Fashion: If You've Got It, Flaunt It

Karl Lagerfeld is used to being imitated. "Chanel called it flattery," he shrugs. "For me, it's good because it pushes me to things they can't copy." By Chanel, he means Coco, the founder of the label Lagerfeld has headed for 22 years. "They" are spry fashion chains such as Zara and H&M, whose skill at reproducing luxury looks at affordable prices is driving designers to more-difficult-to-emulate extravagance in their ready-to-wear collections. At the recent shows in Milan and Paris, even the most jaded front-row fashionistas leaned forward for a closer look at the swaths of excess. On Chanel's runway, there were tweeds that on closer inspection proved to be feather-light embroidery on tulle; at Dior, there was a flight jacket, loosely inspired by The Aviator, in ruby-red mink trimmed with crocodile, and a trench coat mixing the same exotic materials. "Will we sell the crocodile?" asks Sydney Toledano, Dior's CEO. "Of course. If you are competing based on production and cost, it's tough. If you go with a more unique position, then you can lead. You need to watch the top line, not only the bottom line."

Right now, the worst place to be in the fashion business is in the middle. High-end labels are holding their ground, but sophisticated yet price-conscious clothing chains at the lower end of the market have partly usurped spots once occupied by moderately priced lines trading more on quality than trendiness. And the upstarts' sprightly styles, often pinched from designer labels, are forcing the big brands to rely on craftsmanship and extravagant materials to grab their customers' attention. "What's driving our business is the 'Bang! I'll have it' impulse that only occurs if something is special," says Fendi CEO Michael Burke. "The Fendi customer doesn't need us for simple." Hence the house's new evening bag, a reimagining of last season's big, squashy Spy, so-called because of the secret compartments in the front flap and the handle. For the fall-winter 2005-06 season, Spy can be spotted in a variety of incarnations, each signaling its exclusivity with a different twist on conspicuous expense, like rich purple velvet lined in tulle and trimmed with pearls. And at Fendi's European stores alone, the Spy waiting list is now 100-strong.

Lagerfeld is laying on the luxury too. "Last season we had a material that cost 100 euros [$134] a meter," he says. And that was for ready-to-wear. But he is playing both ends of the market, designing couture and ready-to-wear for Chanel as well as collaborating with H&M, where last fall he brought his cachet to the masses with collections of T shirts, pants, coats, blazers and sequined jackets, some retailing for under $50. "The most inexpensive things can be well designed," he says. "Instead of paying too much money for something not exciting, you should buy two or three things for fun from H&M and, if you have the money, a Chanel jacket." H&M stores reported lines around the block when Lagerfeld's collection arrived.