in the United States. "Is that something we can change?" asked Wintour. "We have friends in the White House now!"

Finally, von Furstenberg addressed the elephant in the room: "Everyone had been too greedy," she said, "and everyone thought the party was forever."

Indeed, they were, and they did. During the 1990s, business executives, most with no previous experience in fashion, began to buy up small family businesses and turn them into corporate conglomerates. The executives saw the growth potential in the brands by targeting a new audience: the increasingly wealthy middle market consumer.

The executives "renovated" the houses by hiring media-hyped young designers, spent billions of dollars on deliberately shocking advertising campaigns, dressed celebrities -- some paying six-figure sums to the celebrities to wear the items, introduced fashionable lower-priced logo-covered accessories, rolled out thousands of stores that are as ubiquitous and approachable as Benetton or Gap, opened outlets to sell leftovers at bargain prices, launched e-commerce sites, and ramped up their share of duty-free retailing.

To raise the profit margins that much more, many of the companies quietly began to use lower quality and less costly materials and move their manufacturing to developing nations, where labor is vastly cheaper, and they switched from individual handcraftsmanship to more cost-effective assembly-line production. Most of those brands hid the fact that their products were no longer produced in Italy, France or Britain -- the only countries, executives insisted publicly, that has the "culture" to produce luxury handcraftsmanship. Simultaneously, the companies raised their prices exponentially: the average luxury brand handbag is marked up 10 to 12 times its production cost; clothing as much as 20 times, sometimes more.

Most importantly, they shifted the focus of the advertising from the product itself to the logo stamped on it, thus changing the reason consumers buy fashion, from what it is to what it represents. As a result, the luxury industry exploded -- it grew to a staggering $200 billion a year in sales -- and luxury fashion brand owners and shareholders have gotten staggeringly rich. In 2007, Bernard Arnault, head of Moët Hennessy Louis Vuitton-LVMH, a publicly traded group of more than 50 luxury brands, was named by Forbes to be the seventh richest man in the world.

That's all changed in the last six months. After nearly two decades of getting fleeced, the middle market consumer has wised up and stopped buying. In part, because the recession has curbed unnecessary spending, and consumers rightly see fashion -- particularly luxury fashion -- as ephemeral and unnecessary. But also, consumers have taken a good look at what they are getting -- massed produced clothes and accessories, often shoddily made, for thousands of dollars -- and realized that as the prices have increased, the quality has decreased. "It's junk," Tom Ford told me. "And it's getting junkier all the time."

Greed has killed the fashion industry, just like it killed the automobile industry, the banking industry, the music industry and all the others who are in a panic now and holding summits and asking their "friends in the White House" to fix their problems. When integrity becomes the leading principle in business again, only then will we be able to right our economy, and our lives.

Dana Thomas is the author of Deluxe: How Luxury Lost Its Luster, published by The Penguin Press.