World has just destroyed any premium value for their 'Made in New Zealand' clothing

Following the fallout from the World Made in New Zealand saga (where the New Zealand fashion label World was caught out selling t-shirts with "Fabriqué en Nouvelle Zélande" labels when those shirts were actually made in Bangladesh and Hong Kong), the New Zealand Herald ran a good story on why we're willing to pay for 'Made in New Zealand':

But why would anyone pay $99 for a T-shirt which, it turned out, was materially no different from one sold for a fraction of that price?

When we pay a premium for retail items it's because the branding for that item convinces us it contains some intangible benefit, says Dr Sommer Kapitan, a senior marketing lecturer at Auckland University of Technology.

"Before we knew there was a question about that brand we had this quirky, artistic premium New Zealand fashion brand."

A World shirt was not just a shirt for someone who values artistry or quirkiness, but an expression of those values, Kapitan said.

And the target market for World and most other designer labels were people willing to pay a premium to stand out.

"I [a designer label fan] might not want to see myself as someone who wears $30 stuff. Whether you can tell or not, I want to know that I wear a $100 T-shirt," Kapitan said.

World's decision to write Made in New Zealand in French on its swing tags was an example of the way brands would use symbolic cues to communicate worth to consumers, Kapitan said.

This story, and the explanation, calls to mind two important (and related) concepts from economics. The first concept is hedonic demand theory (or hedonic pricing, which I have written about earlier here in the context of education). Hedonic pricing recognises that when you buy some (or most?) goods you aren't so much buying a single item but really a bundle of characteristics, and each of those characteristics has value. The value of the whole product is the sum of the value of the characteristics that make it up. In the case of a t-shirt from World, you are not only buying a t-shirt, but you are buying something else. As well as the garment, you are buying: (1) the 'warm glow' feeling that you are supporting New Zealand clothing manufacturers; and/or (2) an image that wearing that t-shirt allows you to project to the world ('Look at me! I'm wearing this t-shirt that was made in New Zealand. Aren't I a great person?'). So, people are willing to pay a premium for a World t-shirt that has a 'Made in New Zealand' tag for one or both of those reasons.

That brings me to the second concept - conspicuous consumption (which I've written about earlier here). People engage in conspicuous consumption as a form of signalling - they want to signal to other people the type of person that they are (or the type of person that they want other people to think they are). A signal is only effective if it has two characteristics: (1) it is costly; and (2) it is costly in a way that makes it unattractive for those with 'low-quality' attributes to attempt (in this case, it would have to be unattractive for people who aren't the type of person who buys New Zealand-made to pretend to be that type of person).

With a $100 World t-shirt (with a 'Made in New Zealand' tag), the first characteristic is assured. There is a premium for the 'Made in New Zealand' label, which makes the t-shirt more expensive than a regular t-shirt made in Bangladesh. What about the second characteristic? Assume that there are two types of people: (1) those who really do buy New Zealand-made because they want to support local industry; and (2) those who buy things with 'Made in New Zealand' labels because they want to be associated the first group, even though they don't feel that strongly about it. The first group is (probably) willing to pay a greater premium for 'Made in New Zealand' than the second group, but this can't be assured. Even if the extra cost of buying 'real New Zealand-made' clothing is high, at least some of the second group will not drop out of the market. The signalling value of 'Made in New Zealand' is therefore pretty weak.

The weakness of the signal (and therefore the conspicuous consumption value) of buying 'Made in New Zealand' is also clear because the 'Made in New Zealand' tag is hidden inside the t-shirt. If you wanted people to know that you are the type of person that buys New Zealand-made, you'd want to project that to the world, which is difficult to do if the tag is hidden. So the only way you could present that signal is therefore to buy from a designer where all of their clothing is New Zealand-made (then you don't have to show the label). And this is where World has clearly gotten things wrong. Any signalling (or faux-signalling, given the weakness of the signal) value is going to be lost from World clothing, now that we know they aren't really selling New Zealand-made t-shirts.

Although, that does still leave the 'warm glow' from buying New Zealand-made. But in order to be willing to pay a premium for the 'warm glow', customers have to believe that the 'Made in New Zealand' tag is credible. And World's credibility has surely taken a huge hit. Why would you believe that their clothing is New Zealand-made based on the tag, when the tag has been shown to be worthless in this case? And this is a seriously weak response from World:

But World co-owner Dame Denise L'Estrange-Corbet told Newstalk ZB tags sewn into the garments said "Made in Bangladesh", and stated they were sourced from AS Colour, so it was not misleading customers.

L'Estrange-Corbet said only a small percentage of her products were manufactured overseas.

She said: "99 per cent of our clothing is made here."

So, if the signalling value (which was limited anyway) of World t-shirts has declined, and the 'warm glow' value has declined due to a loss of credibility, that leaves World in a seriously difficult position.