Archive for the ‘Luxury Goods’ Tag

Luxury Goods: Where is the Runway Headed?

Few industries face more uncertainty over the next couple of years than the $225B luxury goods business.  This recession has pummeled luxury sectors – designer apparel, exotic cars, watches & jewelry etc – with some brands recording 30% revenue declines. Increasingly, consumers have become more fickle and demanding as they have become more globally fragmented.   With many pundits forecasting a slow and uneven economic recovery, and in some cases a permanent retreat in consumer demand (at least in North America and Europe), the industry faces some major challenges.  Over the next year, how can luxury firms rebuild revenues, profits and brand equity?

Remain true to your brand essence

Luxury franchises must stick to their knitting if they want to survive and prosper. Major global brands such as Louis Vuitton, Hermes and Mercedes have demonstrated that luxury brands can grow during recessions by maintaining an emphasis on core values like quality, exclusivity and image. Firms should be very careful before they reduce investment and focus on design, marketing and merchandising.  Companies should also resist the temptation of short-term, volume-driven revenue expansion by rashly shifting core brands laterally or down market.  For one thing, strong core brands can provide a powerful halo over secondary or mid-tier brands within the same corporate portfolio. Also, the decline of Pierre Cardin in the 1980s still serves as an example of how to ruin a premium brand by repositioning it downward through excessive licensing and over-distribution.

Tailor offering to key segments

New market realities require a two-pronged strategy tailored to the challenges of each major consumer segment.  Firstly, brands need to reengage with aspirational, middle-income buyers who during good times emerged as the major drivers (between 60-70%) of revenue. The recession saw a significant decline in demand from this group with many buyers likely never to return to the sector.  Reacquiring aspirationals will be difficult given a newfound caution rooted in employment anxiety and high levels of personal debt.  Firms will need to refine their marketing tactics and products mixes to improve perceived value, while avoiding marquee brand cannibalization and dangerous price discounting.   Additionally, there are significant opportunities for luxury brands to drive differentiation and value through enhanced Web capabilities, brand communities and integrated on & offline customer experiences.  Burberry, BMW and Calvin Klein serve as good models of how to target different segments with multi-brand strategies.

Secondly, companies can not afford to take their core wealthy consumer base for granted.  This segment is a major revenue pool and serves as a key influencer for aspirational buyers.  Should a product’s brand image wane in terms of cache, quality and exclusivity, wealthy consumers could quickly migrate to a competitive luxury brand, with aspirational consumers not far behind. To increase wealthy consumer loyalty, companies should reinforce their premium brands via strategic pricing management, limited supply and enhanced design & quality.

Optimize the supply chain

The emergence of web-enabled supply chain management combined with global shifts in customer demand have created a unique opportunity for luxury firms to reengineer their product supply chains in order to reduce cost, improve flexibility and minimize design times.  For example, luxury companies could consider following other manufacturers and locate some product design, merchandising and marketing operations in high growth markets like China and India.  As well, some brand portfolios like Armani and Gucci that compete in many categories (e.g., apparel, sunglasses and fragrances) could benefit from portfolio rationalization of duplicative or low volume products.

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Best Practice Branding in a Recession – Louis Vuitton

The recession is clobbering the luxury goods market, as falling incomes have curtailed customer spending especially in the near affluent segments.  According to Bain & Company, 2009 global industry sales are expected to fall by 10% to $225B.  Moreover, a number of venerable labels have either filed for bankruptcy (Escada and Christian Lacroix) or are considering bringing in partners (Prada Group). 

Tough times may not be a short term phenomena.  For the past 10 years, the key industry growth driver has been “aspirational” middle class customers, who make up 60% of the luxury market (according to Bernstein Research).  Worryingly, these customers’s attitudes and behaviors may be undergoing a paradigm shift. Bernard Arnault, chairman and CEO of LVMH (the largest luxury products conglomerate and Louis Vuitton’s parent) has said: “The word luxury suggests triviality and showing off, and the time for all of that is gone.”

However, one powerful brand is bucking industry declines and profitably increasing share.  In 2009, Louis Vuitton  has registered double-digit gains in every market while maintaining industry-leading profit margins of around 40-45%.  Indeed, Louis Vuitton has benefited from a traditional industry pattern that sees a flight to quality, established brands during difficult times. However, Louis Vuitton is pulling ahead because of their relentless focus on getting product, distribution, communication and pricing right.  For example:

Uncompromising Quality – Louis Vuitton has refused to cheapen its quality, production standards and materials for any of its products. Unlike many of its competitors, the company has avoided brand degradation by declining to license its brand to poor quality or unrelated products.

Savvy Marketing – Louis Vuitton has resisted the urge to move down market and compete with near-luxury brands like Coach in order to retain an air of exclusivity and premium price points. Furthermore, the company is also the only leather goods firm that never discounts its products, preferring instead to destroy obsolete inventory. Finally, Louis Vuitton has been very agile and sensitive with international expansion.  The firm is aggressively expanding into the lucrative Chinese market but with the same exacting standards that would befit a store in Milan or New York.

Operational Excellence – Louis Vuitton’s model of owning retail outlets has allowed it to maintain high standards and exert tight control over pricing, the in-store experience and inventory.  For example, the firm will quickly shift merchandise between stores to reflect changes in demand.  In addition, the company has adopted best in class production techniques (many from the car industry) to deliver process consistency, workforce flexibility and cost reduction.  

Continuous Innovation – To stay on the cutting edge of fashion with the right product mix, Louis Vuitton has invested substantially in design and creativity beyond its signature “Monogram” print. As well, the company has successfully launched a number of new and limited products in a variety of style and colors without cannibalizing its core leather bag franchise, introducing complexity or cheapening its image

Louis Vuitton’s story is a lesson to premium brands that to sustain success substance must accompany style.

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