Other books by Jean-Noël Kapferer published by Kogan Kogan Page P age The Luxury Strategy: Break the rules of marketing to build luxury brands , Second edition, by Jean-Noël Kapferer and Vincent Bastien (isbn 978 0 7494 6491 2)
The New Strategic Brand Management: M anagement: Advanced Advanced insights insights and strategic str ategic thinking thinking , Fifth edition, edition, by Jean-Noël Kapferer Kapfere r (isbn 978 0 7494 6515 5)
Note on the Ebook Edition For an optimal reading experience, please view large tables and figures in landscape mode mode.. This ebook published published in 2015 by Kogan Page Limited 2nd Floor, 45 Gee Street London EC1V 3RS United Kingdom www.koganpage.com © Jean-Noël J ean-Noël Kapferer Kapferer 2015 E-ISBN 978 0 7494 7437 9 Full imprint details
CONTENTS CONTENTS Introduction: Introduction: Growth issues issues for luxury
PART ONE How luxury is changing 01 Sustaining Sustaining the the luxury dream: challenges challenges and insights insights An industry industry like no other The f uture(s) uture(s) of luxury The rise rise of fashion: from dream to contagion of desires Facing Facing high demand and abandoning rarity How will How will China influence the the dream? The challenges challenges of the internet Against the blurring of lines: recreate the gap, transgress the codes Sustainable development: development: the future dream of luxury References 02 Abundant rarity: rarity: the key to luxury growth Luxury Luxury financial dream The many meanings of luxury How scarcity creates value From scarcity to qualitative rarity Introducing virtual rarity
From craft to art: elitism for all The new reality of Asia: egalitarian luxury? Is the cult of luxury religious? Nurturing the symbolic power of the luxury brand brand Short-term or long-term policy? Conclusion and clues for entrepreneurs References 03 The artification of luxury: luxur y: from artisans to artists The challenge of growth for luxury companies The radical transformation of luxury today How growth creates two major problems for luxury brands Luxury growth and the rising issue of legitimization Why art now? Becoming an industry A short history of the relationship between art and luxury What’s in art for luxury? Entering new countries through art How artification involves all art institutions Involving all artists at all levels of the value chain The multiple media of artification Conclusion: Conclusion: an ambitious ambiti ous vision for f or luxury? References PART TWO Specific issues and challenges 04 Luxury aft after er the crisis: pro logo or no logo?
From absolute to relative luxury Modern economies trigger status needs Adapting the price and logo to different segments Why conspicuousness will come back: it never left! Back to luxury? References 05 Why luxury should s hould not delocalize: delocalize: a crit cr itique ique of a growing tendency From a well-kept wel l-kept secret to an overt announcement announcement Luxury: do not confuse the concept, the sector and the business model Luxury brand building is about building incomparability Do not confuse luxury, fashion and premium business models The consumer opinion on delocalization Sustaining ‘made in’ as a real brand The The challenges of non-delocalization non-delocalization References 06 Internet and luxury: under-adopted or illadapted? The new frontier of luxury Luxury and the internet: a reciprocal myopia Revisiting the potentialities of the web Clouds Clouds over the internet: the loss of control Adapting the luxury organization to the web
Transforming the web to adapt to luxury References 07 Does luxury have a minimum minimum price?: price?: an exploratory study into consumers’ psychology of luxury luxury prices The The elusive luxu l uxury ry definition definiti on Price and luxury The paradox and research question: How expensive is expensive? Results Results and insights Summary of the findings Implications Implicati ons for luxury price management Conclusion References 08 All that glitters glitters is not green: gree n: the challenge of sustainable luxury Luxury under pressure of sustainable development Luxury and SD share two deep concerns: rarity and beauty Distinguishing the luxury strategy from a fashion or premium strategy Luxury is by definition durable Why this present SD focus on luxury? Acting as an SD model to preserve luxury reputation Is SD ready for luxury standards? How SD needs a luxury strategy too
Status redefined: from power to altruism References Further reading PART THREE The business side of luxury
brands’ growth 09 Not all luxuries act alike: the distinct business models of luxury luxury brands The desire for luxury Behind a single term, multiple business models What discriminant criteria differentiate business models? Global competition between models of luxury References 10 The LVMH–Bulgari agreement: what changes in the luxury market lead family companies to sell up? Introduction The Bulgari acquisition: a model for family-owned luxury brands? Luxury Luxury transformation: from manufacturer of rare products products to creator of retail experiences experiences Closing the gap with Cartier and Tiffany China: the capital dilemma for family-owned luxury companies
Why the source of capital is i s not incon i nconsequen sequential tial The price of Bulgari: too high, or an accurate measurement of the financial dream? High growth assumptions: no brand equity dilution diluti on Conclusion References 11 Developing luxury brands wit w ithin hin luxury groups: synergies without dilution? Luxury concentration in question How luxury groups grow Theoretical background: how groups create value Research objectives and methodology Findings of the transversal analysis Implications Implicati ons for growing luxury brands brands within wi thin groups References
Index
Introduction Growth issues issues for luxury
Luxury is an industry like no other: it is the only one for which growth creates a problem. Is a lack of demand the source of the problem? No, the problem is just the opposite: excess of demand. For example, how many more Ferraris should the brand sell each year without endangering its dream value and profits? Should Hermès decide not to sell more Kelly bags this year than last year? When should Louis Vuitton decide to reduce its number of stores in a given country? Yet, outside the doors of luxury stores, ordinary people want to access the ‘banquet’. They can now enter the websites and social networking pages of these stores. Luxury symbolizes their access to a life that is as happy as the celebrities’ they observe wearing such luxury dresses or watches, which they have long been coveting from watching Western movies, news and television series. In the luxury market, clients not only buy an exceptional exceptional product – partly handmade, with with the savoir faire of artisans – but also a legend: a great tradition made modern modern to fit one’s present present life, a culture anchored in a
country. In addition, they also buy exclusivity, though this does not mean buying the only copy in the world. Luxury products are not paintings. Exclusivity means that the brand is purposely limiting demand: the higher price reflects the price paid for gaining the right to be associated with selected, affluent co-consumers. To paraphrase Groucho Marx: ‘I would never want to be part of a club that would accept me.’ This exclusivity factor is what distinguishes luxury from premium premi um brands and, all the more so, from masstige (mass prestige) brands. MercedesBenz now competes against Audi, BMW and Lexus in volume: with BMW leading the flock with 1.66 million cars sold in 2013. Should there be a limit to the sales objectives of Mercedes S-Class in the forthcoming years? Probably not. In contrast, Rolls-Royce will purposely sell one car less next year than this year, but each car will be tailor-made. The company makes more money by customizing each Rolls-Royce to the individual owner than by selling one more car. Doing so creates the image of more exclusivity and value. Managing a luxury brand does not mean running after the maximum m aximum number of customers but rather the right ones associated with their own status. Goods are chosen when one knows who else is selecting and wearing them – for example, fashion relies heavily on celebrities to sell its products. However, luxury is not fashion, as is discussed in The Luxury Strategy (2012), which I co-authored co-authored with wit h Vincent Vincent Bastien. Growth in luxury is a fragile concept and a mixed blessing. When does saturation occur? Too few clients
prevent brands from covering the considerable fixed costs of luxury retail. Today, niche is out: an unknown luxury brand cannot accumulate the symbolic capital needed to endow its clients with status and respect. But too many clients endanger the exclusivity factor and the luxury experience of these clients. How many people are now wearing Chanel eyewear logos on the streets of Paris, bought in regular optician chain stores? Even in flagship stores the luxury in-store experience can become damaged because of the long queues and the lack of attention from minimal staff. What level of service is really delivered in the retail stores of luxury brands? At stake here are the brand value and its ability to command a high price premium without any form of justification. Luxury as a sector is becoming consolidated as a result of the problems raised by growth. How fast should a firm grow? Where in the world should it do so? How much volume should it sell? According to Bain & Company data, Italian brands have the highest rate of sales growth in the world, even higher than French brands. However, many of the Italian icons have been bought by French groups (such as Moët Hennessy Louis Vuitton (LVMH) and Kering). Growth needs cash and know-how, and family companies may not have enough of either eit her.. Many formerly former ly independent family companies have sold to luxury groups, even those that said they would never do so (such as Bulgari, Loro Piana and Gucci). By contrast, some family companies, such as Hermès and Chanel, are great cash machines and remarkably profitable.
Wall Street interest in luxury groups rests on two parameters: the ‘luxurious margins’ that this sector provides and the growth of the market. Therefore, because luxury groups are listed on the stock exchange, there will be continued pressure pressure on growth objectives, something that the independent family companies will not have to bear. So far, Wall Street has been well served by the booming expansion of this industry since 1990: • Horizontal expansion has occurred, due due to the conquest of the BRIC countries (Brazil, Russia, India and China) and now the MINT countries (Mexico, Indonesia, Nigeria and Turkey). China is the most symbolic and powerful proof of this expansion. An example is the t he success of Louis Vuitt Vuitton on in China: the brand brand now symbolizes the t he economic economic success of the country itself, with stores opening in first-tier and now even second-tier cities. • Luxury brands have also experienced experienced vertical expansion, expansion, with wi th the creation creati on of second and third lines. The most typical example is Armani. Another sign of vertical expansion is the growth of accessories as a major source of profitability. • Luxury brands have also engaged engaged in diversi diversifi ficati cation, on, abandoning their former single specialization to encompass a wider range of products. The goal of such brand brand extension is to t o profitably develop directly operated stores. Diversification is also an answer to
the problem created by new clients of luxury – that is, the absence of loyalty. New clients choose brands by contagion of desire, not by adhesion to their values, nor by connoisseurship. Extension of luxury lines provides another reason for consumers consumers to visit boutique stores or company websites. But what comes next, after horizontal and vertical expansion and diversification? More of the same? How, then, will the luxury sector overcome the chasm between the images it promotes – continuously defining luxury as rare, noble, crafted, exclusive, spirited, elevating and servicing – and the realities of business growth? This book aims to propose insights into possible growth issues for luxury, and maybe even foresight. We analyse the current ‘artification’ of luxury and the rise of ‘abundant rarity’ strategies that help to sustain the luxury dream with higher volumes. We also discuss the internet challenges in a renewed way and present sustainable development issues. Finally, we address the management itself of luxury companies and groups. The book includes some of my recent articles (some coauthored) published in international journals, addressing the issues of growth and its many distinct facets. Each of them can be read on its own. In addition, it includes several original chapters pertaining to issues not covered in these published articles and new data from our latest international research on the levers of the ‘luxury dream’ in the minds of the customers in the luxury sector. This
book serves as a companion book to The Luxury Strategy, which remains the international reference for managing luxury brands in a distinctive way, to sustain the gap between luxury and fashion or premium.
PART ONE
How luxury is changing
01 Sustaining the luxury dream
Challenges and insights
Luxury sells dreams. The more the luxury sector grows – as it has been doing since the mid 1990s – the more this threatens the levers of the luxury dream and the essence of what luxury evokes: the notion of rarity and of access to a privileged life, to products of exception – and to a life of exception. We review here the main facets of this market growth that challenge the luxury dream and its sustainability: the dominant weight of the Chinese consumers; the central role of the internet and social networks in consumers’ behaviour; behaviour; the blurring of frontiers f rontiers between luxury, fashion, premium and masstige (mass prestige) prestige) brands; the new demands of sustainable sustainable development. development.
An industry industry like no other
Luxury sells dreams. Luxury magazines regularly feature articles citing dream places to visit, dream houses to purchase, dream yachts, dream cruises, dream cars, dream watches and so forth. Headed by CEO Bernard Arnault, the world’s leading luxury group LVMH sells billions of dollars of items that promise to ‘fulfill the hopes and dreams of consumers’ (Harvard Business Review, October 2001). As Robert Polet, former CEO of the world’s second-leading second-leadi ng luxury group explained, ‘We are in the t he business of selling dreams’ (Fortune, 6 September 2007). Gian-Luigi Longinotti-Buitoni, president and CEO of Ferrari North America, co-authored the book Selling Sell ing Dreams Dream s (1999). A recent article arti cle from the Wall Street ournal (11–13 July 2014) had the following headline: ‘LaFerrari Is a Million-Dollar Dream Car’. Selling dreams is indeed the core mission of the luxury sector and its brands. The luxury industry has become a business of brands. Customers visit brands’ websites and flagship stores. They click on and search for ‘Prada’ or ‘Bottega Veneta’, not ‘leather bag’. The luxury market entails more than simply selling excellent products in excellent places with excellent service; it is the brand itself that activates and embodies the intangible element of the dream, the symbolic access to a specific universe of privilege and a measure of social stratification. Royal Salute is not simply a rare whisky that has been aged for a minimum of 21 years, unspoiled, waiting for maturity; it represents access to a highly symbolic moment and universe, the coronation day of
Queen Elizabeth II, heir of a legendary dynasty. On 2 June 1953, 21 gunshots were fired by the Royal Navy and, on that day, this rare whisky was offered as a tribute to the new queen. By extension, the Royal Salute brand is a tribute to the new kings and queens of the modern day, namely, the successful entrepreneurs – particularly those from Asia – who have built new empires, companies and brands all over the world. Being a consumer of Royal Salute, then, is like being a member of an exclusive club. In short, the consumption of luxury products fulfils dreams and acts as a social stratifier. This dimension of dream fulfilment – that is, symbolic access to excellence and to a privileged life as a result of one’s efforts and choices – is what separates luxury from premium. There are many premium brands of cars, all of which claim to be the ‘best car’. The essence of premium brand positioning is the ability to claim being the number-one brand in a given category and to furnish various offerings of proof to sustain this assertion. Premium brands need to justify their pretension of being best in class. For example, Lancôme advertisements often offer claims that a product is the best skincare cream because it has a unique feature or ingredient or creates a unique result that the competition cannot emulate. But luxury is not simply a matter of being best in class; it embodies class itself. This is why luxury brands seem able to command any price. Premium brands cannot do this; their price level is ultimately capped by the mere rationality of their proofs. Premium cars sell ‘progress’ and, therefore, obsolescence:
one version of progress will ultimately be replaced by another. Dreams, however, last a very long time. A striking feature of the luxury industry is its constant growth despite economic crises, downturns, revolutions and wars. Bain & Company estimates that the luxury business represented €800 billion in 2013, with €319 billion spent on cars, €138 billion spent on hotels and €217 billion spent on personal luxury items (such as leather goods, clothing, watches, jewellery and fragrances). By contrast, these personal luxury items represented only €80 billion in 1995. The source of this significant growth in the luxury sector is the world’s economic growth itself. Bernstein Research has demonstrated that luxury growth in a country is closely correlated to its gross domestic product (GDP) growth. This is to be expected because growth comes from companies creating value and distributing wages, and top managers enjoy harvesting the fruits of their efforts. Gone is the image of stingy or mean millionaires, who save money all their lives but never really enjoy their fortunes. This old type of ‘rich’, aptly described in the book The Millionaire Next Door (Stanley and Danko [1998] 2008) no longer represents the reality of consumption among the new rich, especially those from emerging countries, with China being a prominent example. In China, chief executive officers (CEOs) are younger, and there are numerous millionaires under the age of 40. They want to live as their Western counterparts do and enjoy similar expressions of wealth and happiness,
such as the consumption of luxury products and brands. The luxury sector has also thrived among the upper middle class in China, who want to emulate the lifestyles of their country’s rich and famous as well as celebrities in the West. A symbolic part of such behaviour – and one that can be easily imitated – is the consumption of luxury brands. When luxury brands began being distributed in emerging countries, the luxury industry took off. In China, it is said that the luxury market started when Plaza 66, China’s first luxury shopping mall, opened on Nanjing Road in Shanghai. The dream became visible and accessible for all those ready and willing to pay the price. With growth from €80 billion in 1995 to €217 billion in 2013 the personal luxury market is clearly no longer the privilege of just a few. few. The The Webster’s Dictionary definition of luxury in 1828/1913 provides an interesting reminder of how the concept has changed: ‘anything which pleases the senses … and is also costly, or difficult to obtain; an expensive expensive rarity’ (see http://www http:// www.webster.websterdictionary.org/definition/luxury). Granted, only 6,922 Ferraris were sold in 2013 and 3,630 Rolls-Royces, but the Audi brand ‘[pulled] ahead of BMW worldwide to grab the lead in luxury car sales with 1.6 million cars sold’ (Independent Ireland Journal, 16 March 2014). Such statistics offer further proof that the luxury industry is no longer made up of small niche companies as it used to be. It represents a real macroeconomic sector, aiming at big numbers and under the direction of managers. Unlike other economic sectors, however, growth creates
problems for the luxury market because the luxury dream is partly based on the notion of rarity and of access to a privileged life, to products of exception and to a life of exception. These beliefs are at the core of what the luxury concept evokes among luxury consumers today. In one of our latest studies, 3,085 3,085 affluent consumers consumers from six major maj or countries (the United States, China, Japan, Brazil, Germany and France) were interviewed. Respondents were selected on the basis of their declared purchases of certain products above a given price and were asked to select the attributes that most defined their vision of ‘luxury’ from a list of 10 attributes. Table 1.1 shows both the convergence of clients’ definitions of what the luxury concept evokes and also some notable idiosyncratic differences between countries. There is a striking similarity between these findings and the old Webster’s ebster’s Dictionary Dicti onary definiti definition, on, which emphasizes pleasure and costliness. Only the Chinese respondents explicitly reported that luxury evokes both the very expensive and exclusivity for a privileged minority of consumers so as to make these consumers stand out from the crowd. Among other nationalities, notions of rarity and being exclusive to a minority of the privileged few are present but not among the top four associations; instead, they are perceived as consequences or correlates of the high quality, high prestige and high cost of the luxury goods and brands. TABLE TABLE 1 . 1 Mean Meaniing evok evoked ed by by the word word ‘l‘luxury’ uxury’ for
consumers in six countries (n = 3,085)
France
United States
1
high quality
2
China
Brazil
Germany
Japan
high quality
ex pens iv e
high quality
high quality
high quality
pres tige
ex pens iv e
high quality
pleasure
ex pens iv e
prestig
3
ex pens iv e
pres tige
fas hion
dream
fas hion
ex pens
4
pleas ure
pleas ure
minority
ex pens iv e
dream
intemp
The more the luxury sector grows – as it has been doing for nearly 20 years – the more this threatens the levers of the luxury dream and the essence of what luxury evokes (Thomas, 2008). Growth of sales means growth of customers, as is evident from the long lines of Chinese clients waiting to enter the Louis Vuitton store on the Champs-Élysées in Paris or the Gucci store in London in order to buy expensive handbags for themselves and their friends. Ferdinand Porsche, son of the founder of Porsche and designer of the iconic 911, once said that he did not like it when he saw two Porsches on the same street (visiting London today would give him a heart attack!). Thus, a primary consideration for all general managers of luxury brands is how to reconcile growth and luxury. How can such a company grow while remaining true to the model of scarcity of supply that prevents growth? Can a manager adhere to the tenets of a true ‘luxury strategy’ and yet still grow? grow?
The Luxury Strategy (Kapferer and Bastien, 2012) reminds us that if luxury as a concept is subjective, and if the luxury sector is elastic in terms of the brands and companies that should be included, the luxury strategy is nevertheless a very precise notion and a demanding strategy – it is a unique mode of conducting brands and companies. The luxury strategy entails a certain obligation to break the rules of marketing in order to build luxury brands. We identified 24 ‘anti-laws’ of marketing that should be followed to create a successful luxury brand. They have been developed and implemented by the most successful luxury brands over time. These anti-laws have become references among luxury companies and groups. The present book is not intended to be a substitute for The Luxury Strategy. Rather, it focuses on the main challenge of the luxury industry and brands today – namely, the challenge of growth.
The future(s) of luxury What is the future of luxury? This question is repeatedly raised in publications and international conferences on luxury. This future is partly known – not as a result of guessing but rather as a consequence of empirical or sociological laws. In addition, will there be one single future? In the past, predictions about the future of luxury were based on intuition or some sort of sixth sense: this attitude
is naive because it ignores the fact that luxury is not out there, waiting to be discovered in its new forms. Actually, luxury is a product of its time, epoch and the dynamics of class in specific countries: luxury fulfils social and economic goals and is more than a status or conspicuous consumption game. Luxury in the 17th century served the splendour of the Sun King, as luxury at the end of the 19th century served the splendour of the Rockefellers, the Vanderbilts and the Carnegies. Post-modern luxury is a euphoric hymn to the media power of the ‘people’; that is, the celebrities. Today, luxury is more than a macroeconomic sector; it is at the centre of society, held as its most elaborate form of cultural production. This omnipresence of luxury in modern societies cannot be separated from the hyperindustrialization of the world, which leads to the saturation of consumption. Saturation can be overcome in two ways, as exemplified by Uniqlo and Louis Vuitton. Uniqlo proposes quality and style for all through a low-cost business model. In contrast, Louis Vuitton adopts a value strategy that encourages everyone to buy fewer objects, but ones that last and are highly cultured. To secure its own growth, luxury must manage its own image, the one that will legitimize it for years to come. Furthermore, because this sector has become more consolidated, in the hands of groups gone public (such as LVMH, Richemont, Kering and Prada), the stock exchange will play a role in the future of luxury. It has already contributed to the naming of all these companies under the same umbrella word ‘luxury’. Several years ago, each
brand and each company was known by its own speciality (eg a saddler, a trunk maker, a shoemaker); now, they are all presented as ‘luxury brands’. Wall Street expects permanent growth from LVMH, which differs from how luxury was conceived by family-owned companies. They previously had no pressure to grow – they had time. The future of luxury will also need to satisfy the stock exchange by taking into account the political, sociological and ecological parameters of the epoch of today: is it time for euphoria? Where? To celebrate what? Isn’t it time to get back to the essence of luxury? The willingness of major luxury brands to be considered cultural productions is a signal that, in some countries, conspicuous waste is a deadend street for the luxury industry: it now needs to promote conspicuous taste (Shipman, 2004) as a signal of consumers’ consumers’ cultural ability abili ty to select green conspicuousness. conspicuousness. Where is the future of luxury? After the BRIC countries come the MINT countries. Because luxury sector growth is directly correlated with GDP growth, the future of the sector likely resides in China, where there is a vast untapped reservoir of potential new clients. Africa also shows great promise as a new market for luxury items. Many indicators suggest that this process is already under way in African countries with rare resources that are fuelling economic growth, such as Nigeria, Mozambique, Morocco and Angola. Brazil may also emerge as a prime luxury market, but this will not likely happen for a while yet. The wealth from Brazil has already settled in Miami, where the rich go shopping for luxury brands.
Luxury consumption is also deeply linked to urbanization, a movement that is luring people away from their original homes, villages, parents and clans. When they arrive in cities to find jobs, these people enter into a competition of sorts – and must build a new identity. Luxury brands represent an easy way to build such socially desirable identities. This can also be acquired at low cost due to counterfeit products whose logos are prominent. In emerging countries, such counterfeit brands paradoxically act as entry range of the well-known institutional brands. Research on counterfeit brands has explored the notion that such products might not be as detrimental to the brands as once thought; indeed, some argue that they even contribute to the diffusion of their fame (Nia and Zaichkowsky, 2000). Now, because brands are often made by their clients, the multiplication of these unexpected clients may be a mixed blessing from that standpoint. For example, Burberry experienced this when the brand was chosen by the ‘chav’ subculture (lower class, brash and often loutish) in Britain. With regard to China, it is likely that the local HNWIs (high-net-worth individuals, or millionaires in cash) are sensitive to the fact that they belong to a minority. Through their success, they have distinguished themselves, and they want recognition for this. For them, the diffusion of a brand is not positive. For the mass of middle-class consumers, however, it is reassuring to buy the same Louis Vuitton bag as everyone else; it is a way to be certain of one’s choice and to become symbolically integrated into an
‘upper class’ by wearing this brand logo, which has today become the proud symbol of China’s economic take-off (Rambourg, 2014). Another forecast can be made about the future of luxury in emerging countries: after the discovery phase of luxury items is over, these consumers will begin to seek out experiential luxury. However, this will take time. In these countries, buyers still mentally live in a world of material shortage: they were poor only decades previously, or at least their parents were. As Chadha and Husband (2006) show, new luxury buyers emerging from a state of poverty and hardship enjoy spending time visiting luxury stores, where people address you with respect, extend VIP treatment, and purport to care about you as a person rather than just a number. In addition, these stores are like those made famous in New York or Milan, which enhances the magic of the place and offers the ability to ‘travel without travelling’. In this luxury discovery phase, happiness is measured by the number of Louis Vuitton bags that one buys. Only later will the realization come that possessions do not equate to happiness. Such a mindset is more characteristic of mature countries, in which there is a society of material abundance but a shortage of happiness. Under such circumstances, so-called experiential luxury needs begin to emerge – that is, the opportunity to engage in unique, rare, emotional and meaningful experiences anywhere anywhere in i n the world. w orld. This This is why so many new luxury resorts comply fully with the demands of sustainable development: through such efforts, their
high prices offer a more meaningful experience. In mature countries, as Jean Baudrillard (1998) predicted, elite consumers are competing on both wealth and taste. They move from a compulsive and contagious appropriation of objects to the demonstration of appreciation of these objects. This is why luxuries and luxury brands exist. As soon as a brand becomes preferred by the new rich, the old rich move to another, less visible, less coded brand, one with subtle indications of recognition that signal the owner’s ability to ‘understand’ and be ‘part of it’. Baudrillard also notes that the products signalling wealth, taste and social group are continuously changing. As these products become embraced and consumed as luxury symbols by the upper middle class, it is likely that they will no longer be held as such by the rich. Celebrities (eg new actors, new sports figures, new pop stars) are often characterized as the new rich: they are high in their need for status and buy brands they believe to be status symbols. However, the rich have less need for such displays of status (Han, Nunes and Drèze, 2010); they prefer bespoke, experiential luxury (such as a visit to an iconic château of the Bordeaux wines, having dinner with the owner and attending the harvest). They may also express their status through the acquisition of contemporary art (which, as a result, has become a speculative venture) or real estate and by adopting the latest sustainable and digital technologies for their homes, cars and boats. Who will make the future of luxury brands? To date,
large institutional brands have been good at identifying rising designer stars and often prompt them to manage an institution (eg Marc Jacobs, John Galliano). Through this practice, the large companies bring fresh perspectives to old brands, prevent decay and essentially avoid the entry of new competitors (if the designer had launched his or her own brand and devoted all his or her energy to it). However, as is the case in any sector, competition often comes from where it is least expected. New technology is one avenue. The innovation of dosettes has created Nespresso, the ultimate experience in coffee, which has fully adopted a luxury strategy. Apple is another company that has pursued a luxury strategy (in contrast with Samsung, which has followed more of a premium brand strategy). Hybrid engines have allowed the newcomer Lexus to become the industry standard for clean luxury cars, and lithium batteries have made Tesla the ‘it car’ of all Hollywood celebrities, cautious to be no longer seen driving Ferraris or Lamborghinis (icons of yesterday’s dream). Celebrities are in the business of self-branding to maximize their sustained relevance and financial value. Emerging countries are likely to produce the future luxury brands for the world. This is why Hermès was clever enough to buy majority shares in Shang Xia (China). China has the potential to produce such brands: it has a long history, a tradition of excellence in craftsmanship and art, new designers who are able and willing to succeed, and the support of the state. The only thing missing is the belief that they can succeed. Innovativeness and creativity
are essential to the development of luxury brands, yet these qualities are not facets historically embraced by the Asian culture, at least not yet. Finally, luxury entails more than just products; it is the culture of excellence all along the value chain, including all the subcontractors. Unfortunately, in China, in the wake of the cultural revolution, a lot of know-how has been destroyed, and many master craftspeople have disappeared. It will take time to rebuild these skills. The same holds true in France – a lot of precious knowledge essential for haute couture is no longer taught because there is a lack of both teachers and students. This is why Chanel decided to buy several niche companies that possess this idiosyncratic knowledge – when they were at risk of going bankrupt. Without this valuable know-how, where can the luxury dream go? Everything must be made in such a way as to prevent the relocation of production sites to foreign countries (see also Chapter 5). Finally, for some specific targets, will tomorrow’s luxury brands be non-material? What will be rare tomorrow? Silence, air, harmony, peace … these are public goods and are difficult to privatize, but some places in the world might be uniquely endowed with such rarities. We now turn to a panorama of major challenges that potentially threaten the luxury dream, in both the present and the future. In one sense, these challenges are the result of the luxury industry’s incredible growth worldwide. However, they also result from deep changes in the environment: technological (the internet), socio-economic,
political, ecological and so forth. Each of these issues is covered in greater detail elsewhere in the book. book.
The rise of fashion: from dream to contagion of desires desires Do the Chinese tourists who patiently line up outside the Gucci flagship store in London know why they do this? Or do they simply imitate the behaviour of others like them? This is indeed more fashion than luxury. What sells fashion? Being fashionable – a very transient and fragile state that needs to be continuously revisited and reimagined. Luxury, however, is about long-term value. Being a fashionable item is excellent for sales in the short term, but this also moves the brand away from a luxury positioning and towards more of a fashion strategy. In emerging countries and among new consumers, there is a quid pro quo, a misunderstanding: in China, for example, luxury is now bought in order to be fashionable. Table 1.1 illustrates this phenomenon: Chinese respondents defined luxury as expensive, high quality, fashion and only for a minority. As the anthropologist René Girard (2005) has demonstrated, the fashion desire rests on a mechanism he calls the ‘triangulation of desire’. Consumers do not desire the product or brand per se, but rather the desire of another person. It is similar to a child who wants a toy just because another child has or wants the toy. However,
once bought or possessed, that toy loses its value. The notion of luxury is tied to the selling of dreams, not wants or desires. It takes time to build an exceptional product (eg a Patek Philippe watch) and there is no rush to buy it. The dreams that a luxury brand embodies are ideals that might come true. One dreams of buying a Porsche 911 Carrera; time will tell if and when this purchase will ever be realized. The completion of these dreams depends on many factors, but the dreams alone are pleasant to covet. They give rise to goals. Desire is consumption – that is, consummation (fire) – leading to endless replacement. Because the new rich in emerging countries often come from poor backgrounds, they do not yet have the same advanced cultural sensibilities as the ‘old rich’ (no one has taught them what good champagne is, for example). They make many of their decisions on the basis of price and popularity, on what is fashionable today. The enactment and consumption of luxury in mature countries are very different. As Patrick Thomas, former CEO of Hermès, bluntly used to say: ‘When a product sells too much, we discontinue it immediately.’ His reasoning is simple: afterfashion comes out of fashion. Luxury does not aim to become a bestseller but rather a long seller. Certainly Louis Vuitton hired Marc Jacobs for the launch of a ready-towear line and its défilés, but the business model of Louis Vuitton has not changed. It is a paragon of the luxury strategy. One of our recent studies validates this managerial intuition. We measured consumers’ perceptions of 60
luxury brands (belonging to Comité Colbert, Fondazione Altagamma and similar professional syndicates in the United States, Germany and the United Kingdom) on six structural variables: brand dream potential, brand luxury, brand tradition, brand fashionability, brand prior purchase and brand awareness. Respondents were luxury buyers in China, the United States, Brazil, Japan, France and Germany (n = 3,085). Pooling all the results for the 60 brands, we were able to map the relative position of these six structural variables. This map appears in Figure 1.1. In interpreting this figure, note that when two variables are close to each other on the map, they are correlated and thus work together. The dream value of a brand is nurtured by its perceived luxuriousness and its tradition, legend and historical heritage. Luxury represents the future of tradition. As the mapping in Figure 1.1 reveals, the dream value is also nurtured by the number of people who have heard of the brand (awareness) yet do not purchase it. Notably, fashion goes in the opposite direction, meaning that it does not create value with regard to luxury-related dreams. Fashion and luxury are opposing concepts. It may be fashionable to wear luxury brands, but if a luxury company starts behaving as a fashion house, unless there is a purposeful desire to leave the luxury sector and enter the fashion sector this move will be a source of value loss. FIGURE 1 . 1 Luxury Luxury and fashion fashion are are opposi opposite te concepts concepts (pooled data from China, the United States, Brazil, Japan, France and Germany)
SOURCE Kapferer, Valette-Florence, 2014a
The business model of fashion is based on the necessity of making as much money as possible at the start of the season before the item goes out of fashion. As a result, to increase the gross margins, everything that costs too much
is not used – gone are refined works, rare fabrics and ingredients; gone is the importance of complexity and high quality; and gone is the motivation to make something by hand. Value is based purely on style, design, logo, glamour and marketing. In addition, relocation of production to low-wage countries is the norm because this maximizes gross margins by reducing the costs of manufacturing and quality controls. The luxury industry must be cautious not to fall prey to the confusion of luxury and fashion. The growth of demand for luxury items in China is based on two levers that will not last forever: the first one – luxury gifts – has already been halted by state authorities as they have worked to put an end to corruption (luxury items were very practical and common gifts and tools of bribery). The second lever is that Chinese consumers today do not differentiate between fashion and luxury: they conflate the two concepts. However, if luxury adopts a fashion business model, it will lose its long-lasting, dream-based source value. There is another consequence of this misunderstanding and conflation of the luxurious and the fashionable, which has fuelled luxury growth in China and other fast-growing economies – namely, the lack of loyalty to brands. Fashion is whimsical. In addition, new Chinese consumers are indiscriminate buyers. How can Chinese consumers adhere to Gucci values when they just do not know them? The same goes for Chanel or any other foreign brand. It takes time to learn what lies beneath a brand. Fashion can be as
simple as just knowing which celebrity wears what brand. However, luxury does not usually need celebrity endorsement; indeed, it is one of the major ‘anti-laws’ of marketing (Kapferer and Bastien, 2012: 77). Mature countries have had at least a century (sometimes more) to learn the values of luxury houses. How can new consumers from the high-growth countries be endowed with this innate knowledge? Brands will have to educate them through exhibitions, creation and diffusion of brand content on the web, direct contacts and so forth. But, in the short term, a key business question remains: How can a luxury brand keep keep its clients (and employees)? A consequence of this lack of loyalty is the systematic brand extension of luxury brands today: once-specialized brands are now a thing of the past. Berluti used to be the male luxury shoe brand, a source of the male dream. In an effort to entice clients to come back to the stores and to buy online, the company hired the designer from Zegna to compete against Zegna by designing men’s suits, shirts and other garments. Gone are the times when a brand grew and had a singular speciality that made it an icon. To justify the high rent of locating stores on popular shopping streets in wealthy urban areas, it has become customary for brands to extend their range and lose what made them specific and special. Luxury brands are fast becoming sellall brands. brands.
Facing high demand and abandoning
rarity Historically, luxury was made for the few: it was the ordinary life of extraordinary people. In today’s consumer landscape, luxury faces a tsunami of demand. Asian-based travel is mostly luxury-purchase tourism. At Jeju Island, Korea, Chinese tourists do not even need a visa (whereas they need one when they go to Seoul, the capital city). Jeju Island is a massive tax-free island where everything is geared towards buying luxury goods. Also one is sure that they are authentic. However, Paris is the most exclusive destination for buying luxury brands – the silk road in reverse. There is undoubtedly a sense of pilgrimage – a religious dimension, if you like – in tourist visits to the temples of consumption and the flagship stores of luxury brands. Put simply, the luxury industry was not prepared to meet this kind of demand. And indeed, some even ask, should they meet it? This sudden demand has put a lot of strain on many facets of luxury companies. companies. For example: • Production processes used to be time-c ti me-consuming onsuming and painstaking, and thus waiting lists due to bottlenecks in production were common. Luxury brands are often mythologized further with the ideology of slow production time and long waiting lists. But dreams can wait, whereas desires require immediate consumption.
• The supply chain for luxury goods has traditionall tradit ionallyy been neither fluid nor rationally managed (unlike fast fashion, such as Zara, which has thrived on the basis of a revolution in the supply chains). This presents a problem: problem: when consumers consumers and retailers retail ers demand to know exactly what time a product will be ready and accessible in stores, this creates impatience and often a lack of understanding understanding when there are no definitive definiti ve answers to such questions. • Finally, the luxury luxury retail experience experience is suppose supposedd to be a delight – justifying in itself the visit to the stores. As such, this is a major reason that luxury brands need stores. Given some of the aforementioned issues that luxury brands face, it is fair to ask what kind of delight Chinese consumers experience, experience, for example, when they have limited time to make several purchases purchases in a luxury store. Will these purchases purchases be the prized souvenirs of a lifetime, or will these consumers leave with the feeling of having been processed quickly and efficiently and shown the door? Luxury brands are not to blame for this conundrum. It is very difficult to serve 60 clients entering a store with lists of products to buy before the bus leaves at a fixed time. To solve this problem, should these retailers create special counters just for Chinese consumers, without hurting the sensitivity and sensibilities of these welcome customers? Would they feel discriminated against? At the very least,
these retailers retail ers should have Chinese-speaking Chinese-speaking staff on hand. But should they then also have Japanesespeaking and Russian-speaking employees? The task is tricky for this industry when faced with big numbers of clients to address in a limited amount of time. High demand means higher volume. How can a company build a dream and abandon rarity? Some luxury brands will decide not to do so: they will aim to please only a few. Their business model will remain one of limited supply (eg Romanée Conti wine, Krug Champagne, Ferrari, Lamborghini). These brands raise their prices or sell mostly bespoke products and restrict their sales (Ferrari reduced the volume of cars sold in 2013 in order to rekindle its image of exclusivity). However, the growth of the luxury sector – long-awaited by the stock exchange, venture capitalists and investment funds – is not based on these niche brands but rather on brands that have adopted the ‘abundant rarity model’ (see Chapter 2). Indeed, it is interesting to observe in Table 1.1 that rarity per se is not in the top four list of attributes that define luxury worldwide. Yet the data in Table 1.1 come from luxury buyers themselves – the affluent – selected by their purchases of products beyond a certain retail price. They still view brands such as Louis Vuitton as luxury and perceive them as being able to nourish their dreams, thus indicating that scarcity alone is not the primary lever of this dream, but rather a combination of feelings of rarity,
privilege and luxury. The mental processes behind these feelings are analysed later in this chapter. luxury buyers who view Louis Louis TABLE 1 . 2 Percentage of luxury Vuitton as luxury and dream
D ream Dr
Luxury
27%
60%
United States
22.5%
62%
China
23.4%
59.4%
Braz il
16%
60.6%
Germany
26.1%
58.7%
J apan
33.9%
56.9%
Franc e
SOURCE Kapferer, Valette-Florence, 2014a
Notably, the perception of Louis Vuitton as a luxury brand is very high and homogeneous across both mature countries and emerging ones (see Table 1.2). Two-thirds of the respondents consider Louis Vuitton a luxury brand despite its wide success, which makes this brand everything but a niche brand today. As to the dream potential of the brand, it is lower yet still homogeneous, reaching its highest levels in Japan and lowest in Brazil, where the brand has not yet developed its business and distribution. Interbrand (a global design agency) rates Louis Vuitton as the world’s most valuable luxury brand, ranking it 17th among all global brands from all economic sectors, with
an estimated brand equity of US 24.9 billion. This value, or brand equity, indicates that the brand will be able to exert significant pricing power on a large volume of products over a long period of time, with regular growth across countries. In addition, due to conformity, contagion, or merely the dream potential of the brand, its stores rarely lack clients. Louis Vuitton demonstrates that powerful brands are not contradictory with the concept of luxury as long as they respect the luxury strategy. Conversely, the handbag brand Coach follows a mass prestige strategy, with lower-priced products manufactured in low-wage countries: it is the most-searched luxury handbag brand on the internet, but is far behind Louis Vuitton and is only valued at US$14.6 billion. Figure 1.2 summarizes how luxury brands create high value through specific levers and how these levers work in combination to build the overall luxury desirability today. This model emerges from a statistical partial least squares (PLS) analysis of perceptual measures of more than 60 international and local luxury brands, offering a wide variety of situations, price levels and so forth (Kapferer and Valette-Florence, 2014a). Some of these brands may be criticized by industry experts as ‘not being luxury’ because of their size or accessible price or because they are not selective enough in their distribution, but the data demonstrate that despite these judgements (which are often defensive in nature) many of these brands maintain a high level of perceived luxuriousness and dreamability among affluent clients. The levers in the upper half of Figure 1.2
refer to the selectivity of everything the brand does: it has tangible elements of rarity (not to be confused with mere scarcity of supply) such as know-how, heritage, selective distribution, targeting and availability – everything indicates that the brand does not target all consumers equally. The levers in the bottom half refer to the construction of dreamability through the communication of prestige and glamour and through highly symbolic and high-priced products. The bottom half pertains to building the power of the brand itself (awareness, attractiveness, momentum). Today, luxury is a business of brands. People enter a Hermès store or a Prada store. Beyond selection, one must build the seduction of the name itself. FIGURE FIGURE 1 . 2 How How differen differentt facets combin combine e to bui build ld the perception of luxury
Figure 1.2 is useful to identify what makes people consider a brand a luxury brand, although luxury experts might disagree and even though a brand might not be following a luxury strategy. For example, Ralph Lauren has not adopted a luxury strategy but rather a masstige business model, with factory outlets representing a large share of its sales, the relocation of production to low-wage
countries, a high rate of promotional sales and so on. Yet Ralph Lauren is nonetheless perceived as a luxury brand by 50 per cent of a French sample of affluent buyers, 47 per cent of a US sample, 48 per cent of a Chinese sample, 58 per cent of a German sample and 32 per cent of a Japanese sample. Comparing the perceptions of respondents who deemed Ralph Lauren to be a luxury brand with those who did not, this reveals that the main lever is ‘this brand has a very selective distribution’; this item carried the most weight in determining luxury impression formation for this brand, along with the halo of ‘class and distinction’ and the ‘glamorous image’ it has created. The strength of these perceptions offsets the potentially negative effects of the promotional sales, the factory outlets and the quality of the Polo Ralph Lauren line (the company’s main line). Yet Ralph Lauren’s flagship stores (outside the United States) are the brand’s primary communication investment: they are designed to load the visitor with sensuous impressions and experiences of prestige and tradition (even though the brand has been recently invented from scratch). (For more details on the business model of Ralph Lauren, see Chapter 9.) Because of the remarkable growth of Louis Vuitton, many experts assert that it cannot any longer be classified as a luxury brand. However, this vision is limited because it confines the concept of luxury to niche brands aimed at the select few – that is, ‘confidential’ brands that are high in product luxuriousness but not in dreamability, at least based on name. Wall Street and Interbrand do not adhere
to this restricted vision. They estimate that Louis Vuitton is indeed the most powerful luxury brand in the world (in terms of financial value). In our recent research, 60 per cent of the t he affluent affluent people interviewed interview ed also perceived Louis Louis Vuitton as a typical luxury brand. In mature countries, for example, those who acknowledge Louis Vuitton as a luxury brand perceive this brand to be higher on the following four dimensions than those who do not grant such status to the brand: • • • •
‘The brand is still stil l actual and and remains very unique.’ unique.’ ‘It endows endows with class and status.’ ‘The products are very superior.’ superior. ’ ‘It is not for everybody.’ everybody.’
Notably, when the same type of analysis is done to distinguish the levers of Louis Vuitton’s dream potential, a similar list of levers results, with a few significant differences: • The The first lever that distinguishes Louis Louis Vuitton Vuitton as a ‘dream brand’ for the same affluent sample from a mature country is that ‘it looks inaccessible/expensively inaccessible/expensively priced’. • Second, Second, ‘it endows endows with wit h class and and status’. • Third, ‘the ‘t he products are very superior’. superior’ . • Fourth, Fourth, ‘it has a halo of glamour’. glamour’. • Finally, ‘it looks looks fashionable’. fashionable’.
This final lever echoes the hiring of Marc Jacobs in 1997 (he left in 2013) to take the artistic direction of the leather brand, introduce ready-to-wear lines, and create buzz among the artist arti st community communit y (see also Chapter Chapter 3). This strategic hiring choice has achieved its goal of boosting the dream value of the Louis Vuitton brand, but it had no effect on its perception as a luxury brand. This is not surprising, given the aforementioned notion that fashion and luxury are contrary concepts as business models and also in affluent consumers’ perceptions (see Figure 1.1).
How will will China China influence influe nce the t he dream? According to Bain & Company’s latest estimates, luxury sales in mainland China rank fourth worldwide, just in front of France, at least in terms of personal luxury goods (such as watches, fragrance, leather, jewels and ready-towear). However, Chinese tourists now also buy all around the world where prices are lower than they are in mainland China and the quality is guaranteed, not to mention the pleasure of purchasing in the home country of these prestigious brands (Rambourg, 2014). Bain & Company estimates that Chinese consumers represent 29 per cent of all luxury sales worldwide (in value) for personal luxury goods. Certainly, the present laws against corruption have created a downturn in the luxury market in China in 2013 and 2014, revealing that part of the market growth was based on this unlawful practice. Nonetheless, the size of
China alone and its future economic growth reinforce the notion that it will someday be the foremost luxury market in the world. Today, nearly one in every three clients of Western luxury brands is Chinese. For many brands, the weight of China goes beyond a mere boost in sales. When a particular segment represents, for example, 40 per cent of a brand’s sales, this cannot help but affect the brand, its management, its products, its production, its philosophy and so forth. On a more general level, China transformed Buddhism and later communism – it will likely transform luxury as well (Beraha, (Beraha, 2012). In the non-luxury market, some brands have already moved their headquarters to Asia. Schneider Electric is now based in Hong Kong. Zegna is still an Italian brand, but it has strongly pushed its distribution in China and now has production facilities there as well. Prada has declared that it is producing products in China. This movement is likely to go even further for brands that are willing to abandon the key commandment of the luxury strategy: not to relocate production (see Chapter 5), unless of course the motivation is to benefit from local, unique know-how or to circumvent exorbitant custom duties. Thus, Audi, which is produced in China as part of the VW group, has a competitive edge in China for that very reason. Interestingly, the top male model on the front cover of the Emporio Armani spring/summer 2014 catalogue is Asian. The The main question about about the seeming sinisation of luxury is: Does it create value for the Chinese consumer?
Certainly, being close to customers is always a beneficial move for a brand. However, the Chinese falling in love with Western luxury brands has helped Chinese consumers to become better integrated at the global level. They can now buy the same outfits and brands associated with Western celebrities. As such, Western symbols of luxury have been a useful marker of the end of China’s seclusion and the beginning of its remarkable economic growth. Louis Vuitton has been lucky enough to be used as the very visible flag of this collective success. This is why everyone in China wants to own some product by this brand: it echoes the nation’s pride (Becker, 2014). However, recall that Burberry almost collapsed 15 years ago after becoming too dependent on Japan, to the point of having abandoned style to the local licensee, which had transformed the revered checkered brand into a female-oriented one. Rosemary Bravo’s audacious strategy to turn the brand around was to rebalance the brand and aim it at the US market, still at this time the world’s foremost luxury market. The number of Chinese tourists travelling abroad is estimated to rise to 100 million by 2020. Why would they visit European stores of brands that were mainly mai nly being made in China? China? No one knows exactly the future of China. Recently, the statistic came out that 1 per cent of the Chinese population owned 30 per cent of the nation’s wealth. How long will Chinese authorities allow this inequality to stand in a country in which socialism and communism are still the basis of the political ideology and governance? Western
luxury brands are the visible face of this overt and growing inequality. As such, these brands may serve as scapegoats. It is also well known that the present interest of China in Western high-end brands in any sector – aviation, automobile, pharmaceuticals and so on – is based on the desire to acquire high technology and ‘premiumize’ their own production. Taking a long-term view, China will need to become independent and may ultimately want to abandon these brands altogether.
The challenges of the internet internet In Far-Eastern Asia, internet challenges to luxury brands are very visible. The data are well known now: in this region, consumers are some of the most ‘connected’ in the world. They have grasped and utilized digital technologies to enhance their lifestyle and add to the fluidity of their life. In China, the single-child policy has created a very high affiliation need, thus paving the way for the success of Weibo, WeChat, Qzone and other social networks. These are urban societies in which consumption is the primary mode of self-realization, with visits to retailers being a major source of entertainment. Living in town, working in town and engaging in leisure activities in town, the mobile phone is the hub of one’s life, and people remain connected around the clock. However, luxury brands have not yet fully embraced the internet. Some call it conservatism, others a
generational gap. But there is more to it than that: in the world of luxury brands, there must be strategic prudence and long-term vision. In this sector, time is long, unlike most other sectors. The same brands are regularly presented as models of the digital avant-garde by most consulting companies (eg Burberry, Net-a-Porter). Yet their business models are closer to fashion than to a luxury strategy. Books have been devoted to the many facets of the relationship between luxury and the internet (Okonkwo, 2010; Kapferer and Bastien, 2012). In this chapter, we summarize the essence of the challenges and opportunities that the internet represents. We devote a specific chapter in this book (Chapter 6) to possibly the most important issue that luxury brands face – namely, how to transform the internet to adapt it to the needs of the luxury sector and its long-term growth. One issue is certain: the internet has not been built for luxury brands; it is a medium for mass actions. In the digital revolution, everything is big: big data, large numbers of fans on Facebook, most-searched products on the internet, most-viewed pieces of brand content on YouTube, ouTube, highest numbers of visit vi sitors ors and so on. This strategy and goal are the opposite of luxury and of its source of value. The internet offers a wealth of opportunities for luxury brands, especially the young ones. A key fact that differentiates luxury from other economic sectors is the notion that more purchases dilute the luxury dream, whereas for brands in the fast-moving consumer goods
category, more purchases increase brand loyalty. There is a point at which consumers realize they are not any happier when they buy their fourth or fifth Louis Vuitton bag, whereas eating more Nutella spread increases people’s loyalty behaviourally and affectively. This detrimental effect of luxury purchases is called the ‘dream equation’. It was statistically demonstrated nearly 20 years ago (Dubois and Paternault, 1995) and has been revisited recently (Kapferer and Valette Florence, 2014b). Indeed, drawing on a statistical analysis of 60 brands, we find that the dream potential of luxury brands is boosted by their level of brand awareness and by the public perception that they express a heritage, legend or history. However, this dream is diluted by the degree of brand penetration (the percentage of people who have bought one product from this brand). The key lesson of the ‘dream equation’ is that luxury brands must be sensitive to the difference between their level of awareness and their penetration. In this difference lies the dream: known by all, bought by few. Of course, if a brand is too unknown, it cannot act as a social stratifier and a source of personal pride. This is where the internet can be useful: it can boost brand awareness without increasing brand penetration. The brand-building potential of the internet, along with the necessary and experiential brick-and-mortar store, is a key asset for luxury brands. Although everyone insists on the internet being a source of direct sales (the e-store), we argue that the internet’s main use for luxury brands is that of communication. The
internet influences purchases because people search for advice and information first and foremost on the internet and social networks, or maybe want to know if there are special events in some department store the day they are visiting a particular city. The internet’s ability to convey images is a great lever for this dream industry because dreams are made of images. This is why luxury brands have essentially become media companies that edit and curate a high level of high-qualit high-qualityy and creative ‘brand content’ material. They talk about their unique craftsmanship, their heritage, the life of the founder, news about their latest creations and so forth. On the internet, everything can be public relations. relati ons. The internet is also a great way to increase the service level of luxury brands. Services are indeed one of the weak spots of many luxury brands today (along with supply chain and staff of the right talent). Of course, services also imply hotlines, concierges and direct communication with experts (eg a platform that enables consumers to discuss how and when to use an expensive anti-ageing cream they just bought). The internet can also inform customers about which store carries a particular item, at least as far as the supply chain information system can tell (few luxury brands actually have an efficient one). Finally, as its etymology reminds us, the internet is an inter-net – it is a way for networks and communities to grow and interact. This is not to be confused with the number of fans that a brand has on Facebook or its equivalents in China. Too many people equate the concepts of ‘community’ and
‘social’: this is a mistake. Luxury brands are not aiming to appeal to a mass of ‘likers’ but rather to build loyal communities of connoisseurs and ramp them up the commitment ladder by creating local selective events and physical encounters. What about the challenges created by the internet? First, remember that the luxury sector has thrived by turning marketing laws upside down. Although the luxury sector recruits high-level managers from fast-moving consumer goods to add a level of professionalism when it is lacking (eg supply chain management, global brand management, rationalization of the ranges, category management), the survival of the luxury sector resides in its differentiation from any other type of business. This challenge is even more difficult to achieve when copycat brands abound, which appear very similar to luxury brands in the eyes of novice or inexperienced consumers (Chapter 9 is devoted to exploring and explaining this confusion in the marketplace). In addition, not all so-called luxury brands actually follow the luxury strategy. Marketing has led brands such as Coach to call themselves ‘luxury’ on their websites, yet Coach price their bags below US$1,000, which is below the level of most real luxury brands. Similarly, L’Oréal Group positions Kiehl’s in their ‘luxury division’. divis ion’. The consequence is that benchmarking with wit h other industries to talk about the internet, for example, is not wholly informative for the way that luxury should build its own version of the internet, in order to keep its differentiation, its reason for being and pricing power.
Certainly, one of the highest levels of service today can be experienced by visiting Amazon.com. This does not mean that luxury can employ the ‘Add to Cart’ strategy to adhere to standards of digital excellence while sustaining the necessary gap with other industries, and mass-market ones in particular. An online presence is mandatory – no one questions this any more – but digital existence needs a strategy. Where should a brand go, and where should it not go? In a sense, luxury is the art of absence: this is why (as Figure 1.2 shows) selective distribution plays such an important role in the construction of luxury brands’ distinctiveness. The same should be true on the internet. Similarly, ecommerce should be handled with care: it helps to identify sites where the goods are authentic, just as in brands’ own stores. However, brand building needs more than just sales; it needs to create a mythology and cult of followers, much like a religion (Dion and Arnould, 2011). This religion needs temples (flagships) where the brand beliefs and faith can be grounded and the experience can be shared. This luxury experience is made of two pillars: 1 The multisensory physical atmosphere in the temple
(store): digital tools and environments can and do play a role within the stores to create an enhanced experience (with interactive mirrors or digital showrooms, as in the case of Audi), thus enhancing the modernity of the traditional brand. 2 The feeling of power, elevation, achievement,
exclusivity and care when entering a boutique (being treated as a VIP). As Liu, Burns and Hou (2013) point out: ‘Chinese consumers have a feeling of prestige because someone wants to cater to their needs.’ They typically ‘feel more important walking into and shopping in a luxury store’. These two facets cannot be recreated on the tablet or smartphone screen; these media lack the multisensory experience and, above all, a sacrificial dimension. There is no religion (or cult of the brand) without some kind of sacrifice – thus, the importance of the high price point, whereas most retailers compete on discounts. There is also the sacrifice of one’s time (planning the visit, going to the store, waiting). In stores, too, unlike on the internet, the consumer can experience the brand rituals and service signatures. There are other challenges created by the internet as well. We have discussed the underlying preoccupation on the internet of ‘big numbers’. Another major challenge is that of burnout. The internet has created a sense of obligation to constantly feed the ‘buzz beast’. However, luxury exists in a world of slow time or even timelessness. The internet may lead brands to change this essence and become more hybrid, possibly sacrificing their specificity for fashion or celebrity. The internet is also a massive marketplace in which by a simple click one can jump from Gucci to Gap, from Chanel to Michael Kors; this has the potential to conflate brands and confuse the shopper by
obscuring meaning and making all brands comparable and accessible. In so doing, there is a real long-term danger of creating banality and reducing brands to clicks, products and prices. Finally, the egalitarian underpinning of the internet and social networks modifies the nature of the relationship between brands and clients. Can a friend make you dream?
Against the blurring of lines: recreate the gap, transgress the codes Luxury is becoming one of the most overused words in the world. The The luxury dream has attracted att racted many imitators imi tators that t hat do not actually compete in the luxury segment but try to blur the lines and make the frontiers less clear. Luxury designers themselves contribute to this confusion: Karl Lagerfeld, Stella McCartney and others have created specific low-cost lines for H&M. This has certainly increased their own fame, but it has also added to the growing confusion. In April 2014, the model Gisele Bündchen appeared in both a Chanel make-up advertising campaign and an H&M campaign, shot in a similar paradisiacal location to those chosen by the most prestigious and rich brands. The photographer is Lachlan Bailey, an Australian who has worked for Balmain and Theory. This confusion is not new. Madonna did some
advertising for both Versace and Gap. Kate Moss also has accepted work for all kinds of brands. Such examples reinforce reinforce anti-law anti-law nu number mber 16 in T h e Lu Luxu xury ry Strategy: Strategy: reliance on top models is a sign of weakness for the luxury brand (Kapferer and Bastien, 2012: 77). It is significant that the choice of Brad Pitt to promote world fragrance icon Chanel N°5 was made by the US headquarters after acques Helleu, the chief artistic designer for Chanel, had died. The confusion is only growing, first, because of the increase in cost to work with top models, which often precludes any form of exclusivity. In addition, fashion mass-merchants (eg H&M, Uniqlo) need to borrow the communication codes of luxury to lift their image while sticking to their low-cost business model of fast fashion manufactured in low-wage countries. Their stores also contribute to the confusion: Zara stores do not look like discount stores and are situated on the same streets as luxury brands; Uniqlo is on Nanjing Road in Shanghai. To maintain differentiation with followers and imitators, there is no solution other than to transgress the communication codes that others are imitating. This is why most of the communications from luxury brands are made in-house and under the supervision of the chief creative designer. In the luxury sector, the norm is not to hire an advertising agency to create communications but rather individuals and artists who will be fruitful for a short time and able to transgress the luxury codes (for the codes
quickly become habit within luxury companies and are soon imitated by others) but will eventually be abandoned on the altar of singularity. This transgression is made possible by the fact that luxury advertising does not aim to sell. This is another major anti-law of luxury marketing (number 15; see Kapferer and Bastien, 2012: 76). In the luxury sector, even a poor campaign builds buzz, reputation and brand awareness. Luxury advertisements must appear off the beaten paths. Luxury brands fear the big advertising agencies because they are too processoriented, making long briefings, formatted by Procter & Gamble. They are well adapted for mass-marketing brands. In the luxury sector, however, the essential element is the quality of execution. Luxury brands typically recruit small agencies that understand the luxury culture and the level of rigour along the whole process of production. There is also less conflict between the artistic director of these agencies and the chief designer of the luxury brand. Paradoxically, for the same motives – the gap is created by the quality of execution – the web agencies that are hired are rarely hot shops and newcomers. Indeed, luxury brands need perfect technical execution, an advanced technological presence and durability in the chosen partner. The web is another way of ‘performing’ retail. If a company is using a particular technology that is a bit old, it can negatively affect consumers’ experience and create discontent, if not bad buzz. People not only expect perfect execution from luxury brands but also divine surprises in their web experience. This means that the chosen digital
partners should themselves be benchmarking their skills and products all around the world; they should be at the cutting edge of the avant-garde; they should be visiting the right professional exhibitions to detect the next trend in innovation and must regularly train their staff to upgrade their own level. There is a global trend towards more professionalism in the luxury industry to achieve a greater sense of excellence, creativity and renewed distinctiveness.
Sustainable development: development: the future dream of luxury In November 2012, a rumour spread from the EEC authorities in Brussels that Chanel N°5 – the world’s most iconic fragrance, the epitome of Western savoir faire and glamour – contained allergenic ingredients. The news spread quickly with the immediacy of the internet, especially in China where expensive things from the West have to be above suspicion. This led the whole Chanel company to reconsider its activities on sustainable development issues – such considerations were no longer something that could be put off, but must be high on the company’s immediate strategic agenda. None of the big and responsible luxury companies waited to put sustainable development on their agenda – and audited their whole value chain to make it cleaner. This process encompassed the luxury subcontractors, which were
suddenly asked to comply if they did not want to lose their contracts. For example, printers of books and brochures for luxury brands are now audited by the luxury brands regarding the inks they use, their printing processes and so forth. Indeed, sensitivity to sustainable development issues seems to have accelerated, not so much at the consumer level itself (Kapferer and Michaut, 2014) but rather at the level of the state and non-governmental organizations, as well as among activists and watchdog groups on the internet. It is significant that the Chinese Authority for Industry and Commerce has asked luxury advertisers to stop promoting luxury products in the media with words such as ‘luxury’, ‘class’ and ‘royal’, and to t o stop st op building the cult of foreign products to maintain social harmony in China, especially among the middle class. Similarly, authorities asked Louis Vuitton to destroy a giant attaché case it had put in the street just in front of its store in the Plaza 66 luxury commercial centre in Shanghai. There is also Xi inping’s recent ‘frugality policy’, an effort to enforce an anti-corruption policy, knowing that luxury goods (especially watches and expensive spirits) were a practical gift to obtain any kind of favour. As far as affluent buyers are concerned – the core target of luxury brands – our research on these issues (Kapferer and Michaut, 2014) shows that people do not think much about sustainable development issues when they buy luxury. Two main factors explain this:
1 Buying luxury is a parenthesis of pleasure: one does
not want to obscure this moment with rational or negative considerations about the fate of the planet, suffering animals, children working in factories, or excessive waste. To protect their pleasure they opt for wilful ignorance. 2 Buying luxury is so expensive that consumers are entitled to make the assumption that luxury companies have already cared about all these demands and that there are laws in the West prohibiting misbehaviour in terms of such sustainability concerns. concerns. Yet our latest international research shows that sensitivity to green caveats is now growing among the affluent buyers of the world as well: they consider it the duty of luxury brands to take this into account. The buyers may take this for granted so as not to be bothered themselves by the issues, but if it were revealed that their assumptions were invalid, this would lead to significant backlash on social networks and to boycotts (see Table 1.3). TABLE TABLE 1 . 3 Afflue Affluent nt buyers buyers’’ sen sensi sitiv tivity ity to sustai sustaina nabl ble e development and luxury (based on a scale ranging from 1 = ‘totally disagree’ to 10 = ‘totally agree’)
France
United States
I could stop purchasing a luxury brand if I
6.3
6.7
China
Brazil
Germany
Japan
7.4
7.2
6.9
5.9
learned it did not comply with sustainable development By definition, a luxury brand is exemplary in everything it does, hence in terms of sustainable development
6.0
6.7
7.4
6.9
6.4
6.2
I tend to choose luxury brands that are committed to sustainable development
6.3
6.7
7.6
7.3
6.6
6.0
It is noteworthy that the two countries in which the affluent respondents’ respondents’ sensitivity sensitivit y to sustainable development is highest are China and Brazil, both of which are relatively new to the luxury industry; however, these countries represent the future of this industry. Indeed, our interactions with China’s new luxury entrepreneurs during our seminar on luxury at Tsinghua University (Beijing) reveal that they are highly educated and do not want to recreate the same type of companies as their parents’ generation. They know that China is too polluted and they want to do something about this. This is why sustainability concerns are now integrated as a prerequisite, a trend that is evident in the business models of many luxury start-ups. This does not mean that these entrepreneurs want to
position their brands as eco-fashion or eco-luxury, but their thinking is ahead of their Western competition at least on these criteria. Doing so, the risk is that they could create a critical mass of luxury newcomers, a tipping point, with their new standard being affirmed as the norm, thereby disqualifying the competition of traditional brands. This is reminiscent of the US Lexus executive who stated that: ‘A very high quality that pollutes is no quality at all’ – the initial success of Lexus in California has been based on the rejection of German brands among the new local elites and the ability of these new affluent people to buy an expensive dream car (silent and comfortable, with an exceptional level of service). But this dream car also clearly communicates to others that its owner is a pioneer and cares about the planet – and is ready to pay the price for it. This is called ‘green conspicuousness’ (Griskevicius, Tybur and Van den Bergh, 2010).
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02 Abundant Abundant rarity rarity
The key to luxury growth
This chapter was originally published as an article in Business Horizons, 55 (5), pp 453–62, Sept–Oct 2012.
Although the Western economy has not moved out of the financial crisis triggered in 2008, the luxury sector is growing again, especially at the high end. In emerging countries, its continued growth is double-digit. As their penetration grows, the prestige of brands such as Louis Vuitton or Prada is not declining at all. This seems at odds with the concept of luxury being tied to rarity and exclusivity. How can one reconcile these facts and theory? This chapter chapter first recalls that the word ‘luxury’ has diff erent erent meanings. Then we propose that in order to capture mounting mounting demands, not only from from extraordinary people but f rom rom ordinary ones as well, many luxury brands enact virtual virtual rarity rarity tactics, construct themselves as art and adopt
a fashion business model. They de-emphasize exceptional quality and country of provenance. Rarity of ingredients or craft has thereby been replaced by qualitative rarity. The cult of the designer is a potent tool to build emotional connections with a vast number of clients. Today, brands in the luxury sector are actually selling symbolic and magic power to the masses. Finally, there is a culture gap between Asia and the West. Asian consumers feel safer buying prestigious Western brands that are known by everyone around them. These insights provide clues for entrepreneurs attempting to launch a luxury brand.
Luxury financial dream Bernard Arnault, founder and CEO of LVMH, says straightforwardly: ‘luxury is the only sector providing luxury margins’. In July 2011, after three years of paralysis, the affluent class in the United States is again fuelling luxury growth. It is difficult to postpone indefinitely an unnecessary but very appealing desire to buy a luxury product. Interestingly, it is the high end, ultra-qualitative, not too conspicuous but fully priced products products that are flying off off the t he shelves (New ( New York York Times , 2011). One effect of the 2008 economic crisis on the affluent – the top 20 per cent of income earners who together represent 60 per cent of the market – is to refocus on real value and great classics, and to pay the price for them. In a sign that the sector is exploding again,
especially in Asia, 2011 was a year of new acquisitions of luxury companies and brands by investment funds from Asia and the Middle East, and by luxury groups (LVMH, Kering, Richemont). Prada had its initial public offering (IPO) in Hong Kong in June 2011. In all cases, the high multiples (around 20) measuring the valuations of these companies demonstrate that investors share the dream. They believe that the sector’s prospects for growth are huge (Tabatoni and Kapferer, 2010). They are right: the future is bright, especially in the BRIC countries (Brazil, Russia, India and China) and soon in the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa). In all these countries, GDP growth is high, a fine prospect since Bernstein Research financial analysts showed that luxury market growth is strictly correlated with GDP growth. The latter creates a middle class and fosters optimism. Consumers in these countries generally do not save for their retirement (unlike consumers in Europe), but rather spend for newly available best products, especially those that confer status and serve as a symbol of their own self-achievement. In BRIC and CIVETS countries, there is no middle range. Consumers find local brands or global fast-moving consumer goods brands for everyday life, and luxury foreign brands to reward themselves. Having developed consumption societies quite late, people in these countries advance by leaps and bounds and claim their right to luxury. Visiting the newly built luxury malls is a favourite leisure-time activity. What was once described as the
‘malling of America’ (2002) has now become the malling of Asia or even of the world, with retail and entertainment mixing into ‘retailtainment’ within superb luxury stores. To capture mounting demand for luxury goods in newly rising cities, major luxury retailers are now engaged in a very dynamic store expansion strategy. Thus, Louis Vuitton announced that it would enter so-called third-tier cities – mainly provincial capitals – in China. Today, the brand has 37 stores across 29 cities in China. This move is driving the luxury brands (eg Gucci, Zegna, Coach, Burberry) into these same third-tier cities. This fast-paced retail expansion strategy would be good news for the luxury business, if only it could twist the basic equation , which predicts (Figure 2.1, A) that a product’s luxury status (which is crucial for commanding high prices) will be diluted when its penetration rate increases, because too many people own it. A less stringent prediction is that increasing penetration first boosts a product’s luxury status (by making the brand visible and recognized), but with a tipping point beyond which luxury status dilution occurs (Figure 2.1, B). Chinese third-tier cities represent big numbers demographically speaking, but by entering them luxury brands brands run the risk ri sk of becoming provincial themselves. relationships FIGURE 2.1 Luxury–rarity relationships
Brands such as Louis Vuitton have thus far succeeded in postponing this tipping point. Fifty per cent of women working in offices in Tokyo possess a Louis Vuitton bag (Chadha and Husband, 2006), yet according to Ipsos data (2011) consumers in Japan still regard this brand as the most luxurious. Is the luxury industry actually inventing case C (Figure 2.1), in which luxury status is not diluted but actually reinforced by the penetration rate?
The many meanings of luxury Why is there apparently no contradiction between such high penetration of a luxury brand and its resilient luxury
status? It could be due to the many meanings of the word luxury itself. One must make a clear distinction between ‘luxury’, ‘my luxury’, ‘the luxury sector’ and ‘the luxury business model’.
Luxury as an absolute concept This typically evokes images of the lives of the rich and powerful, the ‘ordinary of extraordinary people’. It is no surprise, as J Castarède (2008) has reminded us, that luxury DNA is to be found in the history of society’s elites. Luxury was first found in religious temples, churches, pagodas and Egyptian pyramidal tombs – tributes to almighty God and attempts to buy mercy through the sacrifice of wealth. Later, luxury became the signal of rank in all aristocratic societies (Podolny, 2005). As Bataille (1991) showed, one’s rank is demonstrated by one’s ability to sacrifice productive resources to buy non-productive items. In the past, luxury was the consequence of social stratification. Only recently has there been a paradigmatic shift: luxury now creates social stratification in countries in which it did not previously exist (Kapferer and Bastien, 2012). As a newly rich Chinese man puts it in a focus group: group: ‘What I like in i n luxury is that it i t is i s expensive.’ expensive.’ This This is is luxury’s core, latent sociological role, despite the overt alibis or rationalizations that consumers may provide when asked in surveys why they purchase luxury items for themselves.
Interestingly, when asked ‘What examples of luxury spontaneously come to your mind?’ typical answers are inaccessible products or lifestyle elements of the very rich (helicopters, private jets, private islands in paradise seas and so on). Luxury as an absolute concept needs no brand (Kapferer, 2010), as people talk more about lifestyle elements than about products. However, if the interviewer instead asks ‘What brands come to your mind when you hear the word “luxury”?’ then the answers change and refer to products or services, with the list being more or less the same worldwide: Louis Vuitton, Chanel, Gucci, Rolex, Ferrari, Dior, Prada, Bulgari, Ritz-Carlton and so on (Ipsos, 2011). Note that these brands are more accessible than the former evocations. They also communicate a lot in the media and through their magnificent stores.
My luxury This most often refers to a personal, small luxury purchase. A typical example would be buying a Dior lipstick (€24). The word ‘lipstick effect’ is attributed to Estée Lauder, founder of the skincare company, who was surprised by the increase in lipstick sales during the Great Depression. It is an example of the well-known phenomenon that, after a psychological stress, women trade up on affordable luxuries, as a substitute for more expensive items. My luxury is clearly a break, a disruption
from normal life and its many constraints – an escape into an ideal world of beauty, pleasure, taking care of oneself, and a bit of eternity. One compulsorily buys what one should not buy, an unneeded product or service, at a price far above what functional values command. This overly qualitative product, with an excess of small details, is bought to pamper oneself, to offer oneself a gift, a reward. However, it needs to be from a prestigious brand: selfhealing requires big names in order for its magic to operate. This is exactly like the placebo effect by which patients’ illnesses disappear because they believe that they are taking a real medicine with a famous brand name. The lipstick effect only works with brand names that evoke the lifestyles of the rich or famous. It also requires a sacrifice of money. As anthropologist Marcel Mauss (Hubert and Mauss, 1981) showed, this high-price sacrifice is the condition for the product to become sacred and to endow the buyer with its blessing.
Luxury is also an economic sector This is the meaning that is implied when one talks about the growth of luxury. In fact, Bain & Company, a consulting company specializing in the luxury sector, regularly publishes forecasts about luxury sales. How does Bain generate these forecasts? Its analysts add up figures provided by 290 brands considered by syndicated authorities to be part of the luxury sector. In Italy, France,
Germany and the UK there are syndicated authorities that act as representatives of the collective interests of the luxury companies companies (ie (i e those that belong to these syndicates). The luxury syndicate in Italy is called Altagamma. In France, it is Comité Colbert, representing one-fourth of world luxury sales, twice as much as Altagamma. These luxury syndicates are not independent of the companies themselves and work like a club. Any new member has to be co-opted, and must behave according to a set of criteria and values in order to be admitted. However, not all members would be widely perceived as luxury brands. Thus, in France, although almost no one would consider a Lacoste polo shirt to be a luxury product, Lacoste, as a company, is part of Comité Colbert, and as a consequence Lacoste’s sales are taken into account in French luxury sector forecasts. Similarly, Illycaffé is part of Altagamma. In contrast, Corneliani, the Padovan luxury men’s fashion brand of Italy, is not part of the Italian syndicate, even though its stores are located just in front of those of Zegna. Corneliani’s sales are therefore not included in Italian luxury sector data. Bain’s forecasts do not include automobiles, five-star hotels, resorts, etc – rather they concentrate on luxury fashion, leather, watches, jewellery, shoes and so on. In order to continuously grow, these companies have decided – following LVMH, the world’s number-one luxury group with more than 50 luxury brands – to democratize the sector, and to capture part of the massive demand in emerging economies, BRIC or CIVETS, in which a middle class is growing, with an
appetite for recognition, status and pleasure. To do so, many luxury brands (considered as such by corporative syndicates) have moved away from the classical luxury business model in two major ways. First, many luxury companies now base their profit on logotyped accessories or second lines, produced in larger series seri es and sold as fashion fashi on objects, such that consumers need to buy a new one each season as the fashion system dictates (eg the famous ‘it bag’: Aspers, 2010). Fashion is about contagion of desire (Girard and Gregory, 2005). Thus, the number of consumers buying the same fashionable product ceases to be a problem, especially in Asia where Confucian rules forbid being too original. In apan, unlike in individualistic Western societies, wearing the same Louis Vuitton reinforces feelings of togetherness, which are very important there. In Asia, in fact, luxury creates both distinction from others and at the same time a sense of belonging. Second, many luxury companies have abandoned a major obligation of the luxury business model: no delocalization. Prada, for example, by making some of its products in China has reduced its production costs and improved its gross margins, thanks to low labour wages, thereby making the company still more appealing to Asian investors who have been able to buy the company’s shares on the Hong Kong stock exchange since June 2011. After all, Coach (the New Yorker brand) has been delocalized for a long time. Lower production costs also allow the brand to invest more in communication in order to build
the dream that consumers associate with it.
Luxury is a business model This has been empirically fine-tuned through time by those luxury brands that dominate the pantheon worldwide: Louis Vuitton, Chanel, Gucci, Hermès, Ferrari, Rolex and so on. These companies, many of which are still family owned, have crafted a unique common business model, a pillar of their resilience and profitability. This business model runs contrary to most present business models in any sector. It rests on strict principles that maintain the uniqueness of luxury and preserve the non-comparability of those luxury brands that stick to it (Karpik and Scott, 2010). Here are a few examples, some of which have been called the anti-laws of marketing m arketing (Kapferer (Kapferer and Bastien, 2012): • Do not not delocalize delocalize production: production: luxury is the ambassador ambassador of the t he local culture and refined art de vivre. • Do not not advertise advertise to sell: luxury communicates to build the dream and to recreate it. This is not measured by short-term sales sal es increase i ncreasess because, unlike fast-moving consumer goods, goods, possession of a luxury good dilutes the excitement one had before the purchase was made.
• Communicate Communicate to non-targets: non-targets: part of of the value value of of owning a luxury good is the quality craftsmanship of the product, but another necessary part is the recognition by non-owners. This is why Aston Martin, although a very small brand, used product placement in the blockbuster James Bond movies – so that everyone in the streets could recognize recognize one, thus endowing the driver with admiration. • Maintain full control of the value chain: from from ingredient sourcing to the retail experience, experience, luxu l uxury ry quality can only be delivered if the brand has 100 per cent control. • Maintain full control control of distribution: this is where one-to-one service and interaction should take place. The experience must be exclusive. • Never issue licences: licensing necessitates loss of control and increases the risk of consumers having a bad experience. Luxury promises exceptional quality and an exceptional experience, but licensors must be profitable even after having paid important licensing fees. This can only be achieved by reducing the quality of the products themselves or of the distribution. This is why between 1998 and 2008 Ralph Ralph Lauren retail sales from licensing l icensing decreased from 60 per cent to 35 per cent. The US fashion brand bought back many of its licences worldwide. • Always increase the average average price: since the middle middle class gets richer, to remain its dream the luxury
brand should never trade down nor cut its prices. If it does create some accessible lines, this must be done on a limited scale and be counterbalanced by systematic trading-up. All new models of Jaguar, for example, when managed by Ford were designed to make the brand more accessible. The brand never created its own ‘S Class’ (as Mercedes did). • Develop direct, one-to-one one-to-one relationships with clients. Luxury means treating all clients as VIPs. This necessitates direct, personalized, personalized, one-to-one one-to-one interaction, ideally in exclusive stores that represent the dream in 3D. This luxury business model can be applied to companies in any sector. Thus, Apple, MINI and Nespresso are typical examples of companies that are not considered to be luxury companies, but nevertheless follow the luxury business model. There are other business models among the high-end labels: the fashion business model and the premium business model. The main characteristic of the fashion business model is that it delocalizes production in search of low-cost labour forces. Unlike luxury, fashion does not sell timelessness. As soon as the fashion season ends, sales and super-sales that slash margins are employed to eliminate inventory. Fashion does not worship quality as much as luxury does. As for pricing, in the luxury business, model average prices should always go up (this does not prevent having some access prices), as there are enough newly rich
consumers to justify this strategy as long as they dream of the brand. When this dream falters, many luxury companies prefer to expand downwards, selling to more people, thanks to profitable accessories that have more accessible prices and are produced in larger quantities in countries with low labour costs. Such accessories are to be bought repeatedly by the clients, a sign that the luxury brand has moved to a fashion business model, in which originality and change are valued, not rarity and timelessness. The premium or super-premium business model rests on the willingness to create an objectively ‘best’ product. Grey Goose super-premium vodka, for example, advertises itself as the ‘world’s best-tasting vodka’ since it has received many awards from expert juries. Unlike luxury, which refuses any comparison, super-premium brands look for it and build their fame through it.
How scarcity scarcity creates value It is a basic law of economics that when demand is larger than supply, price goes up. In one behavioural experiment, social psychologists psychologist s Worchel, Lee and Adewole Adewole (1975) made some cookies suddenly become unavailable to one group of persons, while another group could still buy them. Post-experiment measurements showed that the perceived value of these cookies was higher in the first group than in the second. Apple capitalizes on this effect
by creating an artificial scarcity at each new product launch: people queue the whole night in front of its stores and are price insensitive, even though they know almost nothing about the new product. The same effect can be seen in services: it is a good signal of value when one has to book many days in advance in order to get a table in a particular restaurant. Should the restaurant owner then increase the number of tables and capture a higher daily turnover? Of course not! Doing so would reduce the queue and dilute the scarcity effect and, hence, the attractiveness and pricing power of the restaurant. Remember el Bully restaurant in Spain, which was widely considered to be the best restaurant in the world; the waiting time for a table was over one year. Its creator decided to stop this – but wouldn’t it have been better to create a second line, with a few restaurants that are more accessible in price, located in fashionable areas but still with a queue? This is typically what is done by most famous chefs holding the Michelin three-star recognition. The second line builds the chef’s star brand awareness and the three-star restaurant keeps the flame alive for those rare few who can access it, after a long waiting time and an important sacrifice of money.
From scarcity to qualitative rarity Romanee-Conti vineyards produce only a few thousand bottles per year. Ferrari restricts its production too, as does Patek Philippe. Hermès Kelly bag sales are limited by
the actual scarcity of more-than-perfect crocodile skins. These examples are famous: they entertain the myth of luxury as a rarity business. But physical rarity (scarcity) is not welcomed by shareholders of listed luxury groups, since it prevents fast growth. Even though some brands, such as Hermès, hold to this objective rarity, the luxury sector has grown thanks to a shift to what may be called virtual rarity – everything that gives a feeling of privilege and of exclusivity (Groth and McDaniel, 1993). In fact, objective rarity is quite boring. It is also insufficient if the ingredients are not perceived as noble. This is why sustainable luxury is difficult to grow. Stella McCartney, for example, refuses by conviction to use leather in her fashion lines and accessories. Her craftspeople therefore painstakingly make use of alternative fabrics, none of them being held as noble. This is a typical premium or a fashion endeavour, but lacks the dream factor attached to luxury. It is time to acknowledge that modern luxury enacts a qualitative rarity. It embodies a level of over-quality, which runs contrary to all the trends of modern industrialized production processes and defies all laws of value analysis, the method by which the costs associated with features of a product or service are reduced while maintaining the features’ target value for the consumer. This qualitative rarity can be enacted through the production process, if for instance handwork is needed to tie a precious red ribbon on each Chloé fragrance bottle or to engrave a seal on each Royal Salute bottle of whisky.
Non-delocalization is also part of this construction of value, as is the culture or historical reference that is embedded in the product.
Introducing Introdu cing virtual rarity rarity Rarity can also be artificially induced. One classic way of sustaining desire for brands that now opt for longer series and extended production is to regularly launch limited editions that capture media attention and sustain the desirability of the brand through ‘ephemeral rarity’. Another essential lever for creating a halo of privilege is selective, if not exclusive, distribution. Luxury rarity is built at retail. Thus, there is no Louis Vuitton fragrance, for this brand refuses to sell anywhere but in its own stores. Fragrances, however, are closer to mass market: they need wide exposure. Most luxury fashion brands have chosen to sell their fragrances (a key lever of brand awareness, image and profits) through selective distribution: selective department stores, the mass prestige Sephoras, Douglases and the like. This restricted distribution endows these brands with a halo of glamour and feelings of privilege. In a Chanel skincare and make-up shop-in-shop within a department store, any woman can be cared for like a VIP, even if only for a few minutes. Finally, communication also builds virtual rarity. To build the dream, the luxury brand must communicate far beyond its actual target. The brand, its products and its prices
must be known by many, even though only a few should buy it. This is why Chanel typically advertises its most prestigious jewellery line, not the accessible one. Luxury brands capitalize on a few celebrities or even one single brand ambassador who symbolizes uniqueness. Also, the systematic use of social events by luxury brands aims at exhibiting the brand’s selectivity through the press and the internet – by publicizing who it invites to these events. It must be shown that not just any celebrity can come.
From craft to art: elitism for all A most significant shift is taking place: the starification of designers. There is a real cult of the designer. Unlike the artisan, famous for his or her know-how, designers now beg for recognition as real creative artists. Some, such as Karl Lagerfeld, demonstrate that they have other talents such as photography or cinema. John Galliano presents himself as a work of art, staging the typical figure of the romantic artist. Little by little, art pervades commerce, especially luxury commerce. Louis Vuitton promotes avant-garde artists such as Stephen Sprouse and Takashi Murakami. The Musée des Arts Décoratifs in Paris hosts the Ralph Lauren collection of vintage automobiles. Cartier, to build its prestigious image, installed a temporary museum within the Forbidden City in Beijing. In Seoul, the Prada Transformer is a striking building in the shape of a tetrahedron, with the capacity to change its
own form and function. Luxury likes to be associated with art, because, just like art, it aims at being perceived as intemporal. Diamonds are forever, as is a Porsche 911. This intense proximity between art and business has another goal: to position products as authentic pieces of contemporary art, each one blessed by the hand of the designer. By doing so, luxury brands de-emphasize craftsmanship, which requires time and effort and is not compatible with volume (Catry, 2007). Art enhances also the brand extensibility beyond its core product (Hagtvedt and Patrick, 2008). Thus, the transformation of luxury fashion designers as art icons is a consequence of the search for growth through accessories. Companies will typically look for designers with personality, able to create followers and emotional bonds among larger audiences. It is notable that designers should be avant-garde. They should purposely not appeal to everyone, thus creating a cultural elite of followers, rich or less rich. The designers capitalize on a cultural segmentation, on people who like to think of themselves as the creative elite. Built by the media and social media as a cultural icon, the designer’s charisma is a source of authority and aura, and bits of that aura are passed to clients through the purchase of products. When one buys a special item in the Marc Jacobs e-boutique (eg a Rubixcoin purse at US$18, or neon rain boots at $28), one has the feeling that these items have actually been designed by Marc himself. Despite their low price, this feeling of an extraordinary object is reinforced by the fact that, as the
luxury business model prescribes, they can only be found at Marc Jacobs stores. Finally, the purchase indicates one’s advanced tastes and acts as a social marker. Art and culture create an elitism for all, which can be leveraged by selling more products to more people, without diluting their appeal, because these products are held as art objects, not as commercial products. products. This desire to look non-commercial, and to appear to be fully part of the world of art, is exemplified by advertising. Nowhere should it obey the classical rules taught by Procter & Gamble. For luxury, the less explicit and understandable the advertising is, the better it is. Advertising here seeks to create a distance, but at the same time it also tries to communicate to the many. This social construction of advertising as art holds communication as a full ‘product’ of the creative brand. Dior ads are to be treated in the same way as its bags or dresses. This is why luxury brands do not have communication directors. It is the creative director who imposes his or her vision on all the of the brand’s productions. A consequence of this trend is that some luxury brands advertise that they will soon have a new ad and inform about the famous photographer recruited to create it, the top models it will feature, the incredible place where it was shot, etc. Similarly, luxury brands now put videos on YouTube and other social media sites, documenting the making of their TV commercials. Since advertising is by its essence non-credible, by focusing on the artful construction of this incredibility, the luxury brand reduces reduces its it s commercial undertones. undertones.
The new reality of Asia: egalitarian luxury? Most of the rules of luxury brand management have been invented in the West. They reflect the sociology of Western societies, and are dominated by concepts such as distinction, class differentiation and elite culture. In such a context, increasing the penetration of a luxury brand dilutes the feelings of privilege. As a result, the snobs accept to pay more so that the conformists can no longer buy at that higher price (Amaldoss and Jain, 2005). This is confirmed by the dream equation (Dubois and Paternault, 1994): the desirability of a luxury brand is correlated with the difference between brand awareness and brand penetration. Unknown brands do not create desire and magnetism. But when luxury brands are too massmarketed, going after all consumers (Nueno and Quelch, 1998; Silverstein and Fiske, 2003) in the so-called democratization of luxury, they lose their cachet. They are no longer distinctive enough – at least in Western countries, maybe not in Asia (Phau and Prendergast, 2000). Since 1980, Japan has been the goldmine of the luxury sector. Now, China will soon become the world’s largest luxury market. Interestingly, Japan has a very egalitarian culture, yet it made Louis Vuitton the world’s number-one luxury brand. This looks like a paradox, but it is not. One should keep in mind that, when penetrated by luxury brands, Japan had the largest middle class of all developed
countries, with a very high average income per household (more than US$60,000). It is also a society in which the group is more important than the individual. Finally, Japan is very hierarchical. Western luxury brands provided the apanese with a way to reward themselves, but also to behave according to one’s rank in society, thus without disturbing the social order (conformity). In Japan, owning an unknown luxury brand meant taking a risk. The fame and distribution of mega-brands such as Louis Vuitton are very reassuring from a face-saving perspective. Furthermore, these brands proposed a wide array of products, from accessible accessories to extremely expensive items. As a result, the Tokyo office worker as well as the CEO could both buy the same brand at the same store, but of course very different products. Thus, price distributes distri butes rarity through discriminatory levels. There There is a price for the many and a price for the few. However, even the lowest price must be seen as a sacrifice, or else the magic will not work, as we will see below. The same process is now taking place in China, with millions of consumers eager to show that they are succeeding, while being novices regarding what is or what is not a luxury product. Chinese consumers love strongly leading brands. This is clearly an advantage for brands with high brand awareness and a network of own stores in all major capital cities, and now regional cities. For a Chinese consumer, buying a luxury good locally is a way to participate in world consumption. It is also egalitarian.
Is the cult of luxury religious? A religious phenomenon seems to be acting in the luxury business. In Asia, a literal ‘cult of luxury’ exists (Chadha and Husband, 2006), which in Japan appeals even to teenagers. Western youth have also adopted luxury brands. They mix and match luxury accessories with casual clothing. Why has luxury extended this far from its natural borders? If Francis Fukuyama (1996) is right, since the collapse of communism there are no more ideologies, at least those that promise paradise on earth. Only consumption remains, and in its highest form: luxury goods, which embody both high creativity and heritage, and are very qualitative, hedonistic products, imparting quality craftsmanship, high symbolism, glamour and transgression (through the excessive price). Luxury is a process of spiritualization of human-made objects. This is why price is so important, as well as the blessing of cultural and powerful elites. An excessive price is the measure of one’s desire, and hence of the desirability of the object, based on values that have nothing to do with down-to-earth practicality. By sacrificing an important part of their salary for the purchase of a luxury bag, the Tokyo office worker builds the sacred nature of the object (the etymology etymol ogy of sacrifice is making sacred). The similarities with an actual cult are many. We have already analysed how, in order to sustain this cult, luxury brands seem engaged in the marketing of adoration, starting with
that of the iconic designer. The iconization of some products of the brand’s range is also significant. It is how luxury creates a counterweight to the loss of aura created by the large-scale technical reproduction of products. Iconic products are meant to look intemporal, almost eternal. This is achieved in two ways. First, they are permanently in the catalogue – like the Porsche 911 or Chanel N°5 or Jaeger-LeCoultre’s famous Reverso watch. They are also made intemporal by relating them to some highly significant moment of the life of the brand’s founder. The spirit attached to this moment and the story that goes with it endow the product with part of the aura that its production in long series had destroyed. The iconic product becomes an object of the cult. One needs to possess at least one, once in one’s life. Luxury brands also cultivate mythical stories about their foundation, and maintain high secrecy on their present back office (concerning production sites and quantities, finances, etc). Their flagship stores, magnificent pieces of urban art designed by famous architects, have been compared to modern cathedrals, in which faith is reinforced. In these stores, each product is put on a pedestal, like a holy statue or icon. The stores act as closed shrines where a subtle secret order reigns and where one is introduced selectively, hence the queues outside. Consumers visit the stores in small groups, as in a pilgrimage, and wish to attend the rituals delivered there on a one-to-one basis (welcoming, services, mode of address, demonstration, explanation of the exceptionality of each item, etc). This comparison with
religion is most revealing: luxury likes to present itself as an elevating cultural force. It belongs to the upper tier of Maslow’s pyramid, that of self-realization (Maslow, 2011). Religions like big numbers, large communities, unless they wish to remain as a small sect. However, the comparison with religion has limits, and one may therefore talk instead of magic. As their Latin root suggests, religions tie people together in their belief of God in heaven. Magic instead invokes supra-natural forces in action on earth, thanks to the mediation of objects, icons and shamans. As anthropologist E. Arnould wrote (Arnould and Curasi, 1999: 264): ‘their possession links the owner or holder with immanent powers to achieve certain ends’. There is something magic in the possession of luxury goods. They endow the owner with the ability to become another person just by wearing a blessed cloth, jewel or accessory. The starification of modern fashion designers is an essential prerequisite if luxury brands want to appeal to larger audiences. These designers are not mere humans any more, but lead their followers in the world of art, creative culture, taste and sensory experiences thus far restricted to the elite. Their magic touch is passed along by contagion from the designer to the end user. There is no need any more to link luxury to rarity or a finite number of clients. As expressed by the dream equation (Dubois and Paternault, 1994), the larger the number of clients, the more famous the name must be in order to keep the dream alive.
Nurturing the symbolic power of the luxury brand Symbolic power is now fuelled not by rarity, but by the theatrics of qualitative rarity. Unlike mainstream brands, which have a single logo (Nike’s swoosh, for example), luxury brands develop a ‘chest of symbols’. Thus, Chanel has a magic number (that of Rue Cambon’s first shop in Paris), the camelia flower, etc. Symbolic power is also nurtured by the designer’s visibility as very singular and the brand’s highly creative communication. Hence the importance of fashion shows, those rituals of défilés held in capital cities, acting just as medieval horse jousts once did to designate the bravest to the public. At each défilé, the designers agree to compete in front of the cameras of the world. This is the condition for their fame to be maintained. Similarly, in the automobile business F1 circuits play the same role for Ferrari or Mercedes. This is why giving mass-market brand names to the racing teams instead of the automobile makes F1 lose part of its mystique: one does not hear about Mercedes any more, but about the Red Bull team. The widespread extension of luxury brands’ communication far beyond the classic glossy pages of magazines is also part of this phenomenon, as well as the late but powerful entrance of luxury brands to the internet and social media. In 2011, Louis Vuitton created its own digital in-house agency with 400 employees worldwide. Their goal is to diffuse content about the brand
all over the internet: history, heritage, unveilings of the craft, social events, creative interviews, fashion shows, creative travel guides, limited editions, etc. If the luxury brand wants to stand above its many copies and lookalikes, selling only an image of luxury, it must capture attention on the internet and reveal its depth and infinite creativity.
Short-term or long-term policy? The goal of a luxury policy is to build pricing power, making clients become fans of the brand and price insensitive. Some luxury brands, pushed to grow by their shareholders, have decided to increase their penetration among the public, while trying to maintain high prices. This has been achieved by releasing many constraints of the luxury business model, such as objective rarity and an informal rule forbidding delocalization. Instead, these brands have adopted a religious model of community building in which adoration of iconic figures, experiential selective distribution, and highly visible creative communication play a central role in reinforcing the faith of the many and the symbolic power of the brand. But there is a danger: the trade-off between short term and long term. Knowing that luxury can be defined as the ordinary of extraordinary people and the extraordinary of ordinary people, the question becomes: How long will the former dream about such a brand? These people play the
crucial role of a reference group for the mass of followers. Amaldoss and Jain (2008) demonstrated that they are ready to pay more in order to reduce the number of followers (the conformists). To keep them, brands produce supra-luxury supra-luxury products, products, services and events. But will wi ll trading them up to buy these most expensive upper ranges of the brand suffice to maintain the illusion of rarity and their feelings of privilege? Is there a point beyond which Louis Vuitton will have gone too far in penetration and diffusion? The brand has now decided to open stores in socalled C-towns in China. From a quantitative standpoint, these towns are bigger than many Western capitals. Then why not create a luxury market there too? But seen from the standpoint of Shanghai or Beijing’s modern elites, what does it mean for the brand to go deeper into the Chinese provinces? If, to sustain its dream, luxury needs to be always perceived further and above, how does this distribution strategy maintain the aura? Will the announced stratification between stores – with a clear hierarchy setting apart the few experiential flagships in capital cities from more normal stores in the provinces – be enough? It is known that the Louis Vuitton brand also develops what should be called ‘invisible luxury’ – very private services for the rich and mighty – on an exclusive basis, such as giving the possibility of organizing a dinner for the host and his or her friends in one of the private apartments of the newly built House of Vuitton in London. T h i s invisible luxury is designed to make extraordinary consumers still feel privileged. As for the hierarchy of
stores, it aims at making the provincial client in a C-town still dream of accessing the store when he or she visits a more important town. Clearly, there is a long-term risk here. This may be one of the reasons why LVMH, the world’s number-one luxury group, had taken an uninvited 20 per cent share in Hermès, the brand whose former CEO, Patrick Thomas, said: ‘When a product sells too much, we stop it.’ Hermès wants to remain a luxury brand, not become a fashion brand. It could potentially act as the post-Louis Vuitton brand in the LVMH multiplebrands brand portfolio.
Conclusion and clues for entrepreneurs The future luxury brands are in the making. Everywhere in the world, entrepreneurs are creating luxury products and hoping to build their own luxury brands. They now clearly understand how much they should from the start position themselves as ‘art and craft’ rather than as products. Building a luxury brand takes time. One does not launch a luxury brand as one launches a fast-moving consumer good brand, with a D-day signalling the start of an extensive marketing action plan. Instead, the entrepreneurs should communicate through their creative director and knit close ties with cultural elites, cultural places, art places … with a strong preference for avant-garde, especially if they want to represent the future. They should also understand that the classical distinction between products and
communication is meaningless in the luxury world. Products are communication, and communication should be undertaken with the same exceptional exigency for style, for ultra-qualitative details as any of the products. Also, it is important to build a qualitative rarity, beyond an objective rarity: even newly bred brands should communicate about their heritage, their inspiration, their cultural references, their being the ambassador of the excellence of a culture. Ralph Lauren has remarkably paved the way. But more recent examples are interesting benchmarks: Bell & Ross, a watch brand that is now part of the Chanel Group, is only 25 years old, but looks as if it has existed since the Second World War. Everywhere – on the internet, in stores, in the packs around the watches, in communication and the design of their products – are hymns to the right stuff, those hero pilots who pushed the limits of supersonic jets. This is how new luxury brands acquire depth and brand content, thus sparking the desire for the acquisition of their very symbolic products.
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03 The artification of luxury
From artisans artisans to artists artists
This chapter was originally published as an article in Business Horizons, 57 (3), pp 371–80, May–June 2014.
Growth is the biggest challenge for a luxury brand, in that volume dilutes the brand cachet. In addition, it violates the credo of rarity, on which the luxury sector is originally based. This chapter reveals how the current leading luxury brands use ‘artification’, a process of transformation of non-art into art, to circumvent the volume problem. Artification takes time and substantial investment. It cannot be undertaken by the brand alone; it requires the active collaboration of art authorities and renowned renowned artists. The goal is to change the status statu s of the brand, of its founder and products, and in so doing to reinf orce orce the idea of a better-than-ordinary brand, whose whose price and and symbolic power are undisputed. It is also strategic strategic f or or the globalization of luxury: art is universal.
The challenge of growth for luxury companies Growth is the biggest challenge for a luxury brand. Luxury brands should not endeavour to remain small; yet they face a real challenge of growing while whil e remaining a luxu l uxury ry brand. This statement may come as a surprise; recent headlines have marvelled at the economic story of the luxury sector – one that, despite the global recession triggered in 2008, has continued its growth, reaching €212 billion in sales in 2012 (Bain & Company, 2013). However, this understanding of the sector presupposes that it refers to t o luxury brands; brands; in reality reali ty,, the ‘luxury sector’ is a macroeconomic entity comprised of heterogeneous companies and products, only a few of which follow a luxury strategy. Because the word ‘luxury’ has become fashionable, many companies use it, even if they are fashion houses or premium brands. However, ‘luxury’, ‘fashion’ and ‘premium’ are not substitutable: they refer to three totally different ways of managing a company (Kapferer and Bastien, 2012). The popularization and overuse of the word ‘luxury’ thus blurs distinctions and creates managerial confusion. Even Starbucks coffee has been described as ‘romance, relaxation and luxury’ (Clark, 2007: 94). It would be more accurate to use words such as ‘gourmet’ or the good/better/best hierarchy to describe these products and use ‘luxury’ only in its narrow meaning.
For a premium or fashion brand, growth poses no difficulties: the more the better. For example, masstige brands, such as Ralph Lauren’s mass-produced clothes, are of good quality and made at low production costs in China. Value is created by prestigious retail stores, made to resemble a mansion, materializing the American dream. To access this dream, the brand offers, for example, a panoply of clothes inspired by the Hollywood movie The Great Gatsby, which evokes East Coast gentry, itself inspired by English aristocracy. Volume is not a problem. The problem of growth for luxury brands is that supply should always be below demand; thus, growth is sought after, but cautiously. This goal is especially salient in the early 21st century as luxury brands face surges of demand in developing economies such as Brazil, Russia, India and China (the BRIC nations). Meeting such demand could mean banalization, loss of lustre (Thomas, 2008) and a loss of exclusivity – all preambles to the loss of premium pricing power. To mitigate this risk, some luxury brands limit their volume. For example, Rolls-Royce indicated that in 2013 it aimed to sell just one car more than it sold in 2012, emblematic of a strategy that concentrates on the multiplication multipl ication of custom-made products. products. At Hermès, former CEO Patrick Thomas insisted that ‘as soon as a product sells too much, it is discontinued’, though it appears that this rule applies to bags and silk scarves, not to watches and fragrances, which are sold through wholesale channels to multibrand retailers.
This chapter analyses a transformation of luxury that aims at solving the growth dilemma: to become bigger while keeping a luxury strategy and meet mounting demands that can attract new competitors. This transformation is also motivated by the need to reinforce the legitimacy of the luxury sector as a whole. All sectors must defend their right to exist; it is never given a priori. As long as there has been luxury, there have been moral criticisms of its excesses and its cultivation of inequality. These latent criticisms have been revitalized as a result of the pervasive presence presence of luxury in today’s society. In turn, we argue that the growing multiplication of associations of luxury brands with artists, galleries and museums is not accidental. Luxury brands are actually engaging in a subtle process of ‘artification’, the transformation of non-art into art. The luxury industry aims to be perceived as a creative industry. This chapter therefore begins by diagnosing the problems created by luxury growth and analyses how and why art can answer these challenges. It then explores the concept of artification, the process of transforming a brand into an example of art. The chapter concludes with a discussion of how several luxury brands have implemented this strategy.
The radical transformation of luxury today Luxury has become fashionable, and its status in society
has radically changed. Etymologically, the word luxury means ‘overabundance, excess, beyond necessity’. For centuries, luxury was limited to the happy few. It was the exclusive lifestyle of those in power: pharaohs; kings, queens and their courts; and later merchants and industrialists. It was meant to express refined taste and impress crowds by the magnificence of the palaces, horse carriages, dresses, jewels and so on. This origin is latent today in the consumer psyche; asked what products come to mind m ind when w hen they hear the word w ord luxury, consumers do not talk about watches or leather bags but mention yachts, helicopters, private islands and supercars – that is, an idealized lifestyle accessible only to the wealthiest. This very specific luxury – called ‘überluxury’ ‘überluxury’ – does exist but is confined to a select few consumers. Luxury is a microeconomic sector that has grown since the mid 1990s, slowly extending its customer base beyond the happy few to the happy many, the so-called middle class. This is why this sector is growing fast and captures so much corporate and media attention. Considering China alone, the size of the world’s largest middle class – with earnings between US$10,000 and US$60,000 – is estimated at 300 million people (Wang and Wei, 2010). The challenge for luxury brands is determining what to do with this tsunami of demand. In Asia, where the growth of this market is most notable, a radical transformation has taken place in which, paradoxically, luxury is no longer ‘a luxury’ but instead has become a seeming necessity, as manifested by the
queues of Chinese tourists in front of Louis Vuitton flagship stores in many major cities. There are a number of reasons for this radical transformation, which represents not a democratization of luxury (through lower prices) but rather a democratization of the desire for luxury at high prices: • In emerging emerging countries, countries, growth growth is accompan accompanied ied by by urbanization, urbanization, which w hich creates a context of high competition. People need to define their identities to themselves and others. • Booming economies develop meritocracy meri tocracy and social stratification, so people need clear hierarchies to identify how high they stand or wish to be perceived. These hierarchies rely on not only possessions but also well-known well -known prestige brands. brands. • Unlike Western consumers, consumers, Asian Asian consumers buy buy luxury not to differentiate themselves but to avoid being considered socially below others. Japan, Korea and China are competitive economies, at both macroeconomic and individual levels. Each person feels an obligation to succeed in order to gain esteem from others (Chadha and Husband, 2006), which affects their major consumption choices, including their children’s education. Success must be visible and the markers unambiguous and respected. Thus, Asian consumers consider wearing a luxury suit, watch or leather accessory as a necessity to maintain
face – as a universal social visa. This trait also explains the growing counterfeit economy: economy: counterfeit counterfeitss are the t he poor poor consumers’ luxury, their way to adhere to the norm. Fake products are the gateway before trading up to authentic products.
How growth creates two major problems problems for luxury brands Growth is a blessing for all brands, if they are profitable. For luxury brands, however, it is a mixed one. Growth is not an issue for premium brands (eg top German automotive brands), which in principle do not set volume limits but instead seek to gain market share and new consumers by always improving the performance and services of their products. Similarly, fashion brands extend their distribution to seize this source of growth. In contrast, luxury brands represent much more than products, regardless of their performance. They reflect the taste of elites. By extending from the happy few to the happy many, luxury brands moved from the ordinary of the extraordinary people to the extraordinary of the ordinary people. As a consequence, the first challenge for luxury brands is finding a way to grow while still appealing to extraordinary consumers, those who ensure the long-term desirability of the brand. To keep the wealthiest clients while extending their
customer base, luxury brands permanently raise their average price level. They also limit the number of accessible items for luxury ‘excursionists’, who do not typically buy luxury items but may ‘splurge’. Another option is dual management: specializing labels with their own lines and retail network, one of which is extremely expensive and highly selective and the other that is more accessible (eg Armani Privé versus Emporio Armani, Ralph Lauren Black Label versus Polo Ralph Lauren). The selective labels continue to develop sophisticated rare products, limited editions and special orders. Growth creates a second problem for luxury brands. Booming demand for high-quality, expensive goods attracts many new competitors, with innovative business models that challenge the classical luxury brands. For example, Chanel and Louis Vuitton are currently challenged by Coach. The situation is acute in developing economies, in which new luxury consumers have not learned the hierarchy of brands. In these economies, consumers are not loyal to brands, lacking knowledge about why they should stay with brand A instead of brand B. The differences between the products are not evident, and neither are the brands’ advertising messages or retail store experiences. For example, Coach’s website reads: ‘Artisans and innovators, we continually refine and perfect our collections to create some of the most luxurious handbags in the world.’ Chanel, Prada or Bottega Veneta could write the same words. How, then, can luxury brands mark their distance and
recreate the gap between luxury and masstige? New luxury brands face similar issues. For example, in the champagne market, Jay Z’s brand Arnaud de Brignac and Mariah Carey’s brand Angel have gained widespread recognition in the African American community, due to the active presence of these two celebrities in the media and on social networks. This link offers a challenge to Veuve Clicquot champagne, which has long aimed at a similar audience of young, active, female consumers. These new brands attract new consumers who either do not embrace a traditional culture or just want to switch away from classic brands. The challenge for luxury brands is to create distance from these attractive innovative newcomers. Unlike a premium strategy, the luxury difference is not created by proofs but by beliefs. Proofs call for direct comparisons with competitors about the products, the tangible part of the brand, which would entail stepping down from the pedestal and putting the luxury brand at the premium brand’s level (Amaldoss and Jain, 2005). Luxury brands compete instead on their intangibles: they must educate consumers in order to regain their undisputed symbolic authority, the basis of their price (Karpik and Scott, 2010). To do so, luxury brands must remind consumers of their legendary roots, the mythical history that sets them apart. Whereas celebrities are a form of fashion, luxury cannot be ephemeral. Instead, it provides a bridge between the past and the future.
Luxury growth and the rising issue of legitimization Luxury has always been more or less morally condemned. The Greek philosopher Aristotle talked about luxury in order to criticize it, associating it with vice. Centuries later, the Latin writers Seneca and Cicero saw luxury as an early sign of Roman decline. Today, these criticisms still exist, latent and sometimes explicit. Even luxury buyers tend to feel somewhat uncomfortable with luxury. In the Ipsos World Luxury Tracking (WLT) Survey, a global assessment of the worldwide luxury market conducted by a well-known opinion research institute, the sample of respondents is limited to those persons able to afford luxury goods (eg 2 per cent of the population in China, 50 per cent in Europe or the United States). Yet across all countries, more than 60 per cent of these respondents agreed with the statement: ‘living in luxury is a superficial life’ (Ipsos, WLT Survey, Paris, 2013). Although people like luxury and sometimes adore it, most share this sense of conflict. In ancient Greece, the moral condemnation of luxury came from philosophers. Today, it comes from other sources: moralists, politicians and advocates of sustainable development. Because luxury is an economic sector, with companies listed and tracked on international stock exchanges, it is subject to the obligation of permanent growth (though family companies experience less of this
pressure). Thus, luxury seems to be everywhere today: in magazines, in airports and on the high streets of all major cities, as well as in regional cities. This expansion of luxury may seem shocking in emerging economies. In these countries, the majority of the population still lives in poverty, and a minority shows that they are already well off by consuming expensive goods and brands conspicuously. In a country where 63 per cent live on less than $1 per day, figures from the research company Euromonitor (2012) show that Nigeria had the fastest-growing rate of champagne consumption in the world, second only to France, and ahead of several BRIC nations and mature markets such as the United States. In 2012, China banned luxury advertising in Beijing, whose streets were formerly flooded with billboards promoting promoti ng luxury goods. According to the Chinese Chinese authorities, these ads created a politically unhealthy climate: they were not only too ostentatious but also a painful reminder of the wide gap between rich and poor. The ads, and the luxury goods they promoted, represented for many a misuse of public money, incorrect values and a bad social ethos. One side effect of this ban was that it drove luxury brands to make more use than before of digital and social media, sparking the birth of video websites that provide both entertainment and information. If luxury is the smoke, social inequality is the fire in this controversy. Luxury as a visible economic sector must address its collective image and its perceived legitimacy – just as all economic sectors must manage their reputations,
which determine their right to operate freely. When this reputation is lost, the business is endangered.
Why art now? Becoming an industry The luxury market’s growing desire to be held as art is not because because it is art (what (w hat is art, after all – it is i s an endless endless question) but because it needs to be viewed as art, today more so than ever before. Why? The problems already identified are part of the answer. In addition, luxury has moved from the idealized family business to that of a concentrated, concentrated, very profitable indu i ndustry. stry. Thus far, the luxury sector has thrived on an ideological storytelling based on craftsmanship, rarity, uniqueness, one-to-one personalization, exclusivity, feelings of privilege and boutiques. The central figure in this storytelling is the artisan. Whereas in ancient Greece there was no difference between artists and artisans, since the 16th century artists have been considered free of any constraint (unlike applied arts): they create art for the sake of art, an idealistic search of beauty that reflects emotion. Artisans master maste r the tekhnè, the art of handmade reproduction of fine objects according to specific knowhow. They must be loyal to a model. Certainly, artisans must learn how to be creative when filling special orders, how to bring aesthetics and uniqueness to functional products for a single client. Can the iconic image of the artisan survive the reality
of today? Luxury is an industry, and an industry is about reproduction. In 2009, Louis Vuitt Vuitton on launched a world worl d advertising campaign called savoir faire (know-how), highlighting the work of the firm’s craftspeople. Such a campaign was needed to provide a counterweight to the growing image of Louis Vuitton as a mass-produced, luxury mega-brand. The United Kingdom’s Advertising Standards Agency even banned Louis Vuitton from using two of its ads, maintaining that these images misled consumers into believing that the label’s products were handmade, when the majority of the bags, wallets and other accessories that Louis Vuitton is known for have been crafted by machine. Allusions to craftsmanship can thus backfire. In the past, luxury firms were family businesses, mostly local, with a focus on the core product. Today, luxury is managed by groups, fully global, with a focus on retail and a commitment to expand the brand’s range and diversify, thus abandoning rarity and sometimes even relocating (eg Zegna has factories in Spain, Switzerland, Mexico, Turkey and now China; Prada manufactures in China – a challenge for the magical label ‘made in Italy’). The artification process thus is timely for a sector that is becoming increasingly less artisanal.
A short history of the relationship between art and luxury luxury
Art and luxury have been related since ancient times, moving from close proximity to frontal opposition and now to a renewed collaboration. Historically, there was no art without the support and protection of the powerful elite: for centuries, in Western civilization, painting was exclusively religious, and its purpose was to diffuse the messages of Catholicism on the walls of cathedrals and churches. In an illiterate world, these images were essential for the celebration of God and the saints. Later, with the Renaissance movement, the Medici family of Florence stimulated a renewal of the arts and created some distance from religious motifs. Seduced by Italy, French King François I contracted with artists to decorate his palaces and castles. Other aristocrats became eager to bolster their fame and prestige through the development of art. The 19th century marked an abrupt departure: the advent of a new conception of art called ‘art for art’s sake’, which was devoid of any commercial goal and with a clear desire to be iconoclastic and challenge classic forms of art. The movement arguably began with the provocative Olympia by Manet and extended to Picasso’s cubist paintings and other non-figurative contemporary artists. The notion of an artist changed as well: Van Gogh had become the symbol of the damned artist, living in poverty, refusing the world of money and rejecting the conventional system. Since then, art and money have nourished intricate ties, if only in the sense that visionary merchants collected paintings that critics later recognized as major artwork,
which prompted private collectors and museums to compete for the possession of these unique pieces. It is significant that museums have now become places of mass enlightenment – the ‘churches of Sunday afternoon’ – whereby art is now consumed by all. This shift indicates that the status of art itself has drastically changed in society, such that creation has become endowed with prestige. Perhaps the most emblematic version of the changing relationship between artists and money is the life of Andy Warhol. He called his studio Andy Warhol Factory, meaning he had no problem with the notion of technical reproduction as art. In addition, he was the first to identify the process of artification: when an art gallery exhibited his painting of a simple Brillo Box, this action bestowed the status of art on his work. Luxury brands have learned this lesson. Art is that which is consecrated as such by institutions of art. One of Warhol’s quotes even specifies the opposition between art and money: ‘You know it’s art when the cheque clears,’ such that there is someone to pay for it. Subsequent superstars such as Jeff Koons, Damien Hirst and Stephen Sprouse similarly have blurred the lines between art and business. They willingly become part of the system, lending their own fame to luxury brands.
What’s in art for fo r luxury? Because the luxury industry has subsidized art, helping
artists work, it seems reasonable for the industry to expect something in return. Art can bring luxury a much needed moral and aesthetic aestheti c endorsement, non-commercial non-commerc ial connotations and a paradoxical legitimization of its high prices. Artification helps this sector to downplay the social stratification motivation of consumer demand and to foster more humanistic motivations, such as elevation by objects that condense highly talented artists’ work, tradition and culture, art and creativity, and timelessness. These motivations justify people’s desire to possess these objects: they want access to beauty and depth, a justification welcomed by this industry. Because art is the apex of human activity, associating luxury brands with it can help to sustain the gap between luxury brands and new competitors or brands that imitate the codes of luxury. Art reinforces their symbolic authority. On practical grounds, art and luxury share several characteristics. Both are expensive creations and aim at the same target (the cultural elite). Luxury, like art, aims at immortality, or at least timelessness. According to Oscar Wilde: ‘Life is short; art lasts.’ Art value grows with time (similar to the price of vintage Ferraris). How can art achieve this feat? It does so by being totally independent of function. A painting has no literal function, so it can endure the effects of time. Function creates temporality and a built-in obsolescence; for example, early versions of the iPhone no longer have value. The same effect holds true for fashion, which is invariably of its time and mortal. For this reason, luxury must stay out of the fashion realm. Just
as art has done, luxury must decorrelate price and function. Although a handbag remains a bag, as a piece of art its price must be totally independent of its function. The distance between art and function enhances brand extensibility and entry into new categories – thus far limited by associations to specific know-how (Hagtvedt and Patrick, 2009). Because most economic growth is created by new companies and new entrepreneurs, luxury’s growth is necessarily based on new money. However, luxury brands must anticipate the fast evolution of these buyers. In addition, being associated with conspicuous consumption alienates the creative elite, the influential consumers, people designing the future. It is important to demonstrate that the brand does not segment only on the basis of money but also considers culture, intelligence and the ability to value artwork. How can luxury brands keep extraordinary people loyal to the brand? The best answer may be to give them the ability to distinguish themselves from other clients of the brand and demonstrate their capacity to enjoy aesthetically cultural works, which ennobles the money they have. These happy few are quickly moving towards postmaterialistic luxury. They already own Ferraris, dozens of Hermès bags, a Rolex Oyster Perpetual, yachts and so on – so they have little left to prove. They expect incredible experiences (eg travel, services); culture, if it is truly rare, may also grow in value. Art elevates humankind and makes the human species unique; it also cannot be
criticized. Art aims for the elite features of all people, regardless of their wealth – not at a specific elite class characterized by its wealth. Finally, art takes people to a higher level of meaning. These traits explain why luxury needs art. Through art and the signature of artists, luxury – criticized for becoming the science of artificial rarity – transforms limited editions into authentic artworks, not mere techniques to create demand. When Louis Vuitton creates a €1 million necklace for its new, high-end jewellery collection, the value is not in the number of diamonds – a trite measure of value – but the time and creativity required to design and make this piece of art, under the artistic direction of Lorenz Bäumer, one of the world’s leading jewellery designers and now the head of Louis Vuitton’s high-end jewellery line. The artist endows the object with timelessness, substance, and cultural and temporal thickness: this is ideal for the communication of luxury – and is far less superficial than the use of celebrities. Ultimately, art is universal. That is, it is an elitist language that crosses frontiers. The following sections thus explore the importance of this universality for a brand’s entry into a new country.
Entering new countries through art How should luxury brands enter promising new markets
such as China and India? Formerly, luxury brands had an immediate solution: hire a local agent to import and distribute products. Today’s luxury brands need a longerterm vision. The issue is not simply penetration but setting the bar high, establishing brand non-comparability and acquiring prestige among influential consumers. In this setting, an art exposition may be more effective than advertisements in order to demonstrate a brand’s values or create links with local cultural elites and opinion leaders. The first impressions created among opinion leaders in the country are those that last. Hermès has developed a specific approach to be perceived as arriving ‘as a guest, not a conqueror’. The brand seeks to avoid an image as a predator, only interested in making money by selling highpriced (some would say overpriced) items. Instead, it pays homage to the culture of the hosting country. For example, Hermès entered China by organizing a successful exhibition in the Forbidden City titled ‘Heavenly Horses’, which celebrated the ancient culture of horses in China. That Hermès began as a saddle maker and that its logo is a horse carriage helped to establish a link. The exhibition attracted more than 1 million visitors, and Hermès created a bridge between its brand and one of the oldest arts and traditions of China, appealing to the country’s political, cultural and artistic elite. Cartier used a similar approach when entering India: it paid tribute to the old and uniquely Indian aristocratic tradition of playing polo with elephants. Culture is also a bridge between countries. Luxury
brands aim to be recognized not as product makers but as active elements of the culture and ambassadors for a country’s art. Art allows collaboration with foreign artists. Thus, Ding Yi, a famous painter from Shanghai, was invited to create a specific design at a Hermès exhibition, ‘Tale of Silk’, held in Beijing in 2008.
A forerunner of artification: Louis Vuitton Vuitton in Japan Ja pan Although in 2014 China is perceived as the centre of growth for Louis Vuitton, Chinese consumers are only just discovering what Japanese white-collar workers found out some 30 years ago, when Japan was the main market for luxury. Louis Vuitton’s Japanese experience summarizes both its past success and future challenges. As the brand became widely available through an ever-increasing network of directly operated stores and shops-in-shops, Louis Vuitton products lost their appeal for Japanese consumers. In a highly developed country such as Japan, the cost of losing the support of the local elite or tastemakers is high. In luxury, success has costs, namely overdiffusion and overpenetration. As early as 2000, Louis Vuitton identified a solution for its Japanese market: launching an art strategy. How can art reinforce the brand’s aura and help to renew the customer base? Although no figures document
an actual return on art investment, artification can create value in four major ways: • producing a continually continuall y renewing renewi ng contemporary image of a brand proud of its heritage; • presenting presenti ng the brand brand as an advanced cultural agent, not a commercial one; • reducing reducing the obligation of of rarity in the era of reproducible reproducible works of art (Benjamin, [1936] [1936] 2010); • creating a barrier barrier to entry against newcomers, such such as creative brands managed by younger designers. In the 2000s in Japan, Louis Vuitton, Hermès and Chanel enacted a proactive strategy. These brands had embedded contemporary exhibition spaces in their new flagship stores. Maison Hermès Ginza (designed by the architect Renzo Piano) opened in 2001 and has held contemporary art exhibitions regularly, renewing its shows two to five times per year. Louis Vuitton built its flagship on Omotesando in 2002 (by architect Jun Aoki). Chanel followed with its 2004 flagship in Ginza (by architect Peter Marino), also devoting a whole floor to cultural activities such as classical concerts and art exhibitions. By substituting themselves for well-respected institutions (ie museums), the brands gained credentials and protected themselves. They projected the image of providing artistic enlightenment to Japan elites, creating a cultural reminder that art gives the power to lead.
Artifying the founder: the Chanelization of Coco Chanel Another route for the artification of a luxury house is to artify the founder. If it can be demonstrated that he or she was an artist, it follows that all his or her works are art and not simply products. This is the present strategy adopted by Chanel. From 5 May to 5 June 2013, at Palais de Tokyo, a museum of modern art in Paris, an exhibition called ‘N°5 Culture Chanel’ was held. The show represented the iconic fragrance within the context of the avant-garde artistic movements prevailing in 1922, when Chanel N°5 was conceived and created. It was not an isolated case. In November 2011, at the National Art Museum of China, in the centre of Beijing, another exhibition, ‘Culture Chanel’, explored the roots of Gabrielle ‘Coco’ Chanel’s inspiration and her personal life, starting from when she was a child. These exhibitions provided exclusive, highly informative images that fuel Chanel’s brand content strategy. Images from the exhibition were also available on the internet and through social social media. Chanel also planned a tour of world capitals with a unique travelling exhibition: the ‘Mobile Art Chanel Contemporary Art Container’, designed by architect Zaha Hadid (however, because of the economic downturn, this project was postponed). Placing the Chanel brand at the centre of Paris, in the heart of China, and at the apex of
contemporary art and contemporary relevance, these outward manifestations are unified by one purpose: to endow Coco Chanel with the status of a cultural icon (Heinich and Leduc Browne, 1997). The process is based not on information but on celebration. To quote Marshall McLuhan, ‘The medium is the message.’ To achieve creative credibility, and credibility based on heritage, it is vital that the brand be presented in non-commercial settings – national museums are institutions and agents of consecration. In the case of Coco Chanel, the historical figure herself is not important – although historians have revealed positive and negative aspects of her life (eg Vaughn, 2012), reality does not engage people as much as legends. The company’s aim was the sanctification of the person, a necessary preamble for encouraging people to view the products that Chanel created as pieces of art (including Chanel N°5) beyond the purely commercial products of other brands in the market. These large-scale exhibitions from Paris to Beijing were designed to create incomparability and supremacy, to portray Chanel as of a different kind than all followers in the market. The goal is not to compete on the basis of the products themselves but rather to accumulate symbolic capital. To become a cult brand, the luxury brand needs a saint. His or her products become endowed with magic, regardless of the number sold, thus releasing the constraint created by the rarity principle that blocks the growth of luxury brands. As Heinich and Leduc Browne (1997) rightly point out,
the process of post-mortem transformation is a selffulfilling prophecy, in that it produces what it claims to acclaim. In other words, if a person is celebrated, it must be that he or she deserves it. Coco Chanel was a great person because she is admired, not vice versa. Who she really was is no longer the issue. The queue of people at the museums must be the reflection of the grandeur of the person. Coco Chanel thus is being ‘Chanelized’. While visiting the Beijing exhibition, I was struck by the mise en scène, the staging of the exposition: huge rooms, all in black, with such a paucity of objects that even the most trivial felt highly significant – relics in a silent church. A photograph of a stained-glass chapel window not only reveals that Chanel attended Catholic school but also suggests a more divine inspiration. The pattern of interlaced motifs is almost immediately recognizable as the interlaced Cs of the future Chanel logo. Is it a mystery, or a signal of some kind of predestination? In another room, a book emblazoned with Chanel’s face appears on a shelf l abe ab e l l e d Queens Queens of France France,, thus identifying identifying her as an aristocrat of modern taste. Yesterday in Paris, tomorrow in another major city, the ‘N°5 Culture Chanel’ exhibition takes a different tack, showing all the famous artists that Coco Chanel had opportunities to meet. Retroactively, these sculptors, painters and musicians seem to have knighted her, seem to have included her in their closed circle, thus transforming her status of seamstress and dressmaker into one of creator
– not of dresses but of works of art. Chanel’s goal is to grant non-commercial essence to its bestsellers – in this case to Chanel N°5 perfume.
How artification artification involves all art institutions To be credible, the process of artification must involve the institutional actors of the art world. They are the ambassadors of luxury brands in this process. Consider the following: • International Internat ional contem contemporary porary art shows, shows, such as FIAC in Paris and BASEL in Basel and Miami, highlight collaborations such as when FIAC asked 18 fashion designers to collaborate with 18 artists to provide its opening fashion show (1983). • Art galleries rent out out their venues venues during fashion weeks in New York, London and Paris, among other cities. • Auction houses are owned by luxury brands. brands. For example, Bernard Arnault (CEO of LVMH) bought the Tajan and Phillips auction house in 1999; François François Pinault, founder founder of PPR/Kering PPR/Kering (Gucci), bought Christie’s in 1998. • Museums have have changed into luxury boutiques. The The Guggenheim organized an Armani exhibition in 2000 called ‘Exploration of Seminal Designer’s Vision,
With More than 400 Objects’, after receiving a gift of US$15 million from Georgio Armani in 1999. • In a symmetrical action, boutiques boutiques transform into museums. Their window panels are designed by artists, and the construction of flagship stores has been assigned assigned to famous f amous international architects who w ho make audacious, artful statements visible to all, similar to cathedrals and museums in the past. • The The flagship buildings themselves host artistic artisti c exhibitions. Luxury brands have also developed temporary boutiques in unexpected places and developed mobile museums to host and present artistic discussions of some of their iconic products or logos, such as the Prada Transformer and Chanel Mobile Art Container.
Involving all artists at all levels of the value chain Artification is not a varnish. It is a strategic transformation from the outside in, made possible by a brand’s proximity to artists and their integration in the value chain. Artists have collaborated with luxury houses for a long time, though mostly sporadically. The greatest rival to Coco Chanel, the innovative and visionary Elsa Schiaparelli, a fashion designer from the late 1920s to mid 1950s, was influenced by her friends Salvador Dali, Man
Ray and Marcel Duchamp (Blum, 2003). She in turn influenced the works of Yves Saint Laurent and John Galliano (Dior), who introduced newspaper prints and trompe l’oeil draping in his collections. In 1965, Yves Saint Laurent launched a Mondrian collection and, in 1966, a Pop Art collection. To infuse an art culture in their organizations and companies, luxury groups have created foundations and special collections. For example, in 1984, Cartier created the Cartier Foundation for Contemporary Art. In 2005, François Pinault, CEO and founder of Kering Group, established his Foundation F Pinault for Modern and Contemporary Art, in Venice. In 2014, LVMH opened its Fondation Louis Vuitton pour la Création, designed by Frank Gehry. These classic forms of sponsorship are important investments, whereby corporations encourage the arts while maintaining the independence of artists (see Figure 3.1). FIGURE 3.1 Artification Artif ication ladder
Today, collaboration with artists, mostly stars of the avant-garde, has become even more intimate. Luxury brands have initiated a collaborative stage with artists – who themselves are considered brands – into a de facto cobranding. Thus, as early as 2004, Takashi Murakami collaborated with Louis Vuitton, and introduced his motifs on a limited series of leather bags. In 2008, Louis Vuitton asked Stephen Sprouse to tag a limited collection of bags. Similar collaborations include Yoji Yamamoto for Comme
des Garçons, Robert Combas for Jean Charles de Castelbajac, and Keith Haring for Vivienne Westwood, to name a few. These examples should not be taken as mere public relations events, designed by the brands to remain attractive to the wealthiest consumers and counterbalance the growth of clients. In a much deeper, more significant change, this artification transforms non-art into art – to gain depth, elevation and value, and in the meantime to project old brands into the future in order to ensure their respect, if not iconic status, among the creative elite. This concept explains why many brands now compete to earn the collaboration of the most audacious artists. In line with its own discreet culture, Hermès has preferred to create an ‘Artists’ Residence’ close to the brand’s ateliers and workshops, to better influence the artisans themselves and encourage encourage cross-fertilization cross-fertil ization as they work. Here, the hero is not the artist; it remains the product. At the highest stage of collaboration, artists provide advice and input at all levels of value creation: upstream at the conception of products, production level and knowhow, and downstream in relation to retail architecture, window panels, packaging, merchandising and communication. For luxury brands, every act must be creative and refined in order to create a sufficient gap. Artification means that every act, including advertising, should be artful. Some brands even take their inspiration directly from art itself. Thus, the print ad of Secret Garden
from Dior was directly inspired by the famous Edouard Manet painting, painti ng, Le Déjeuner sur l’Herbe. l’ Herbe. Yves Yves Saint Laurent’s ‘manifesto’ fragrance launch commercial used the body-painting technique developed by Yves Klein. These artful references are explicit and part of the transformation of luxury into art. Moreover, recently luxury brands have begun to enlist famous directors of the seventh art (movies) to make commercials (eg David Lynch for Lady Dior, Martin Scorsese for Chanel perfume Bleu 2).
The multiple media of artification artification In addition to the media outlets mentioned previously, artification can be constructed through other media. Retail is a place where art is to be experienced. Luxury stores are not solely artistic architectural statements; they must also be conceived of as places for an artistic, four-dimensional experience, both within and outside the store. Today, internet and social media are of foremost importance. Although the agreement of key opinion leaders must be obtained first, luxury brands also need to gain the respect of the general public. Luxury brands have become the curator of content – their own. Educating new generations today entails using social media as a way to indoctrinate consumers into the brand universe and culture. However, the process of artification means much more than simply posting rich and exclusive brand content on the many
video websites that attract these new consumers. Events are also a key medium, though they must be conceived as an artistic, cultural event rather than a public relations exhibition. For Chanel fashion shows under the direction of Karl Lagerfeld, the challenge is – with no expense spared – to produce art at the highest level. This four-dimensional sensory experience is not only enjoyed by the select few who are invited but also gets immediately relayed on social media platforms across the world. That is, media advertising is a necessary part of the artification process. Books can also be part of it. Cartier provides an unlimited budget for publishing its own books. Even in the digital world, masterpieces seemingly cannot be sold without an accompanying book, whether about the object itself or the legend of the brand, to commemorate the purchase experience. The quality of these books guarantees that they are not thrown away but remain as durable art sources.
Conclusion: an ambitious vision for luxury? Art has become a way to put luxury at the forefront of contemporaneity, a remarkable feat for brands that promote their past as well. wel l. Luxury brands have been elevated as strong cultural conveyors of advanced taste. By
recruiting rising or confirmed stars from the art world, firms can nourish their brand with a flow of inspiration. At a deeper level, they provide luxury with the necessary transcendence that this sector needs in order to overcome the pitfalls created by irresistible growth. A question thus arises: Does this strategy actually position luxury as the paragon of human work? It might be the unspoken goal, accessible by exploiting three major weaknesses of contemporary art. First, it has abandoned work as a value and focuses essentially on creating experiences for receivers. Formerly, artists had to be excellent artisans first, to master the technique and spend time on each piece of art. If work is abandoned by art, luxury brands could capitalize on this concept and earn considerable additional social legitimization. Second, contemporary art involves provocation, creating a split with elites, which offers another entryway for luxury brands. Third, many contemporary artists refuse to ennoble ingredients and instead create their art using leftovers and junk. Luxury brands thus could become singular, as the only form of human work that combines creativity, art, patient craftsmanship and high nobility.
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PART TWO
Specific issues and challenges
04 Luxury after the crisis
Pro logo or no logo?
This chapter was originally published as an article in European Business Review, Sept–Oct 2010, pp 42–46.
The economic recession triggered in 2008 has hit luxury, as most other sectors. Many luxury brands have reeled from lack of clients and cash. Since then, many experts have predicted that post-crisis luxury would be of a totally different kind. It was the end of luxury, as we knew it, the end of bling-bling, of prominent logos and high-price excesses. It is chorused everywhere in the media that this new luxury will be modest, bespoke. It should be the demise of conspicuous consumption. It is our argument that luxury companies would be very cautious cautious in giving faith to this unanimous and trendy opinion, especially if it is backed backed by cursory polls where respondents tend tend to give socially socially acceptable acceptable answers. Based on a deep understanding of the the dynamics of luxury and on consumer research
worldwide, one thing is sure: conspicuousness is here to stay, of course with differences within the luxury population. The future belongs to companies who understand this need for status and adopt a true luxury strategy, very different from a premium strategy. Those who already did it are the ones that, in fact, grew profitably during the crisis.
From absolute to relative luxury Characterized by the ability to spend considerable amounts of money beyond what the functional value of products would command, luxury has always been subject to moral criticism. During the period of economic crisis that began in 2008, the word ‘shame’ has often been used in Western capitals: anecdotal evidence pointed out that consumers visiting luxury stores wanted their purchases in a blank bag to avoid flaunting luxury logotypes in the streets, for fear of moral condemnation. condemnation. In a rational world, where the value of things would be solely tied to their functional utility, there is no room for luxury. But this world would also be asocial. Luxury is intimately tied to the dynamics of living together, to the need to compare oneself to others, and to the betweenperson competition that is at the heart of economic development in modern capitalism worldwide. This is why conspicuousness is built into luxury behaviour. However, still because of social competition dynamics, some groups
need it more than others, up to the point where to differentiate themselves maximally from the commoners (Bourdieu, 1979), elite groups may even ask for very subdued and subtle forms of ‘brand recognition’, only recognizable to an educated few (the ultimate sign of one’s superiority), without logo. The fact that some critics ask for a no-logo luxury or predict it as a sure outcome of the present economic crisis is a sign that the core social function of luxury is still largely misunderstood. There is no single definition of luxury. Most definitions refer to well-crafted, hedonistic and aesthetic objects, priced excessively above their functional utility and sold in exclusive stores delivering personal service and unique consumer experience, most often from a brand with history and heritage – delivering a rare feeling of exclusivity. However, this is more a description of what people see or experience, rather than a true understanding. What is the difference, for instance, between premium and super-premium super-premium products? products? The difference is in the social function of luxury. Luxury is tied to the social hierarchy. Premium goods are just better goods: they are the best-in-class products, after examination of their comparative performance. Luxury is elsewhere. No comparison here, except between people themselves and their ability to stand out. Looking back at history, luxury was the privilege and the signal of the powerful people (gods, semi-gods, kings, nobles, aristocrats and so on): they had access to gold, to castles, to royal pleasures and did not work. They hunted
and engaged in war. Luxury was a measure of your rank, itself being inherited. With the French Revolution and the Industrial Revolution, everyone could in theory gain access to power with the benefits of wealth and of a hedonistic lifestyle, surrounded by the most exquisite products from around the whole world. At the beginning of the 20th century signs of luxury were displayed by living in a mansion with the latest comforts, driving a car, going skiing, owning a yacht. No brand was needed at that time: this absolute luxury was by its essence conspicuous, visible by all. It was visible while walking in the streets of New York or London or Paris, or along the wharfs. Now, to foster economic growth in the West, the forces of imitation and self-elevation have been released. Everyone could hope to buy a part of the great life of these role models, held by the media as icons of our society: they had money, therefore power and glory. We have entered into the modern luxury, a relative luxury – the question has, then, become not whether you own a car, but ‘What car do you own? A Porsche or a Buick?’ Enter the brand! ‘Where do you go skiing: Gstaadt or Aspen?’ To summarize, in the aristocratic world, luxury was the son of an inherited social stratification. In our open societies, it is the signal of the latent social stratification. This is why it has gained so much importance. No other industry but luxury delivers status to so many people (universities deliver it, but to a few). But status is a zerosum attribute (Bothner, Godart and Lee, 2010) – if you get more of it, someone else will have less of it. This is why no
one really wants to get left behind. Since consumption has become an extension of the self (Belk, 1988), status-loaded objects are essential artefacts for impression management. In addition, they deliver intrinsic pleasure to the owner or user. Everyone can build their own prestige vis-à-vis their immediate social network by having the right objects, signalled by the right ri ght brands. brands. Where is status coming from? From people with the ability to deliver status: the elites. What is typical in our modern world is that there is no longer one single elite: in fact, the evolution of luxury is a reflection of the fight between elites. Through luxury, elites try to impose their own taste, which is held as superior. The luxury of Hollywood stars and sports celebrities is not the luxury of the East Coast WASP, mimicked for mass consumption by Ralph Lauren, which is not itself the luxury of young Chinese billionaires or Russian oligarchs, drawing behind them a crowd of emulators, nor the luxury of the billionaire geeks of the Silicon Valley. Something is certain, however: the need for status calls for well-known and visible brands. Depending on the reference group of your status need, you will choose different brands, known by different people, sometimes by only a few of them.
Modern economies trigger status needs It is easy to understand why luxury has grown so much in our societies, and its future f uture prospects prospects in i n the BRIC countries countries
are considerable. Conspicuousness is at the heart of it. In 1978, to transform China into a fast-growing economy, Prime Minister Deng Xiaoping said: ‘To get rich is glorious.’ After decades of communism, of uniformity, of forced and sometimes brutal equality, the forces of individual competition were unleashed. Everyone could now aim at making more money: no shame. This was even a citizen obligation: glory would be received in return. Millions of people have left their villages in China and joined the megalopolis in search of employment. Their living habits would also be changed: tradition was gone; a new man emerged, self-made. The same thing holds true in India and Brazil, less so in Russia. Soon it will be Africa’s turn (it has most of the ores needed by the world). As recent research has shown, this new urban civilization has strong implications for status needs. We now live in the mating society. In the BRIC countries as well as in the emerging economies, the median age of marriage is going up. This leaves much more money for self-pleasure and more time for mating. Janssens et al (2009) as well as Gris Gr iskev kevic iciu iuss et al (2007) (2007) have demonstrated that men’s men’s interest for high-status goods goods increases in a mating mati ng environment. The mating perspective encourages men to attach greater meaning to displaying success through conspicuous objects. Let us recall that the Chinese luxury market, soon to be the first in the world ahead of the United States, is predominantly a ‘male’ luxury market, one that is mostly concerned with the race for success. To paraphrase Chadha and Husband (2006), two other
social phenomena may also breed the world luxury fever. We live in storytelling societies. But the fairy tales are now about people just like us who became celebrities and rich quite fast. This proximity creates identification: so many websites and blogs tell us how these people dress and what they eat now that they are rich and famous. It has been shown by Mandel, Petrova and Cialdini (2006) that reading about a successful person who is just like oneself (for instance, coming from the same school) increases consumer expectations about their own future wealth, which in turn increases their desire for luxury brands. Let us remember that, in all countries, new magazines – whether they be in paper format or digital – now tell us ‘who are the richest’ and ‘who are America’s richest below 40’. This increases the materialistic values of people exposed exposed to such repetitive repetiti ve stories. Finally, in this race there will be more losers than winners. In a factory or in an office, only the chiefs are in power. Most workers feel a state of powerlessness: they have no control over others. Rucker and Galinsky (2008) have shown that people try to compensate for this, to restore power by acquiring high-status objects, ‘especially if the products’ status is visibly conspicuous’. This overspending is a placebo to restore a sense of power – and, we would add, of dignity. One should never forget that in Confucianist Chinese society reputation and face saving are of paramount importance. We can probably extend this to other countries too, where money tends to become the key evaluator of people’s worth.
Adapting the price price and logo to different segments The luxury industry no longer means an industry that is accessible to only a niche of the richest people. While still focused on this group with regard to yachts, private jets, exclusive trips in the Atacama Desert, and living in a fully ecological, sustainable and zero CO 2 resort, Bernard Arnault, founder CEO of LVMH – the world number-one luxury group with more than 60 brands – summarizes modern luxury as: ‘The ordinary of extraordinary people and the extraordinary of ordinary people.’ This sentence is at the heart of the luxury strategy. Luxury brands need both targets to thrive. When they lack one of them there is a problem: too few extraordinary people means that soon the brand will have to trade down its prices: it has lost its status-giving clients. It has no other solution than to pay celebrities to flaunt its products: a sign of weakness. Having too few ‘ordinary people’ may also limit the dream of the brand by lack of visibility. Investments in megastores also need to bring new clients into these temples. However, the status needs of different segments are not the same. People who already have richness and status have little to prove. They draw no glory from exhibiting their wealth. In fact, they compare themselves only to their peers. They like brands known by them only (Patek Philippe instead of Rolex), just as they like to patronize
golf clubs where the entry fee is so high that it sets up a social barrier. If they buy an expensive Louis Vuitton bag or suitcase it is because they recognize it is a precious object. They have the freedom to choose for themselves, unlike most of us who choose with others in mind. These people will like brands that hide their logo, being recognized only by their typical pattern or design: as Bottega Veneta is. This means that only those in the know are able to identify what you wear. People with less status but a lot of money are craving for status. They buy visible status. A recent research (Jee Han, Nunes and Drèze, 2010) confirmed that the preference for pre-eminent logos was totally predicted by these two factors: richness and status. In addition, they show that a third group (with less money but a high need for status) was also looking for big logos. This is the target of Ralph Lauren’s recently launched big pony polos (with a super-large logo on the chest). No surprise, this group is also the core target of counterfeited products. The essence of the counterfeit industry is to sell very visible logos on low-quality products. This group is not looking for a durable durable product, but a fast class. cl ass. Luxury brands grow by catering to different segments of people. To take one of the world’s most famous luxury brands, Louis Vuitton, it must manage the logo sensitivity of its different client groups. Louis Vuitton uses a dual strategy: • Introducing Introducing expensive expensive new produ product ct lines to capitalize
on the need for uniqueness of some people, called ‘snobs’ by Amaldoss and Jain (2005). Snobs are those people people whose w hose utility utilit y from a product product decreases as more people exhibit it. • Varying Varying the logo logo pre-eminence: pre-eminence: in fact, the more expensive a bag is to buy, the less pre-eminent the logo. And vice versa. Nunes, Drèze and Jee Han (2010) showed that, on Louis Vuitton e-commerce boutique, boutique, one incremental unit of logo discreetness cost US$26. For Gucci it was more expensive: $122. The same holds true for Mercedes-Benz: the logo on an A Class has a 16-centimetre diameter; on an S Class it is 6 centimetres. Nunes, Drèze and Jee Han made a statistical regression analysis and found that each 1 centimetre reduction cost US$5,000 more for the client.
Why conspicuousness conspicuousn ess will will come back: it never left! We have demonstrated that the forces driving conspicuousness have never been so strong in luxury highgrowth countries. What about the Western world? The rumour mill keeps on repeating that logos should now be discreet. Conspicuousness is out. There are three problems with this prediction. The first is that it is trendy. In fact it is the kind of answer that one finds in typical surveys
where people are interviewed on whether or not ‘luxury logos are overly visible and their size should be reduced today’. The answer is typically a socially acceptable one that we would expect today. Interestingly, Han, Suk and Chung (2008) have compared negative opinions about the size of luxury logos and subsequent luxury purchases: they found that people’s preferences in ‘non logo-exposed’ products products did not correlate with actual purchases! purchases! Still another recent study run in the United States looked at the gamut of bags presented between 2008 and 2009 on the websites for Gucci and Louis Vuitton (the two most profitable luxury brands) and compared them with the highest brand equity as measured by Interbrand (2010). The authors (Jee Han, Nunes and Drèze, 2010) make the assumption that such companies are well managed and that their new products and new prices are introduced to match the consumer demand. During the apex of the 2008 economic crisis in the United States, new products introduced displayed the logo much more than products that were withdrawn. In addition, all prices went up! Financial results of the US branch of PPR (now called Kering) and LVMH indicate that this strategy was beneficial. The crisis has wiped out of the stores those who could only buy the most accessible products, just like the cheapest Porsches lost half of their sales in 2008. But the luxury clients have not lost their need to signal status. They are the core target of the luxury brands.
Back to luxury? Dealing with the future of luxury, the problem is that a lot of opinions are held and believed not because they are grounded on research or on facts but because they are repeated by everyone, just like rumours. Two researchers launched the slogan of ‘inconspicuous consumption’ consumption’ (Granot ( Granot and Brashear, Brashear, 2007). They call it i t the t he ‘populence paradigm’ (popular opulence) because ‘it involves the mass production and distribution of premium goods and services, enabling the majority of consumers to pick and choose their consumption of New Luxury brands’. Interestingly these authors use the term ‘premium goods’, thus overlooking the fundamental difference between a luxury strategy and a premium strategy (also called trading-up strategy). Luxury exists because some people cannot access it. Since richness is growing everywhere in the world, thanks to fast economic growth, luxury must never be made too accessible if it wants to remain the dream of those with growing revenues and wealth. Even when made accessible its pricing should be discriminat discri minatory ory.. As a consequence, most of the t he brands that like to call themselves luxury are not in fact following a luxury strategy. They are more driven by a fashion business model. It is noticeable that the brand that most follows a luxury strategy, Hermès, is also the most profitable of the sector (Tabatoni and Kapferer, 2010) and that which grew by 8.5 per cent throughout the economic
crisis.
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05 Why luxury should not delocalize
A critique of a growing tendency
This chapter was originally published as an article in European Business Review, March–April 2012, pp 58–62.
Many
famous luxury brands have recently planned to delocalize delocalize their production. For a long time it had been rumoured rumoured that some luxury brands produce products outside outside their home countries, but this had rarely rarely been confirmed confirmed officially. Such recent public announcements announcem ents are therefore therefore a new and important development. For example, example, Prada Prada recently acknowledged that some of its goods goods are made outside made outside Italy, in China, thus joining Burberry, Burberry, which long ago closed its historical factory in Treorchy, Wales, delocalizi delocalizing ng to China and Mexico. Many applaud luxury
brands for closing production sites in their home countries, considering such cost optimization to be a rational evolution. But others claim that, in doing so, luxury is losing its soul. This chapter reminds managers that any decision must be analysed and evaluated within the t he context of a strategy. Luxury is a subjective concept but a luxury strategy is not: luxury’s ability to sustain its high prices and profitability is governed by strict rules. What Prada and others are doing is, in reality, discontinuing their luxury strategy in favour of a fashion strategy, without acknowledging this explicitly. In fact, the luxury strategy is a specific business model; fashion is another, another, governed by a completely different set of working principles.
From a well-kept secret to an overt announcement Conversations with executives at high-end labels have long confirmed the rumour of rising levels of production outsourcing. But high-end labels always refused to acknowledge these rumours officially. The success of Dana Thomas’s book Deluxe: How luxury lost its luster (2007) is largely due to her journalistic work that unveiled the luxury sector’s taboo about production delocalization. A product’s country of production was often hidden by making the tag that specifies this information rather invisible on or in the product. For instance, it is very
difficult to find any indication of the country of production within a Lancel bag. The same is true for many Repetto shoes. Kenzo, an LVMH brand, moved the production of some clothes from Prouvy, France to Krakow, Poland, where workers’ wages were one-fifth of those paid in France (Korosylov, 2007). Nevertheless, the clothes were still priced as high as before. Armani Exchange cardigans are made in Egypt and Tunisia. Coach, however, has never hidden the fact that a large part of its production is delocalized. The same is true for Polo Ralph Lauren. More recently, Burberry’s turnaround has been accompanied by the closure of its Wales-based factory, due to a belief that producing clothes in the UK does not create perceived value for a fashion brand. Hence, starting in 2006, Burberry delocalized all but its trench coat to China, Mexico and other countries with low labour costs. In 2011 Prada, a very high-end fashion label, decided not only to manufacture in China, but also to announce this change publicly. This new communication strategy is significant of a new era. Thus far, many Italian brands have used and abused the right to use the ‘made in Italy’ tag as long as the product – although manufactured elsewhere elsew here – was ‘finalized’ ‘finali zed’ in Italy It aly.. Thus, the etiquette eti quette ‘made in Italy’ does not at all guarantee that the product is actually made in Italy. What, then, motivated the public announcement by Prada, stating that: ‘About 20 percent of Prada’s collections – which range from bags and shoes to clothes for men and women – are made in China’ (reported in the
Wall Street Journal on 24 June 2011)? This must be understood within Prada’s financial context. The company was pressed to seduce Asian investors, a few days before its IPO in Hong Kong on 27 June 2011. Now, the real question remains: should luxury brands delocalize or not? To provide an answer to this question requires that we first clarify what is meant by luxury.
Luxury: do not confuse the concept, the sector and the business model model Everyone implicitly understands what luxury is, when one talks about the concept. Certainly no two persons have the same definition of what is their own luxury, but the shared concept of luxury refers to ‘rare, hedonic, very high-quality objects and services, sold at a price far beyond what their functional value would command, source of self-reward and of image lift vis-à-vis some relevant others’ (Kapferer, 1998). In fact, as shown by Bataille (Bataille and Hurley, 1991), it is by sacrificing a high sum of money to pay more than the functional benefits are worth that the buyers demonstrate their status and reinforce their own selfconcept. However, the word ‘luxury’ also has a second meaning. It can be used to refer to an economic sector. When Bain & Company value the world luxury market at around €1.7 billion, they perform this calculation by summing the
revenues of companies regarded as luxury not by the public at large but by syndicated organizations. For instance, in France, Comité Colbert acts like a self-appointed club: only those allowed to register in this club are regarded as luxury companies. The same holds true for Altagamma in Italy. For personal reasons, some Italian companies have decided not to join Altagamma, although they would woul d certainly qualify. On the contrary, Lacoste, the French outdoor, chic, ready-to-wear company is a member of Comité Colbert, but very few persons would use the word luxury to define Lacoste or its core product – the famous polo shirt – regardless of its high quality. There is also a third meaning of the word ‘luxury’. It can be used to refer to a unique business model, a specific strategy with exacting and stringent rules to be followed (Kapferer and Bastien, 2009). This latter acceptance is interesting, because any company may enact a luxury strategy, even if the company is totally outside the common understanding of the kind of companies that comprise the luxury sector (fragrance, clothing, leather, watches, jewellery, accessories and so on). For instance, Apple, MINI, Nespresso and even Lacoste more or less follow a luxury strategy, even though these companies are not perceived as ‘luxurious’ by the general public. The fact that ‘luxury’ can have each of these three meanings is a source of much confusion. Since the word ‘luxury’ is fashionable, its use is largely abused, especially by companies that do not in fact follow the rules of the luxury strategy. Coach, for instance, introduces its home
page with a bold headline, ‘The look of luxury’, thereby acknowledging that, although it has an appearance of luxury, it is not a real luxury product. Going one step further, one can say that it is because luxury is a sector, driven by obligations of growth and profitability, that many of its co-opted members have no other choice than to delocalize their production. They rationalize it by invoking the excellent quality of the work now done in China, but the real reason for this delocalization is that they cannot grow and increase their profitability by raising their retail prices. Instead, they are increasing their profitability by reducing their cost of goods. On the luxury business model, one grows by continuously raising the average price. This is the only way for a brand to keep on being the dream of the wealthy and of all those consumers who, although not as wealthy, want to buy a part of the former’s lifestyle. But this business model is exacting. Many companies cannot follow it any more and prefer to discontinue a luxury strategy, without saying it explicitly, in favour of another business model, for instance that of fashion or of premium brands. brands.
Luxury brand building is about building incomparability The luxury business model aims at creating incomparability, which grants freedom to set one’s own
prices. In contrast, on all other business models, prices are set while taking the competition’s prices into account. How does one create incomparability and the price insensitivity that follows? Incomparability is created by moving away from tangible elements of comparison and focusing on concepts such as art and religion – intangibles that elevate people. people. Certainly, incomparability should also have a rational basis. Luxury brands put forth their rare ingredients, rare production, the unique talents of the brand’s craftspeople, the time it takes one person to sew a Kelly bag, or the time that a Royal Salute whisky stays in the barrel (21 years minimum). But the economics of singularities (Karpik and Scott, 2010) that apply to famous Bordeaux châteaux wines as well as to management consultancy prices are mostly due to the uniqueness and desire created by intangibles. The two major intangibles are time and provenance. That date of birth, heritage and legend are one essence of luxury is acknowledged by the relentless attempt att empt by many recent brands to simulate it. Thus, Ralph Lauren is very successful in making everyone forget that it is a recently invented lifestyle brand (1968), the fruit of a business genius named Ralph Lifshitz. The whole atmosphere within Ralph Lauren’s flagship stores and the many black and white photographs on the walls are designed to create the illusion of a brand that already existed at the time of The Great Gatsby, Cary Grant and the early Hollywood golden era. This halo of privileged life is leveraged to sell the Polo Ralph Lauren line at a
premium price, even though much of it is made in China at low cost. Nevertheless, these products are sold in flagship stores that look like mansions in the hearts of the world’s capital cities. Provenance is the second strong intangible pillar of luxury desire, for it builds uniqueness, mystery, magic and non-comparability, and adds cachet. One should not forget that luxury is the by-product of art. Gifts are an important part of the luxury market. This is remotely reminiscent of the exchange of objects of art between the emperor of China and the kings of France and Italy. Luxury was the ambassador of the country from which it came. It epitomized its culture and demonstrated the abilities of its most highly valued craftspeople. For wine, the soil is also part of the uniqueness. To merit the title ‘champagne’ a wine must be made 100 per cent in the Champagne region. Otherwise, it is called sekt in Germany, sparkling wine in Australia, spumante in Italy, and so on. There are very few exceptions to this rule of provenance. Does one imagine Ferraris made elsewhere than in Maranello? After buying the MINI brand, even BMW decided to keep its factory in the UK although it would have been much more rational to delocalize it to Germany. One may immediately object that Audis are made in China. Indeed, this is why the brand has become so prestigious there. Communist Party high officials are not allowed to buy cars that are not produced in China. But Audi does not follow a luxury business model. The single proof is that they do not limit their production, sales
and market share. The same holds true today for Mercedes. At Porsche, a key motto until recently was to ‘always supply one car less than demand’, implying that volume maximization was not the goal. However, since its takeover by Volkswagen Group, the brand has announced high growth objectives: from 97,000 cars in 2010 to 200,000 in 2018. This will be achieved through the introduction of new models designed to attract new segments of buyers into the brand universe, and to accelerate the penetration of high-growth countries, focusing first on China. This is why the hypothesis of having one of these new Porsches made in a Chinese plant has been overtly evoked by Porsche management in anuary 2011. The vehicle would be a mini Cayenne, called Porsche Cajun, to be produced along with the Audi Q5. Clearly, high growth perspectives create production capacity bottlenecks and lead the company to question the taboo of delocalization. In any case, the Boxter and Caiman are already made in Finland. New models could be manufactured closer to targeted markets. As an additional benefit, local production of some new Porsche model in India would reduce the customs taxes in that country from 113 per cent to 40 per cent. Another exception to the rule of provenance is when the homeland is not linked to an added value, or to a specific perceived skill. This is why Chanel or Louis Vuitton watches are made in Switzerland, but in their own exclusive factories. They are not outsourced or made under licence. Similarly, if Hermès wants to launch a new shawl
in rare cashmere wool, it might rely on the unique skills of the craftspeople themselves living in Kashmir. It already has such arrangements with Tuaregs of the Sahara Desert, Indians in Brazil and artisans of Madagascar. These agreements are not aimed at reducing costs, but rather at sustaining some rare local arts and savoir faire.
Do not confuse confu se luxury, luxury, fashion and premium premium business models Luxury is a subjective concept. Many of us may disagree when interviewed about the perceived luxuriousness of a given brand. However, luxury as a business model has quite precise managerial implications. The elements of the luxury business model (see Kapferer and Bastien, 2009) are: • • • • • • • • •
full control control of of the value chain; full control control of the retail experience; experience; highly selective distribution; one-to-one one-to-one relationship with wit h clients at retail level; high level of of persona personalized lized services; high level of craftsmanship; exceptional exceptional level of qualit quality; y; no licences; no super-sales, super-sal es, no promotions; promoti ons;
• developing brand brand awareness well beyond the core target; • always increasing average average prices; • strong involvement with wit h arts; • beware of celebrities. This business model was empirically invented by those luxury brands that today are icons of the world’s desire (Louis Vuitton, Hermès, Chanel, Ferrari, etc). These brands grow by continually launching higher products – higher in creativity, quality and price. Porsche’s turnaround in the 1980s was achieved by the deletion of the many accessible lines (924, 944). Remember, products are perceived as luxury specifically because some people cannot access them. Products for which this rule is not met should not be called luxury products, but rather premium stylish products, for instance, or designer brands or massprestige. Today, everyone can see the multiplication of accessible goods sold by so-called luxury brands. It is normal for a luxury brand to create an access door to its universe, to induce consumers to trade up (Silverstein, Fiske and Butman, 2008). Even Boucheron jewellery house does it, and Cartier. The problem arises when the so-called luxury brand can only grow and be profitable by selling accessories, mostly licences. It means that the brand has, in fact, discontinued the luxury business model, while continuing to leverage its halo of luxury image (inherited
from a past fame) to sell fashionable accessories, produced at low cost in some emerging country. Let’s now turn to the fashion business model. It is totally different for one very good reason. What does fashion sell? The answer: just being … fashionable. This simple insight commands the entire fashion production, distribution and marketing strategy. After two or three months, today’s fashion won’t be fashionable any more. As a result, the prices will need to be slashed so that the shops get rid of their inventory and can be ready to showcase the forthcoming collection. In order to maintain high margins despite the necessity to engage in sales, followed by supersales in factory outlets, there is only one solution: to lower the cost of production as much as possible and try to sell at the highest possible prices at the beginning of the season. In any case, once a cloth is out of fashion it is not used any more. It does not need lasting quality (unlike that of luxury, since luxury is here to last). This is why Coach has always acknowledged being made in China. Victoria Karasik (a US business lawyer) in a financial report to shareholders of Coach (2011) is i s very ver y explici expl icitt about the Coach business model (fashion): ‘In addition, Coach has very high margins, even relative to its competitors. Even its “luxury” competitors such as Moet Hennessy Louis Vuitton and Hermes, who charge significantly higher prices than Coach does, don’t have as high a gross margin as Coach.’ This means that what former Coach CEO Lew Frankfort calls ‘accessible luxury’ for selling purposes is not a luxury strategy at all. As the financial analyst
remarks, the goal is to maximize the gross margin, by manufacturing the products at the lowest possible cost. This is normal. On the fashion business model, one lives in a fragile time: being fashionable does not last. Thus, the past, the heritage and the legends are not important. Nor is the country of origin. However, the designer is – or the strong values held and promoted by the brand (such as Diesel jeans, which brought high fashion into the jeans sector). T h e premium business model is based on the manufacturing of best-in-class products, with an image of style. If there is a best in class, it means that it is possible to make some kind of objective comparison between competitors. In fact, the premium strategy is based on manufacturing skills. It forces respect by increasing the functionalities of the product beyond what was thinkable beforehand, such as the car that slows down when the hand’s grip on the driving wheel is softened, as a sign of driver drowsiness. The whole car industry is engaged in this premium business model. Another example is the skincare sector, in which the ever-increasing claims of skin protection and rejuvenation made in the advertising of new creams and elixirs must legally be justified by scientific evidence. On this business model, time, heritage and even provenance are not important: proof is what is important. To summarize the argument, Miuccia Prada recently said (Wall Street Journal, 24 June 2011): ‘brands need to economise and look for manufacturing territories that offer the best deal, but to also weigh up the consumer response
to a luxury brand’s source and place of origin’. This is a clear statement, admitting that the Prada brand now defines its strategy according to consumers’ own tradeoffs, just as a mass-market brand. But, in fact, what do consumers think about this?
The consumer opinion on delocalization Asia is the future of the luxury market, because of its booming economies. It is, therefore, interesting to look at recent research undertaken in the BRIC countries as well as in Japan, which was the former number-one market for luxury and is still very high. In interviews with 1,500 luxury buyers in Japan in 2009, McKinsey asked whether they agreed with the following sentence: ‘I do not care whether luxury goods are made in low-cost countries such as China, India, Vietnam, so long as they are genuinely from luxury brands.’ Only 14 per cent agreed. This means that 86 per cent of Japanese luxury buyers think that luxury brands should not delocalize to countries with low labour costs. Ipsos, a global market research company, asked another question of luxury buyers in six so-called emerging countries in 2010: ‘A brand fits more with my idea of a luxury when it is made in my country versus in a Western country.’ The answers ranged from 1 (my country) to 6 (it is a Western brand) with intermediate grades corresponding to mixed or in-between opinions. The
average answers by country are as follows: Russia 6; South Korea 5.8; Brazil 5.4; China 5.4; Hong Kong 5.3; India 3.8. Interestingly, in five cases out of six, luxury immediately evokes a product from another country, and specifically from Western countries (France, Italy and Germany – for cars too). One should not overlook the role of travel in the growth of the luxury market. In 2010, according to Bain & Company, total luxury sales in all of China were smaller than total luxury sales in New York city alone. However, purchases made by Chinese travelling abroad represent as much as the Chinese internal market luxury sales. When the Chinese travel to Paris, for instance, they visit the Eiffel Tower and the Louvre Museum and then rush to Louis Vuitt Vuitton’ on’ss flagship flagshi p store st ore on the Champs-Él Champs-Élysées. ysées. They They will bring back a luxury gift from that famous brand, bought in the Parisian store (which increases the perceived value of the gift), like a trophy. They cannot imagine buying in Paris something that is in reality made next door to them, in China, by someone like them. The above-mentioned studies did not ask the same questions of fashion brands or mass-prestige. We can guess that the answers would have been different. Asking for less money, these brands do not need to deliver as much added value. Luxury is special. It is the highest form of consumption, in which all the sources of added value are mobilized to produce the desire of something that is not necessary, making it compulsory: both tangible and intangible added values. Behind the luxury brand there is
the country cachet and culture. This is why on the basis of ethics, as well as of the long-term sustainability of their price, luxury brands should not delocalize, and should remain that for which they are bought: the finest objects and services that a country can produce, with the additional unique cachet of being ‘made in …’.
Sustaining ‘made in’ as a real brand Looking at the attitudes of luxury companies there is a clear segmentation, based on their brand positioning and business model. A first group (such as Louis Vuitton, Hermès, Chanel) emphasizes quality and heritage as the main sources of their incomparability. They are patriots. For them, a country of origin is a homeland, much like the soil in a vineyard – a miracle made of earth, nature, sun, rain and sophisticated human labour, loaded with culture. For them, ‘made in …’ tells a whole story, tying production to a long heritage. It looks like an antidote to globalization, although nothing is more globally managed than luxury brands. A visit to any mall in any country of the world proves it: all luxury brands are present in the capitals of most countries. However, part of the added value and excitement of the brands from this first segment is that they are somehow turning their backs on globalization in terms of production and manufacturing. This is also how they remain incomparable both on tangible and intangible grounds.
A second group of companies emphasizes the creative style only, much inspired by the fashion business model. Thus, Burberry’s former CEO Angela Ahrendts defended the company’s decision to close its British factory as follows: being made in the UK is not a strategic factor to build consumer preference for the brand, which is mostly based on fashion and British style, not on specific British manufacturing know-how, unlike some French and Italian luxury brands. As a result, for this group of companies, the question of ‘made in’ is an empirical one: if there is no difference in the look and feel of the product, consumer satisfaction is then guaranteed in any case. Since it is less costly to manufacture in China, it is rational – from a managerial standpoint – to delocalize. They are advocates of the intangible economy, following Michael Porter’s thesis on the competitive advantages of nations, in which the West would specialize in what it does best (creativity, design and marketing), leaving production to emerging countries that will quickly learn how to match the quality level of former local producers of luxury brands (Porter, 1998). Taking Apple as a benchmark, although almost everything in an iPhone is made either in China or in South Korea, a label on every box reminds consumers that the product was ‘designed by Apple in California’. In this way, the company harvests fame and profits by virtue of being the one who conceived and designed this wonder tool. Thus, this segment does not emphasize the phrase ‘made in’ but rather ‘designed in’ or ‘designed by brand X’ – or does not
emphasize any such particular phrase at all. As one retailer has said: ‘When a consumer buys Chanel, he/she buys France at the same time, so why add a tag on the cloth with “made in France” written on it? To do so would be superfluous.’ This raises a question about the specificity of luxury management. First, delocalization diffuses the, thus far, unique country know-how, thereby destroying levers of added value. It is also the best way to reinforce future competition, not to speak of counterfeits. It is highly significant that in June 2011 Apple decided to sue its main supplier for the iPhone, the Korean giant Samsung, on grounds of breaking patents and counterfeiting. Without any doubt, Samsung’s Galaxy phone and pad look very much like the iPhone and iPad. More structurally, delocalization provides these Western brands with access to higher volumes of production, and hence the ability to capture fast-growing consumer demand in Asia, Russia and Brazil, without limits. Implicitly, this means that luxury is a business just like others, aimed at value creation and shareholder satisfaction (Kapferer and Tabatoni, 2012). We are very far from the philosophy of Hermès, epitomized by CEO Patrick Thomas: ‘When one of our products gets too successful, we stop it.’ This philosophy is surely not unrelated to the remarkable profitability of this luxury brand (its profit in 2014 was 32 per cent of sales). The luxury dream is precisely based on the fact that it is another world, far from all the principles governing the success of global brands made everywhere in the world and
selling just an image to as many people as possible: Nike, Adidas and even Ralph Lauren, Hugo Boss, Tommy Hilfiger, Gant, etc. The latter are often called luxury, because the word ‘luxury’ sells, but they are actually premium stylish brands, if words and business models are seriously to mean m ean something. The consequence of this latter vision is that ‘made in’ must be defended. Otherwise, it will lose its value. A first consequence is legal. The bar must be set very high to allow the right to use the certication of origin (‘made in’). In Italy, many companies want to avoid this. Thus far, ‘made in Italy’ has been accessible to brands that simply assembled the final product in Italy. Yet mere origin is not enough. Respect for a tradition of working methods too should be compulsory and checked. This is to put an end to what has been called ‘Made in Chinitaly’, referring to the many sweat shops installed in Italy itself, using Chinese workers who entered the country fraudulently and are paid at Chinese labour market prices. Interestingly, these sweat shops – Chinese factories installed undergound in Italy – manufacture both for high fashion brands and for counterfeiters. Most importantly, defending the ‘made in’ means that this phrase itself should be managed as a full brand, with both its tangible and intangible sources of added value. Advocates of delocalization hold that ‘made in’ as a mere indication of origin of production has become meaningless in our modern times in which products are, in fact, made in a collaborative way, involving many countries.
Accordingly, they want to eliminate its usage, as a vestige of pre-globalization production processes and supply chains. The luxury strategy plays the opposite game, and regards ‘made in’ as source of distinctiveness. But this works only if ‘made in’ acts as a lever of credibility and aspiration. It is there to sustain the dream. As such, the country dream must be fuelled by permanent innovations and creativity, demonstrating that the country is not only a place, but an engine of love, dreams and cachet.
The challenges of non-delocalization To remain a true luxury brand, following the luxury business model, entails sticking to local production. This is not an easy task for many luxury brands. Those that comply must create the conditions that are necessary to sustain this production. This is why they often buy their local subcontractors in case the latter go bankrupt – in order to be sure to keep alive a historical know-how that might otherwise disappear. Another reason might be that the owners of these subcontracting companies retire, but have no children willing to take their position. Thus, luxury brands play an institutional role in the sector by creating their own schools to encourage youth to enter these rare professions, often unknown amongst most youth, yet very rewarding. Many other brands would have just thrown in the towel and delocalized, happy to find low-cost labour in emerging countries or in Eastern
Europe, thus providing a big bonus to the shareholders, since the retail price of the luxury product is exactly the same regardless of the country in which it is made. In addition, delocalizing appears to be the best short-term answer to the post-economic crisis, fast-growing demand for luxury goods in the world. In fact, delocalization entails often abandoning handmade local production by craftspeople to be replaced instead by efficient machinery. Thus, delocalization is a blessing from an immediate financial perspective. But are shareholders the managers of the luxury brands, as they are for most consumer goods or even mass-prestige brands? Of course not. As long as they remain independent, non-listed, family companies, they have a long-term vision that precludes falling into the trap of short-term benefits. What is at stake is the ability for true luxury companies to remain so distinctive – and the source of an exclusive, long-lasting desire.
References Bain and Company (2011) Luxury in 2011, Bain World Reports, Milan Bataille, Bata ille, G and a nd Hurley, R (1991) (1991) The Accursed Acc ursed Share, Shar e, Zone Publishi Publishing ng Company, Company, New York Ipsos (2011 (2011)) World Luxu Luxury ry Trackin Trac kingg Survey Surv ey,, Paris Kapferer, Kapfer er, J-N (1998) (1998) Why are ar e we w e sedu se duced ced by luxury luxury brand bra nds?, s?, The Journal of Brand Management, 4 (4), pp 251–60 Kapferer, Kapfer er, J-N and Bastien, V (2009 (2009)) The Luxury Luxury Strate S trategy gy,, Kogan Page, Pag e, Londo Londonn and New York Kapferer, Kapfer er, J-N and Tabatoni, O (2012 (2012)) Is luxury luxury really rea lly a financial dream?, HEC H EC Research Resea rch Report, Report, HEC Paris
Karpik, L and Scott, N (2010) Valuing the Unique: The economics of singularities, Princeton Unive University rsity Press, Princeton NJ Korosylov, I (2007) What the luxury profession thinks of country of origin? Researc Rese archh paper, 2007 2007–01, –01, ICN, ICN, University of Nancy Nancy 2, France France McKinsey (2009 (2009)) Luxury Luxury in Japan, Ja pan, research resea rch repo re port rt Porter, Po rter, M (1998 (1998)) The Competitive Competitive Advantage Adva ntage of Nations, Nations, Free Free Press, New York Y ork Silverstein, M, Fiske, N and Butman, J (2008) Trading Up, Portfolio Trade, New York Thomas, D (2007) Deluxe: How luxury lost its luster, Penguin Books, New York
06 Internet Internet and luxury
Under-adopted Under-adopted or illilladapted?
The
internet creates a paradigm shift as big as the introduction of printing in the 15th century. The relationship between luxury brands and the internet is marked by a double myopia: luxury brands may be too conservative but the internet advocates may also be shortsighted when urging the luxury industry to conform to the generalized norms and movements of the web and social networks. networks. On the web, luxury ceases to be evident. Also the internet has not been created for luxury l uxury niche companies, companies, but for large-scale brands and operations. operations. The purpose purpose of this chapter is not to summarize the th e discussions on luxury luxury growth challenges on the internet internet but rather to explore explore in depth some new facets of the the issue and to present present recent recent advances.
The new frontier of luxury Since the emergence of the worldwide web, the luxury sector’s relationship with it has been rather cautious and, some might even say, conservative or fearful. High speed and fast expansion are the main characteristics of the internet: everything changes so fast. To keep abreast of all the changes taking place, everyone needs to be a geek, a digital expert. Thus, a culture shock arose for the luxury industry, which tends to think long term, typically does not act under the pressure of time, and is mostly concerned with the sustainability of brand reputation and the dream of ownership, a key factor in its pricing power. Even more, the risks are not the same for brands that market handbags at US$1,000 and those that start at €5,000. Fundamentally, the internet breaks the barriers of time and space, two essential pillars of the luxury creation of value: luxury needs time to be produced, accessed, purchased and delivered. For example, a customer cannot just enter a Ferrari store and leave with a brand-new car. Buying a Ferrari, or even a Hermès Kelly bag for that matter, is associated with an extended selling ceremony that may take a year in the first case and months in the second. With regard to the negation of space, the internet challenges stores in all industrial and service sectors. But luxury brands tend to view themselves as religions and, as such, their cults need temples without which there is no religious initiation or ritual (Dion and Arnould, 2011).
Luxury also connotes a mythical space, a land of origin, which is often the country in which products are made. As such, they are endowed with both a unique local knowhow (Swiss watches, for example) and the magic spirit of the holy place of origin (eg Paris). Another facet of the chasm between the internet culture and luxury is the fundamental antinomy between the key values of the net – especially since web 2.0 (open space, transparency, collaboration, horizontality, proximity, no control) – and the essence of luxury (relative inaccessibility, distance, control), without which luxury cannot achieve its ontological function of elevation and its sociological function of social stratification. This is why the net has given birth to new actors in the luxury sector, mostly new distributors (eg Net-a-Porter.com, VenteVentePrivée.com), whose core function is to open the doors to increase the accessibility to luxury brands, due to the new business models allowed by online commerce. However, to be able to continue distributing luxury goods in the future, brands must first remain highly desirable. In essence, the whole luxury sector will continue to thrive if it can continue to build and sustain luxury brands that make people dream, not so much among the people of ‘yesterday’ but among the people of ‘today’ and ‘tomorrow’ – baby boomers and Generations X and Y (Briones and Casper, 2014). Indeed, new generations are another facet of the culture shock between the internet and the luxury industry. The growth of the latter since the 1980s has been moulded by
the demands of the baby boomers of the world, especially Westerners. In terms of the industry’s future, in Asia the parameters are quite different: 80 per cent of new luxury consumers are mostly younger than 40 years of age. Furthermore, they seem to be more connected than their Western counterparts: a visit to Seoul or any capital or provincial city in China proves this immediately. This certainly does not mean that luxury brands should target all social networks there, but in these countries and for this new sophisticated target market, technology means edge and relevance in today’s vocabulary, not to mention the creation of value through online services. However, the extent of engagement in e-commerce activities remains an issue for luxury brands that want to prevent being negated on the altar of modernity. Thus, the purpose of this chapter is not to summarize the discussion on luxury challenges (see also Chapter 1), as books have been devoted to this topic (Okonkwo, 2010; Kapferer and Bastien, 2012), but rather, as already stated, to explore in depth some new facets of the issue and to present recent advances.
Luxury and the internet: a reciprocal myopia The relationship between luxury brands and the web and its main actors is marked by a double myopia: luxury
brands may lack realistic vision, but the internet advocates may also be short-sighted when urging the luxury industry to conform to the generalized norms and movements of the web. On the luxury brands side, although the internet has created a paradigm shift as big as the introduction of printing in the 15th century, the organizational structure of luxury brands and companies has not changed much. The most significant fact in these companies is that chiefs of digital marketing are still absent in the comex (executive committee), whereas the heads of advertising and communication are still a part of it. Web marketers and community managers have grown only incrementally within the luxury organizational structure, signalling that luxury brands still consider advertising pages in Vogue as more important to the brand’s future dream potential than mastering the web. This is a mistake: it is clear that today the web has done more for Burberry’s remarkable turnaround than the head of media advertising. Indeed, the web is the medium of all media: all is web today. Thus, it is high time that luxury brands incorporate this revolution into their organizations, their staffing and their new talent recruits. On the internet side, there is also a kind of myopia due to the confusion about the nature and function of luxury in open, democratic societies and also its consequences in terms of the exigency of quality and selectivity. Enamoured with their new toolbox, most internet actors and proselytes fail to recognize that the web can be a threat to the luxury
sector. In its present configuration, the web is not adaptable to luxury: it was created not for luxury brands but for mass brands. Under the influence of its AngloSaxon tropism, the key words of the web include scalability, big data, millions of fans, and so on. The gold medallists of the web are judged by their numbers. Which is the most searched brand of leather bag on the web? Which brand has the most fans on Facebook or WeChat in China? Whose site has the most visitors? Which firm carried out the most buzz campaigns on the web? This all mimics Hollywood heroes or gladiators, personified by Charlton Heston or Kirk Douglas, flexing their muscles to impress the crowd of spectators. This net is not at all tailored for niche actors – in fact, it does not care about them. Fuelled by the considerable enthusiasm for the possibilities of the internet, web advocates and new hightech solution providers have exerted a techno-push on luxury brand general managers. They all sing the same song: embrace the web wholeheartedly, without any restriction, or die! In doing so, however, they help the web to act as the Trojan horse entering the luxury sector. That is, unless the luxury sector can transform the web, the risks are high that the web will instead dilute the sector and the luxury dream. It is time to realize that beyond the fantastic ability of the web to diffuse brand content, thus contributing to building the dream of luxury brands among millions of new consumers around the world, firms need to defend luxury against the web in some of its underacknowledged
facets as well. Although the visible side of the web has many values, the immersed side of the web also needs to be unveiled for luxury general managers. The issues are not technical but strategic.
Revisiting the potentialities of the web What is a luxury general manager mostly concerned about? First, they do not want to miss the revolution of the web. As such, many general managers spend weeks in California to gain full immersion into Silicon Valley and to talk with CEOs to grasp the future of the web. A second concern is the loss of competitiveness competiti veness of their brands brands as luxu l uxury ry brands (not masstige brands); that is, their distinctiveness comes from their ability to create class, to be a class. Third, managers fear a loss of control. And they are right. The web is full of both potentialities and dangers, making brands more vulnerable. Regarding the potentialities, the web is first a great recruiting tool. What would have taken months, if not years, for luxu l uxury ry start-ups start- ups to accomplish can be accelerated today through the web. These start-ups can build brand awareness – without which there would be no brand power and, thus, no dream – much faster. Recall the structural factors weighing on the dream, as measured in the ‘dream equation’ (Kapferer and Valette-Florence, 2014): Luxury dream = –7.0 +.3 Brand Awareness +.6 Heritage
–.4 Penetration The luxury dream is a positive function of both brand awareness and the perception of heritage/history, and a negative function of diffusion. The net is not so much a vehicle for the diffusion of products as a lever of brand power and education about the brand culture, its tradition and its history. As a sign of the times, today luxury brand communications are no longer written, but mostly provided through videos. There are two main reasons for this: 1 Dreams are made of images, so the production of
videos and their circulation on the web are the most efficient ways to educate consumers and unveil the brand story, history and culture. 2 Data indicate that what travels the farthest on the web are videos of all kinds, as long as they have a high emotional power (e-motion). This is why the web has cultivated the new notion of brand content (Bo and Guevel, 2014). Without brand content there is no brand. Brand content is not a sales pitch about one of the products in the portfolio; rather, it is what brands say, show and propose when they stop talking about their product features. To be circulated on the web and in social networks, this content must be informative, entertaining, exploratory and participative. Thus, brand content should aim to nurture the brand
culture, anything that will make it non-comparable and a source of aspiration. Brand content is at the heart of today’s luxury brand communications; it is no longer the fourth cover page in some glossy magazines. Naturally, brand content goes beyond the web, but because all is web, even an exhibition about Mademoiselle Chanel at the Museum of Contemporary Art in Beijing, or in the Forbidden City for Cartier, will also be accessible through the web. With regard to the negative side of brand content, the challenging question is how much to ‘feed’ the web, with its voracious desire for new information. Can luxury brands transform themselves in new ways to satisfy the insatiable appetite of the web and its fans? For luxury, less is more. The power of diffusion through social networks is such that it affects the perennial codes of luxury communication itself. The typical luxury communication is not about shouting and fads. However, the growth of the celebrity factor in the luxury market may be due to this need to invent news: ‘Let’s talk about what Kate Moss is wearing today!’ Today, fashion shows and défilés are also directly available on mobile phones and pads. Some brands, such as Burberry, allow consumers to dive into the show, pick up a product to analyse it in 3D, and order it immediately, thus transforming the immediacy of the desire into action, fostered by the knowledge that the products in the show are in rare quantity. This process capitalizes on an artificially based chrono-rarity. The digital strategy of
Burberry has indeed been the key pillar of the brand buzz: it has generated much public relations and admiration not only from analysts but also from the internet industry and the new, tech-savvy consumers. These consumers are typically Asian consumers from Seoul, Tokyo, Shanghai or Chengdu, who tend to rely more than others on social networks and generated buzz to learn what is hot and cool (Ipsos, 2013). Thus, over time the luxury sector has moved dangerously closer to the fashion sector, in which artificial rarity and ephemerality are the rule, time is short, and immediacy of fulfilling desires is the business goal. This is in contrast with luxury brands’ goals of creating lasting and exceptional products and enhancing people’s lives through quality, style and art. Another strong potentiality of the web is service. Indeed, the weak spot of most luxury brands today is still service. Note that when consumers – even affluent ones – are asked what traits define luxury (see Chapter 1, Table 1.1), ‘having excellent service’ never ranks high in their list, except of course in the hospitality business (Perey and Meyer, 2013). Conversely, when they are asked another key question, such as ‘Without such a trait, is the brand still a luxury brand?’ service excellence ranks much higher (Brovot and Kapferer, 2014). It is well known that the internet can enhance consumer satisfaction and even delight by answering some basic questions raised, such as: ‘Where can I find that product?’ ‘In what particular store?’ and ‘Do they carry my size?’ Of course, the internet will not be able to give the answer if the supply chain itself has
not been endowed with an IT system. Most luxury and fashion brands – even well-known ones – are not yet able to provide this basic information, though some do. Those that do are excelling at what is called web-to-store strategy; instead of pitting online and offline against each other, they maximize their interactions. Service is not restricted to offline, of course; it can also be enhanced by hotline platforms that help stores that themselves are often too busy solve problems; some even provide a dedicated expert on the products. This is what Approche Sur Mesure invented. Paradoxically, this company was created in the late 1990s by a general manager of the skincare division of one of the most famous luxury brands, after he left the company. He decided to propose to his former employer what he had been missing during decades while at the head of the division: a CRM system that enabled clients in need of answers to some specific questions (eg ‘What are the store hours?’ ‘How can I use this cream?’) to directly contact the luxury brand. The role of this platform has been extended to e-retail and has been fully internationalized. Now experts may wonder if skincare is still a luxury activity or a masstige one, considering the way that mass retailers – such as Sephora or Douglas – market this product. In any case, clients themselves still tend to perceive these brands as luxury brands. In terms of loyalty, the web proves to be a great motivator for clients, the fans: it allows them to engage with the brand and, in return, to bring their own content (their own stories) to the brand. More strategically, the
web allows brands to move up the commitment ramp in terms of creating the strategic community of brand connoisseurs (Atkin, 2014). Many people confuse community and social networking, but connoisseurs are more than fans who just say they ‘like’ something on Facebook, in the hopes of benefiting from some later discount. Connoisseurs want to interact with similar others and engage in an exclusive relationship with the brand and its spokespeople. Managing this community worldwide means leveraging members’ innovativeness, eliciting their will to share their own stories and exchange within the community, and also proposing special restricted events that reward them for being real connoisseurs, not simply fans. When considering e-business for luxury brands the following followi ng questions should be considered: • How far should a firm go? • Should Should it sell the full range of products products or or only only a few? • What is the relationship relationship of e-business to the bricksand-mortar and-mortar stores? There are no straight answers to these questions; rather, they are part of the strategy of each brand. Selling on the internet is, at minimum, a sure way to make known to all potential buyers that there is an authorized e-supplier of authentic goods of the brand. Otherwise, the door is wide open for the myriad, myri ad, unauthorized e-retailers e-retai lers to t o source
products on the grey market (eg counterfeits). On 17 July 2014, LVMH and eBay settled their long-lasting dispute after LVMH, the world’s number-one luxury group, sued eBay for being the main platform to allow unrestricted access to counterfeit products of its brands. The fact that LVMH needed to go to court to win the case demonstrates how much the founders of the internet tend to discount the needs of the luxury sector. For these founders, access to counterfeits is not an issue in a world of freedom. Thus, they negated the patents and copyright and trademark laws that forbid production and distribution of counterfeit goods. Why would what is forbidden in bricks-and-mortar stores be authorized on the internet by virtue of its dedication to a deregulated and free-exchange world? The inescapable necessity of the web as a source of ebusiness for luxury brands is due to another cause: the skyrocketing price of rentals for bricks-and-mortar stores. Luxury is an urban business. Where there is traffic, there are also tourists. Paris has 154 luxury brands, London 126 and Milan 85. But stores have a cost and, in 2014, the average annual rental rate per square metre was US$24,938 in Hong Kong, $20,702 in New York, $15,000 on the Champs-Élysées, $8,666 on Bond Street in London, and $8,152 in Ginza, Tokyo. These rents make it very hard to make money: how much does a store need to generate in terms of sales to be profitable in light of these rates? This leads to another major question: How can brands get more people into their stores? There is a tactical answer to the rising costs of rentals and to the need to get people into the
store – pop-up stores. Pop-up stores do the opposite of bricks-and-mortar stores by actually pushing new products towards luxury clients. To bring more people into flagship stores, the role of the internet as a web-to-store tool has become even more necessary. Another answer to the profitability question is to consider that sales can also take p l a c e after the visit to the store. Time is an essential essential dimension of luxury, as the production of partly handmade products takes time. So too does their purchase. That is, purchase of an iconic product can wait – as long as the brand has built a lasting desire through, for example, a delightful store visit. Visits to bricks-and-mortar stores are not always delightful experiences, however. Consider, for example, a Chinese tourist who, with just two and a half days to spend in Paris, must buy at the Champs-Élysées Louis Vuitton store a long list of specific products to bring back to friends in China, with the signature of the ‘holy’ store. It is time to question the quality of these Chinese tourists’ purchasing experience while the bus is waiting outside the store. Can brands still talk about the luxury experience in this case? Or, rather, could pre-purchase lists sent on the web be a better way to make purchasing more fluid?
Clouds over the internet: the loss of control
The essence of a luxury strategy is control. This is why true luxury brands buy back their production and distribution licences. Doing so is the only way to master quality along the entire value chain, from the crocodile or python farm to the store experience. The growth of directly operated stores (DOS) echoes the same need: excellence in stores st ores defines defines their t heir quality and high standards standards within the brands’ selective distribution network. Selective distribution is like pregnancy; there is no such thing as being half pregnant. A store must be very exacting or not at all. This is true for bricks-and-mortar wholesale circuits as well as e-retailers’ authorized sites, which need to be scanned on the grid of quantitative and qualitative criteria (see Derville and Kapferer, 2014). For many e-retailers, selling luxury brands means discounting them for a limited time: on the internet, such brands become a good deal. This is clearly a practice that needs to be regulated by the luxury brand selection grid. One understated function of retail stores for luxury brands is their ability to select clients. Certainly luxury brands are rather discriminatory: they target clients who are likely to be able to afford such luxury. Analysis of affluent clients’ perceptions of 60 brands reveals that selectivity is essential for the perception of the brand as a ‘luxury brand’ (for more details, see Chapter 1, Figure 1.2, p 24). Luxury stores select their quarter, their street, the side of that street. They act as filters: entering is like a rite of passage, access to another world. These symbolic access barriers are disappearing on the internet: anyone can enter,
jumping with a simple click from Zara to Chanel and from Gap to Gucci, consequently destroying the symbolic frontiers between them. Opening a website is like opening a store in a street that no one knows. Another facet of the loss of control pertains to the messages. On the web, luxury brands – due to the diffusion of their messages – lose the monopoly they previously had. The web is a playing field for sharing by the people who use it, thus putting an end to the old broadcasting topdown model. Consumers now want to engage in conversations with brands, bottom up or peer to peer. Brands should respond to this demand but also maintain distance; otherwise, the luxury brand becomes just another pal or best friend and, over time, loses part of its sacred and distant nature that sustains the dream in the long term. Still more problematic on the internet is the loss of control of luxury brand clients, if not their data. For web adulators, it is a great feat for a luxury brand to have 15 million fans on Facebook, but the less acknowledged part of the story is that these fans do not belong to the brand, but to Facebook, whose business model is to make them accessible to competitors, for example, renting out LVMH clients to Burberry. Recall that a key facet of the luxury strategy (Kapferer and Bastien, 2012) is the one-to-one contact, the sense of privacy and the intimacy that goes with luxury relationships. Although the web is presented as the domain of freedom and happiness, the fact is that four major actors
now make the law: Google, Apple, Facebook and Amazon (or GAFA). Their quasi monopoly is the source of their power. They define the conditions of usage of their services – that is, of the web. Thus, it is true that the competitiveness of luxury brands is endangered by Facebook because Facebook can provide the fans of any brand to competitors. The luxury brand does not ‘own’ its fans any more: they are for sale. It is no longer science fiction to predict that someday a big data agent will have built the database containing all the luxury buyers of the country. When such a case happens, what will the brand’s power be? Another concern is if the GAFA privatize cookies, the little spies that identify everyone. But does the luxury clientele want to be tracked? Do they want everyone to know what they do? Maybe Nike’s or Zara’s or Ralph Lauren’s clients do not care, but what about Maserati’s or Chanel’s? Chanel’s? The issue of the control of data is one of privacy owed to firms’ own clients. This was true as long as they visited the boutiques, but on the web the laws of privacy are made by those who control the web, not by the luxury brands or the consumers themselves. Such privacy issues will call for a reaction, such as the European Economic Community laws, which in 2013 mandated that Google comply with a person’s right to be forgotten (erasing past negative information from web memory). Another type of loss of control was recently experienced by wine companies when they realized that the new generic top-level domains (gTLDs) such as dot-wine
could now be owned by an American company called Donuts, which was purposely created to gain ownership of as many domain names as possible. Because it owns the rights to dot-wine, the company can rent this suffix to anyone with the address Bordeaux.wine or Burgundy.wine, even though this person or group may have no special relationship with these two regions, which make some of the most prestigious, luxury iconic wine brands in the world. What lies behind this issue is not a question of ego but a whole vision of how to create value. The Internet Corporation for Assigned Names and Numbers (ICANN), which is in charge of the allocation and management of domain names worldwide, depends on the US Secretary of State for Foreign Trade. ICANN helps to push the free circulation of US products and the like throughout the world. It expresses the US vision of how to create value – through mere brands – versus the European desire also to protect the names of specific regions (eg Bordeaux, Champagne), which is also the vision of most wineproducing countries. Some luxury companies have reacted quickly to this development: Hermès has secured dothermès, Richemont has secured dot-Cartier, and so on. Other groups, however, have been slow to act. Typically, dot-luxury is now owned by neither Comité Colbert nor Fondazione Altagamma but by an independent US actor, with no relationship to the luxury world. Another underestimated facet of the loss of control pertains to customer relationship management (CRM). Luxury companies ask external agencies, or big data
companies, to manage their CRM, with direct applications on mobile phones or on the internet. AmEx acts also as the CRM of many luxury brands because elite clients pay with AmEx, thus procuring remarkable access to these clients. This means that the frontier between CRM and media is becoming fuzzy and also that the key principle of a luxury strategy – to know the client one-on-one – may no longer be possible through these data providers. The new actors on the web do not try to qualify people individually but by the millions. The task of building individually based CRMs remains to be done by the luxury brands themselves.
Adapting the luxury luxury organization organization to the web As a famous proverb states, when you live close to the sea, instead of building a big wall you better learn how to swim. It is high time for luxury companies to learn how to swim. The digitalization of society clearly raises questions about power and organization. Should there be a digital officer on the company board? Is digital dependent on marketing, or vice versa? How can barony silos (PR on one side, media on another side, web on a third side) be erased at a time when digital has become transverse? How can firms persuade persuade people people to t o work together?
Rethinking the word ‘communication’ Today, communication means the web, not just advertising. Luxury brands should devote time to answering questions about the web rather than discussing the next advertising page. Because the web is the medium of all media, all company actors should work together and abandon their silos. Let’s recognize the reality – clients are omni-channel. They live on the web, read less, and favour original visual and sensory experiences. Luxury communication must express the creativity of the house across all the channels, not one in particular. Tradition is not an excuse for laziness or over-conservatism. The older the brand, the more its creativity can be bold. Consider again Dom Perignon, whose name is that of the Christian monk who, according to the legend, invented champagne. As early as 1961 it broke the rules of a conventional champagne communication by sponsoring James Bond, at that time regarded as the ultimate sex symbol.
Transforming the organization to adapt to digital If digital is de facto the medium of all media, the digital officer of web operations should be integrated into the comex and even possibly become the head of communications. For example, it is notable that the digital
direction at Hermès is situated close to the room where mythical Kelly bags are made. Chanel now employs digital artistic directors, who are well aware of its culture and can hire both outside and inside talent for a digital campaign. In the same vein, bricks-and-mortar stores, the web and e-commerce are not enemies but rather should be managed synergistically. The stores themselves can provide 3Denhanced digitalized experiences (to try products on, to attend private showings, to choose a car). The web is the best preparation to making a visit to brands’ sacred places that are still called stores. Without stores, the brand ritual that accompanies visits, the design of brand-specific services, and a large part of the symbolic and intangible dimensions of luxury will be missing.
Transforming the web to adapt to luxury The internet was not created for luxury but for big brands, big numbers. As a result, luxury will need to carve its internet presence to regain control of its image, its clients, its destiny. The fundamentals of luxury cannot just be abandoned because of technology. For example, luxury is distance, but the web destroys distance. The question becomes how to recreate distance between the brand and its clients. This does not mean never answering their queries. In fact, Chanel innovated by creating the first call centre for its skincare and make-up lines. By considering service, caring for clients and treating them as VIPs, luxury
brands should be protective of the intimacy of these clients. To do so, perhaps luxury stores will need to gain 100 per cent security by being non-traceable through wi-fi or by disabling cookies. Isn’t that what luxury’s exceptional exceptional clients cl ients expect? In conclusion, luxury brands must define their own digital strategy if they want to gain differentiation and position themselves as true luxury brands, not as masstige or premium brands. A major facet of luxury brands is the equilibrium between presence and absence. Unlike CocaCola, for example, which needs to be present everywhere, at hand’s reach, luxury brands need to be absent – not overly visible – in order to build their reputations as rare and a privilege. So far luxury expansion has been made by opening more doors in new cities. Today there is a strategic discussion about reducing this number, which means closing boutiques. Actually, in 2013 those that command the highest prestige in China are also those with the smallest number of stores (Chanel 10; Dior 20; Hermès 21; Prada 27; Louis Vuitton 47; Gucci 58). Now and in the future, they will need to process the internet in the same way. Rather than creating presence everywhere, absence is the key. When the brand is present, it must dictate its own conditions. After all, Rolex expects the lion’s share of space in any jeweller authorized to sell its brand. This should be expected of e-retailers as well. If Hermès invests in e-commerce, it should be exclusively in its own territory – dot-hermès. Luxury brands need to re-fragment the web for their own profit.
References Atkin, Atkin, D (2014) (2014) All together no now: w: the new and vital strate s trategy gy of commun community, ity, jn The Defini De finitive tive Book Book of Branding, Branding, ed e d K Kompella, Kompella, Sag S agee Publications, Publications, Thousand Oaks, CA Bo, D and Guevel, M (2014) Brand Culture, Googtime editions Briones, Briones, E and Casper, Cas per, G (2014 (2014)) La génération gé nération Y et e t le luxe, Dunod, Dunod, Paris Brovot, F and Kapferer, Ka pferer, J-N (2014 (2014)) The Kernel of Luxury, Luxury, unpubli unpublished shed resea res earch rch paper, HEC Paris Derville, Der ville, X and Kapferer, Ka pferer, J-N (2014) (2014) Selectiv Se lectivee distributio distribution, n, unpu unpubli blished shed working paper Dion, D and Arnould, Arnould, E (201 (2011) 1) Retail Reta il luxury luxury strate s trategy gy:: assembli as sembling ng charisma c harisma through art and magic, Journal of Retailing, 87 (4), pp 502–20 Ipsos (2013 (2013)) World Luxu Luxury ry Trackin Trac kingg Survey Surv ey,, Paris Kapferer, Kapfer er, J-N and Bastien, V (2012 (2012)) The Luxury Luxury Strate S trategy gy,, Kogan-Page, Kogan-Pag e, Londo Londonn Kapferer, Kapfer er, J-N and Valette-Florence, Va lette-Florence, P (2014 (2014)) Levers Lev ers of the luxury luxury dream, drea m, paper paper presented at a t the INSEEC/International INSEEC/International University Univers ity of Monaco first Luxury Luxury Symposium, Monte-Carlo, April Okon Okonkwo, kwo, U (2010 (2010)) Luxury Luxury On-Line: On-Line: Style, Sty le, systems, sy stems, strateg stra tegies, ies, Palgrav Palg ravee Macmillan, City State Perey, Perey , E and a nd Meyer, Meyer , L (2013) (2013) Luxu Luxury ry Attitude, Attitude, Maxim Ma xima, a, Paris Pa ris
07 Does luxury luxury have a minimum price?
An exploratory study into consumers’ consumers’ psychology psychology of luxury prices
This chapter was originally published as an article in ournal ournal of Revenue and Pricing Management, 13, pp 2–11, 2–11, 2014, 2014, co-authored with C Klippert and L Leproux.
Consumer studies show that luxury evokes high prices. prices. However, However, the remarkable growth of this sector is based on on its extension extension to the middle class, with affordable prices. This is a paradox: luxury needs to be expensive, yet the sector sector grew by being accessible. Hence the question: If consumers want access to luxury, below what price would they consider consider that it is no longer luxury? Is there a
minimum price? This chapter explores how consumers decode luxury prices; how lower prices are compatible with luxury; and how strong brands have more latitude for accessible pricing than new luxury brands.
The elusive luxury definition Although luxury shops are everywhere in our modern cities and online, there is still no consensus about the definition of luxury. In short, luxury refers to rare, hedonic objects and experiences beyond the necessities of life, therefore affordable mostly to those who have surplus money. Such definition is subjective: for some people Ralph Lauren is luxury, for others it is not rare enough. It is not the purpose of this chapter to address this elusive question of definition, for luxury is a relative and cultural concept, fluid and changing (Yeoman, 2011). The word luxus comes from Latin but etymologists disagree as to its root: is it excess or standing apart? Luxus has no equivalent in apanese nor in Chinese. This is why Japanese people speak of ‘lugujuri’ (phonetic adaptation of lu-xu-ry). They refer not to the concept but to what they experience in the stores of prestige brands anywhere in the world. w orld. Another definitional difficulty is that people confuse a concept and a conception. Thus the luxury creators – the brands – emphasize such facets as exceptional quality, craftsmanship, handmade, rarity, noble ingredients, maintaining tradition, and so on. The luxury buyers tend
to speak of their sense of exclusivity, hedonism, access to rare quality and to authenticity and experiences (Yeoman and McMahon-Beattie, 2010). Finally, the majority – the non-buyers – equate luxury with conspicuousness, excess, waste: they underestimate the product, paying no attention to craftsmanship. A recent research (De Barnier, Falcy and ValetteFlorence, 2012) factor analysed three main scales used to measure luxury (Dubois and Laurent, 1998; Kapferer, 1998; Vigneron and Johnson, 1999). They converge but each one measures some specific factors. Thus luxury can be identified by six dimensions: • a very qualitati qualit ative ve hedonistic hedonisti c experience or product made to last; • at a price that that exceeds exceeds what functional values values command; • tied to heritage, know-how know-how and culture; • available in restricted and and controlled distribution; • offered with highly highly personalized personalized services; • acting as a social stratifier, giving a sense of privilege. As shown by Kapferer and Bastien (2012: 47) these criteria are necessary but their weight differs according to the sector (service versus product, automobiles versus clothing, etc). They capture the two facets of luxury: for oneself (reward) and for others (appe ( appearance arance,, sign of power).
Price and luxury Despite the elusive nature of luxury, consumers and professionals converge on one point: price is part of the definition. Bain, the expert world consultancy on luxury, defines it as ‘premium products sold in premium stores at a premium price’. Kapferer and Bastien (2012) have shown that luxury is not just more of premium. The price of premium goods needs to be justified by objective facts about quality. In luxury, quality is assumed and the price does not have to be explained rationally: it is the price of the intangibles (history, legend, prestige of the brand). In Seth Godin’s blog (17 May 2009) he echoes this key distinction by quoting luxury as being ‘needlessly expensive’. US wine professionals (Castaldi, Cholette and Frederick, 2005) classify wines according to price: popular and medium ($7 to $10), mid-premium ($10 to $14), ultra-premium ($14 to $25), luxury ($25 to $50) and super luxury ($50 to $100). Those wines still more expensive are called ‘icons’. Since an icon is a fixed religious figure, this implies that such prices have no rational basis but instead a spiritual one. Recent international consumer studies point out the key role of price in the categorization of anything as luxurious (Godey, 2013). Being ‘expensive’ is the first criterion for qualifying luxury in Japan, the second in France, the third in China and Germany. These results are not surprising. Historically, luxury has been the lifestyle of the
aristocracy, and later the wealthy bourgeoisie (Veblen, 1899). The modern evocations of luxury retain from this history feelings of exclusivity, exceptional quality, craftsmanship, uniqueness, noble ingredients, rarity, hedonism, art and prestige – today attached to those who can afford this lifestyle by their own success. In fact, in the same study ‘exclusivity’ is the number-one criterion for defining luxury in the United States, Germany and Italy; and the number three in Japan. The rate of growth of the luxury sector since 1995 is remarkable. The personal luxury products market (watches, jewellery, leather goods, clothing, fragrance and skincare) has grown from €77 billion in 1995 to €217 billion in 2013 (Bain, 2014). This steady growth has been possible because luxury has become ‘the ordinary of the extraordinary people and the extraordinary of the ordinary people’. Once limited to high-net-worth individuals with more than $1 million in cash (Capgemini, 2012), luxury made the dream accessible to the middle class and ‘excursionists’ (Dubois and Laurent 1996) who buy only once a year. Most of the luxury buyers are not ‘rich’. An article published in Harvard Business Review, ‘Luxury for the masses’ (Silverstein and Fiske, 2005), identifies how an accessible ‘new luxu l uxury’ ry’ has allowed the masses to trade up. New luxury refers to luxury brands’ downward extensions (Chanel make-up or skincare), to premium goods (Grey Goose vodka or Callaway golf clubs) and masstige products (Victoria’s Secret, Polo Ralph Lauren). In this chapter, chapter, however, the concern is specifically specifi cally luxury l uxury brands. brands.
The paradox and research research question: How expensive is expensive? At this point we face a contradiction: being expensive is part of the concept of luxury, yet the luxury sector has grown partly because it stopped being out of reach of the many. This leads to a question: If consumers want access to luxury, below what price would they consider that it is no longer luxury? This question is important for managerial purposes: how far should a brand go in price accessibility if it wants the product to remain a luxury? A recent survey (Kapferer and Laurent, 2012) based on 8,370 actual luxury buyers, 21 product types and seven countries showed that threshold prices of luxury had a long tail shape, with a majority of respondents declaring quite low prices (€300 for a pair of shoes; €450 for a man’s suit). This is akin to the professional wine classification where ‘luxury’ starts at $25 a bottle! This survey, however, did not aim at uncovering what psychological processes the interviewees used to determine the price below which luxury would be absent – which is the aim of this chapter. Academic literature on luxury rarely talks about price. When it does, it often refers to brands not fully perceived as luxury: Yeoman and McMahon-Beattie’s (2006) analysis of pricing strategies in luxury markets use as examples Victoria’s Secret, a masstige brand, or MINI, a premium brand. However, there are exceptions: Amaldoss and Jain
(2005) demonstrated that luxury prices are subject to externalities effects. People called ‘snobs’ are ready to pay more for a product if the effect of this price increase is to reduce the number of ‘conformists’ also buying the product. ‘Conformists’ are people who buy because they want to look like aspirational people. If snobs exhibit a typical Veblen effect (demand grows when prices increase), conformists follow the classical law of price elasticity: demand grows when prices go down. Hence the success of luxury trading down. Becker’s (1991) analysis of restaurant pricing shows that, unlike what classical economics recommends, a successful premium restaurant should not increase its price to the point where demand equates supply – for there would be no more waiting list. In luxury, one keeps supply below demand; obstacles to purchase increase perceived value. Allsop’s (2005) analysis of premium pricing shows how higher price creates desirability: not only as a signal of quality, but as a measure of one’s ability to afford it. Luxury is a way of showing both to oneself and to others (the two facets of luxury) that one can pay the price of luxury that is extravagant from a rational standpoint, such as a $1,500 Château Latour Bordeaux. For economists, luxury pricing is discriminatory pricing: it aims at eliminating consumers who cannot follow (Groth and McDaniel, 1993). This literature is mostly focused on the attractiveness of high prices. Here, however, we address a symmetrical one: where does luxury price stop? Marketing literature on price psychology (Mazumdar,
Raj and Sinha, 2005) proposes the concept of reference price: consumers consumers would estimate that a product product is expensive on the basis of a price stored in their memory, coming from their last purchase experiences with the same product class. In luxury, however, unlike fast-moving consumer goods (FMCG), purchases are infrequent. Also, on the internet, famous luxury brands restrict the diffusion of information about price: one must ask for it. However, we cannot discard the idea that, through personal inquiry or social media interaction, typical prices circulate about the hot items of the season. Our specific research questions questions are: • What psychological psychological processes processes intervene in defining defining the minimum price of luxury? • What are the relative relative roles of of tangibles and intangibles in these t hese processes? processes? • How do price and brands interact inter act in these processes? Can brands trump the price? • What individual differences play a role in determining the luxury price threshold? These questions have academic and managerial relevance. To understand a phenomenon one should analyse it at its frontiers. To get at the essence of luxury, identify the parts that can be played down and those that are quintessential : should one study Rolls-Royce or borderline cases? From a managerial perspective, the reality is that luxury brands, in
order to grow, will have to recruit newcomers. Analysis of consumers’ reactions to luxury lowered prices will be insightful. To address the research questions, an exploratory study was set up: 150 questionnaires were sent in March 2013 to parents, friends and relatives of MBA students at HEC Paris, an elite school. Of these, 110 were received back: 66 per cent from female buyers, 67 per cent between 20 and 30 years old, 54 per cent declaring annual revenues above €27,000, 34 per cent above €60,000, and 54 per cent saying they buy luxury goods two or three times a year. The The questionnaire ran as follows: f ollows: • Under Under what what price do you estimate that (a ring) is not not luxury? • In your your mind, what is the typical typical price of a (Mauboussin ring/Ralph Lauren shirt)? Would you say it is luxury? • If Dior decided to reduce reduce their prices on an item by 50 per cent would it still be luxury? Why? • For you, can a very well done counterfeit counterfei t be luxury? For instance, a superb copy of a Louis Vuitton bag sold at €200 instead of €2,500? • Finally, what justifies for you the high high price price of a luxury product? The products used with the questions varied according to gender (for instance, rings for females, watches for men).
We used Mauboussin jeweller and Ralph Lauren as brands because their luxury status is debated, as shown by Ipsos World Luxury Survey (2012). Mauboussin is a historical prestigious jeweller who – to avoid going out of business – underwent a complete turnaround and is now selling at very accessible prices, and advertising on TV to wider audiences. This strategy is worldwide. We used Hermès and Louis Vuitton as typical luxury brands: according to Ipsos they are among the most spontaneously quoted luxury brands in the world. We also included a follow-up qualitative part to the survey: eight actual luxury buyers were interviewed in depth in Paris. After discussing their last luxury purchases, and what luxury was for them, the interviewer addressed the central question of the minimum price in a given category. Then we asked the interviewees if sales and super-sales or websites selling luxury goods at a discount price (such as Net-a-Porter) were still luxury. The perception of counterfeits was also checked. Finally, since many luxury brands buy some of their products from small craftspeople, would buying directly from the craftsperson – of course at a reduced price – qualify as a luxury experience?
Results and insights Since luxury is a cultural notion we do not claim that the results are generalizable worldwide. This is the case for all
studies undertaken in one single country. However, because people’s understanding of luxury is shaped by luxury global brands acting worldwide, these results have external validity.
Price threshold or no man’s land? To identify a minimum price of luxury we asked two questions: 1) ‘Under ‘Under what price would you say that t hat (a ring) is not luxury?’; 2) ‘At what price would you say that (a ring) is luxury?’ Surprisingly, these questions provide quite different answers: where luxury stops and where it starts are not the same notions! There is a gap of €853 between these two points (as shown in Table 7.1). The higher the price, the higher the likelihood of luxury. This is why newcomers in any luxury market often buy the expensive items. Since they lack the culture, price acts as a diagnostic cue: it signals luxuriousness. At the other end, brands have a latitude of acceptation when they decide to create an accessible range. Consumers do not have one threshold price in their mind acting as a ‘guillotine’ – but two. Below €1,983 the luxury status of a ring is conditional: it will depend upon other factors, one of them being the brand status. However, there is a limit, a lowest point (€1,130) where none of these factors can help.
The moderating role of brand status
Tiffany is a famous American jeweller with a prestigious heritage starting in 1837. In the early 1990s the brand launched an accessible siver line at $110 called ‘Return to Tiffany’. It was a success, attracting many young people to the brand. But it hurt the feeling of exclusivity and dream attached to Tiffany. In 2007 they increased the price from $110 to $175. The Wall Street Journal wrote: ‘Fashion victim: to refurbish its image, Tiffany risks profits. After silver took off, jeweller raises prices to discourage teens’ (10 January 2007: A1). TABLE 7.1 Luxury minimum price Below what pric e would y ou s ay a ring is not lux ury ?
€1130
At what pric e would y ou say a lux ury ring s tarts ?
€1983
At $110 did these young buyers perceive it as luxury? As shown in Table 7.2, 7.2 , using Mauboussin’s Mauboussin’s present pres ent trading-down strategy, we asked what is the typical price of their rings and if they are ‘luxury’. The perceived average price of a Mauboussin ring (€1,213) falls just within the no man’s land identified above. The lower quoted price is €150, the higher price €7,000. Actually, Mauboussin rings extend from €400 to €24,000. Results show no systematic link between the average price quoted by an interviewee and their perception of such a ring as luxury or not. Some consumers declare €300 as
the average ring price, yet categorize it as luxury. Others quote €1,000 but say it is not a luxury ring. For the former, if Mauboussin is a luxury brand, its typical ring is a luxury ring. The second group compares Mauboussin to famous jewellers such as Cartier in order to deny any luxury status to Mauboussin even if they said €1,000. This illustrates the power of the brand to trump the price alone. For those consumers with no clear idea about Mauboussin, price alone becomes a diagnostic cue to categorize as luxury: at €3,000 or above it is hard to say that it is not luxury.
Negative eff e ffects ects of price reductions reductions on the luxury status of the brand Fashion brands need to discount their unsold inventory. As a rule, luxury brands don’t (Kapferer and Bastien, 2012: 227). As shown in Table 7.3 we presented a situation where: if Dior, a prototype of luxury, ‘were to reduce their price by 50 per cent on some products without changing anything in the product nor in the associated services’, then would it still be luxury? TABLE 7.2 Is a typical Mauboussin ring luxury? Perceived typical price of a Mauboussin ring Is it lux ury ? YES
€1,213 (varying from €150 to €7,000) 60%
Is it lux ury ? NO
40%
TABLE 7.3 TABLE 7.3 Would a 50% 50% price price reduction reduction hurt hurt luxury? If Dior reduces the price of an item by 50% it remains lux ury
45%
it is no longer lux ury
55%
There is a split of half in the answers given in Table 7.3. The reasons invoked by those who say that this is still luxury are: • First comes the brand brand strength. Dior has has been been a synonym of luxury for decades. It shaped what luxury means. Whatever it does remains luxury. A quote from the interviews is insightful: ‘Dior products are not luxury because of their price. The fact that it is luxury has nothing to do with price.’ However, they voice a little restriction: in the short term, despite the price drop, Dior remains Dior, therefore luxury. If it were to be repeated, doubts could arise: ‘Is the brand admitting it is now weaker, it has lost some prestige?’ There is a risk of brand equity dilution. • The second reason is that the product remains remai ns unchanged with the same amount of work, crafsmanship, service too.
• A third reason reason is that, despite despite the 50 per cent cent price reduction, it would remain expensive, in two ways: 1) it would remain above normal brands’ retail prices; 2) it would also be beyond one’s financial resources – ‘A Dior watch at €6,000 instead of €12,000 will still be far above €1,000, my own limit today.’ What about those 55 per cent who declare that Dior product sold with a 50 per cent discount is no longer luxury? What What drives this t his answer? • The The product product may be the same but but it has lost its exclusivity cachet, the feelings of rarity attached to it. The new price leads the product closer to mass, is less discriminating. ‘Luxury is not given to everyone’: price drops hurt this source of perceived value. • These These consumers consumers also feel betrayed betrayed in the intimate relationships they had woven with their brand. This price drop indicates that the brand is wooing another target – a sign of disloyalty. • Finally, some remarks suggest that luxury luxury is a total behaviour remote from what other brands do. Luxury should never use price promotions. Also, how can the same luxury product be worth €1,000 and then €500? Luxury is not fashion: its value should be timeless. counterfeit eit an accessible accessible luxury? luxury? TABLE 7.4 Is counterf
Counterfeit is s till lux ury
6%
Counterfeit is not lux ury
94%
Is a superb s uperb Louis Louis Vuitton Vuitton counterfeit counterfeit luxury? Today, counterfeits offer excellent copies of luxury products at a much reduced price. It is luxury made accessible. But is it perceived as luxury? See Table 7.4. Among the 110 persons interviewed seven declared that if it is a great copy – that no one can identify as such – then counterfeits are luxury. What are their reasons? Since luxury has two facets, luxury for oneself and luxury for others, those people value more strongly the second one. They pursue a social adjustment goal (Wilcoz, Kim and Sen, 2009), valuing the logo more than the product. When the counterfeit cannot be identified by others, ‘it remains luxury because others do perceive it as such’. The majority of those interviewed (94 per cent) do not consider counterfeits as luxury because: • For tangible reasons: reasons: equivalence equivalence of quality quality is denied either on an a priori basis or with rationalizations (‘the ingredients are not as noble’, ‘the design is less refined’, ‘a connoisseur will identify it’). • All the other other reasons reasons rely on intangibles intangibles as the source
of value of luxury: – The The pleasure pleasure of owning an original, the authentic authentic versus the copy, however perfect the latter might be. – The The defence defence of of intellectual rights. Copying Copying is by definition far less valuable, at least in the Western world, which holds innovation and creativity as important values. – Counterfeit Counterfeit products products have no umbilical link with the tradition, the history, the savoir faire of a renowned luxury house. They are just products, made by anonymous workers in poor conditions, not objects created by revered artisans pursuing a very long tradition of excellence. – The The buying buying experience experience is miles away from luxury. luxury. Even when one buys a small-ticket item in a Hermès store, the experience is luxurious. Counterfeits are bought in the back of shops, fast, as if the cops might arrive soon. As a result, counterfeits evoke negative feelings tied to fraud and deception – and the object is desacralized. Luxury brands, on the contrary, sacralize their products, which are held as icons, sold in temples (the flagship stores) and revered as art and heritage or the legacy l egacy of a worshipped creator. – There is a lack of pride when buying a counterfeit. counterfei t. By owning a fraudulent product one cannot symbolically enter the meritocratic club of persons
who can afford the price on their own merit and hard work.
Is buying directly from a craftsperson luxury? In the qualitative interviews, we presented the case of a new brand creating a rare crafted product. These products attracted the attention of a famous luxury brand who incorporated them in its own offering. For instance, Norlha – founded in 2007 – produces textures with unique yak fibres, processed by hand by nomads living on the Tibetan plateaux. They are now sold by Hermès, too, under its own label. Would buying directly at the nomads’ camp or factory still be luxury? One clear conclusion emerges. Buying directly from a craftsperson or at a luxury brand store are two different experiences: one is not above the other. However, only brand creates luxury. Quotes speak for themselves: ‘If I buy it directly from the craftsperson, this remains craftsmanship: just a nice product with nice quality, made by nice people, surely something rare too but not luxury either.’ ‘A jewel bought from a craftsperson is nice but not luxurious: buying it at Cartier brings you into another world.’ The brand creates trust and confidence: it elevates the product to the level of luxury.
What justifies the high price of luxury products? How do consumers justify the high price of a luxury product? What values do they identify in judging this price to be fair? Unsurprisingly, among the 110 collected answers, quality is quoted 47 times. An extraordinary quality is what most justifies a significant price difference with products fulfilling the same function: • Quality refers to the ingredients (27 collected answers), how they are selected, from what country they come, their ‘nobility’. • Quality is experiential. experiential. Luxury Luxury pricing has similarities with the placebo effect (Carmon and Ariely, 2005) – one quote expresses this effect: ‘We had parties with cheaper wines, but had less fun.’ • Quality refers to the work itself, itself , its complexity, the know-how, handmade, the amount of time spent to create one single product. These dimensions of qualit qualityy guarantee exceptional exceptional durability durabilit y and reliability. • Quality Quali ty concerns the persons involved: luxury brands hire talents, not workforces. For some interviewees they are even artists. Everyone in a luxury house (creators, designers, seamstress, etc) is highly qualified: they justify extra costs.
• Quality of service: there is no luxury withou wit houtt service – before, during and after the purchase experience. • The The aesthetic aesthetic qualiti qualities es of of the object, or the place place where service is delivered. The client has to pay for the good taste that the brand guarantees. In return, the brand endows the client with surplus elegance and self-confidence. This has a price, that of having the right to exhibit the logo – as a marker of good taste. The collected answers also identified the following: • Rarity Rarity is mentioned 19 times, along with other other words words such as exclusivity, unicity, authenticity and originality. This rarity has a cost when it is actually the result of the scarcity of ingredients, or of the talents who work with them. But rarity is also virtual, produced for the sake of creating a halo of exclusivity – special feelings for the clients who can believe they are now somehow different, or that they symbolically belong to a club of a happy few. Such clubs have an entrance fee. • One has has to pay more for the brand brand itself (10 occurrences): occurrences): for prestige attached to history, hist ory, heritage, the dream associated with the brand, the famous clients and celebrities, extraordinary extraordinary people people in the dual definition of luxury. Thus price is not merely the consequence of extra costs of luxury: it is
the preconditi precondition on for the luxu l uxury ry magic to operate (Dion and Arnould, 2011): magic happens when objects transmit supernatural forces onto their owner. To transfer onto oneself the prestige of the brand one must pay the price. The higher the prestige, the higher this price: ‘in fact one does not buy a Louis Vuitton bag, one buys the right to flaunt with this bag at one’s arm’; ‘it is the price to pay to be allowed to buy this allegory of success’. This is why successful brands have to be more expensive. Each year year Rolex increase their prices systematically, systemat ically, without any objective reason (cost-based), just as an entrance fee. • Last but not least, some consumers consumers attribute luxury luxury high prices to the costly artifices of marketing (paying top models, ad campaigns, extravagant défilés).
Summary of the findings Figure 7.1 shows the three paths used by consumers to determine the minimum price of luxury: • In the first path, household budgets are anchoring points for any evaluation. ‘At €200, these days it would already be a folly for me to pay this price.’ This explains the high variance observed by Kapferer and Laurent (2012) in the quantitative study on price
thresholds: when in financial difficulty, no one can spend on non-necessities, even low-priced ones. This threshold may move through time for the same person. • The second path is close to reference price theory: consumers use prototypical luxury brands, asking what is their entry range price: ‘Panerai watches are beautiful. beautiful. There There is nothing below €6,000!’ €6,000!’ • The third thir d anchoring process rests on the necessary necessary gap between luxury and premium. Luxury is not premium: it is another world. Both prices should be contrasted strongly. According According to one interviewee: i nterviewee: ‘To get very good solar eyewear, really protecting your eyes, you need to pay at least €200 just for the glasses, maybe €100 for the frame. That makes €300 in total. Therefore, I would not expect a luxury brand to be close to this price, it should be significantly above, say at least €500.’ According to another: ‘Vanessa Bruno bags are priced at €340, and this is not at all a luxury brand. I guess luxury bags to be three times more expensive.’ FIGURE 7.1 How consumers consumer s evaluate luxury prices
When disposable budget is tight, the consumer experiences guilt in indulging in a luxury purchase. This is why websites such as Net-a-Porter, or Vente-Privée.com have developed considerably. They authorize the transgression attached to luxury purchases by giving the impression of a very good deal. Still they respect the exclusivity of the brands by working either like a private club, or by leveraging chrono-rarity (reduced prices during one day only) or virtual rarity (there will not be more than 100 bottles). However, for other consumers less financially tight or less oriented by ‘value for the dollar’, such sites
have an adverse effect: by stressing the price they bring luxury back into normal purchasing modes. Also, they suppress the pleasure of the transgression that is attached precisely to the folly of the price.
Implications Implications for fo r luxury price price management manage ment This research suggests that luxury brands have a latitude of pricing. Price alone is used to qualify as luxury only when the brand is not known. If luxury brands wish to attract new clients they can create entry lines, as long as three conditi conditions ons are respected: • The The prices of of these entry entry lines must reproduce reproduce the positioning of the brand vis-à-vis competitors’ own entry lines. For instance, Chanel fragrances should be priced above Armani or Dior fragrances. • The The so-called entry lines must really deliver deliver the key key brand values and extras. • Their Their price must be far above above normal normal lines, to signify that there is no comparison – and that luxury is another world. On these conditions, the entry lines of famous luxury brands will be perceived as luxury. Unlike premium products where quality is to be demonstrated, it is implicit in luxury: it is what the consumer assumes. This is why he or she will focus on other details and small extras:
• ‘My small bracelet bracelet by Hermès is only only €100. €100. This This is not too expensive yet it is luxury: look how nice it is, the materials are nice …’ • ‘A Dior nail varnish varnish at €22.50; €22.50; yes, it is luxury. luxury. I have the brand, I have a feeling of already being a Dior client. Yet it is four times the price of a normal varnish.’ • ‘My Guerlain fragrance at €90 €90 is my luxury, although neither precious nor rare: but it is very well done and it transmits all the values of the maison Guerlain. I buy a bit of the savoir faire of this house.’ • ‘€150 for a Louis Louis Vuitton Vuitton scarf, it remains luxury: I have all the know-how and quality, plus the brand, the prestige, the purchase experience experience (they offered me a cup of tea!). Finally, my name is now on the list of Vuitton clients!’ What about young luxury brands? They cannot leverage a status they do not have. As a result their prices should be bolder without reaching the sky-high prices of a Richard Mille first watch (RM-01 at €250,000) – in order to signify luxury one has to create the gap.
Conclusion This chapter offers several implications for managers responsible for luxury brands. Each year, managers must
find ways to increase their sales; for many, the temptation to expand the customer base by creating more accessible product lines has been irresistible, despite warnings that such trading down can dilute brand equity and cause the brands to lose their luxury cachet. Our findings, based on a qualitative methodology, indicate that consumers draw inferences on the basis of the price of an item, but these inferences are also influenced by the brand. Many brands are endowed with so much prestige that they can overcome any inferences that might be made on the basis of the price of selected product lines. Thus, a nice leather belt with a Dior logo remains emblematic of luxury for consumers. Managers should take advantage of this evident halo effect. This finding is particularly good news for luxury brands that actively seek to find a balance between exclusion and inclusion. Attracting new consumers (often younger ones) may require lowering the price barrier, which is not necessarily risky if the product retains present physical elements that make it stand out as a qualified form of luxury, even at an accessible price. For instance, Dior recently launched a pair of earrings at €250: It has been a total success. Despite this very accessible price, the product was endowed with Dior’s halo of prestige. However, for the halo effect to persist, the brand’s prestige must be continuously reaffirmed. That is, luxury brands need to trade up too, in order to fuel the dream. Consider Armani: on the one hand, it created accessible lines (Armani Jeans, Armani Exchange) to attract youthful consumers, while on the other, it launched Armani Privé, a
highly exclusive label comparable to haute couture brands. Ralph Lauren created its Purple Label and Black Label for the same trading-up purpose. Thus many consumers still feel distinctive when they purchase a product from the Polo Ralph Lauren line, even though prices on these items are regularly slashed for promotion or in factory outlets. If price alone were the only cue of luxury, the brand would already have have lost its considerable considerable cachet. For future luxury brands, this chapter also offers predictive insights. Young luxury entrepreneurs might pursue the highest price points; for example, some watch brands offer an average price above €50,000. But these are inherently niche brands. A luxury strategy does not mean being the most expensive on the market. One can enact the luxury strategy at different price points (Kapferer and Bastien, 2012). For an entrepreneur, the pricing question relates to the firm’s ultimate goal and its target market. Expensiveness has distinct meanings across different consumers. Therefore, an entrepreneur must first determine the price at which the targeted market considers a product equivalent to, or no longer, a luxury offering. For the targeted market, the optimum price is above this luxury threshold but still a price he or she can afford, close enough in reach so that the dreams come true.
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08 All that glitters glitters is not green gree n
The challenge of sustainable luxury
This chapter was originally published as an article in European Business Review, Nov–Dec 2010, pp 40–45.
Sustainable development is on the agenda of the entire planet. Intensive demographic and economic growth devoid of ecological concerns jeopardizes the life of future generations. In line with these concerns, governments, nongovernment organizations (NGOs) and consumers ask all economic economic sectors to change fast. Luxury has recently been a target for public criticism: accused accused of lagging behind – if not at odds with – sustainable development imperatives. Focusing on specific products products and consumers, critics point at the waste of resources resources for the pleasure of a happy few. Luxury attracts special special attention for, beyond ecology, sustainable
development talks about social equity. Now, a deeper analysis reveals how much sustainable development is deeply congenial with luxury, but real luxury: both take rarity as their central concern and real luxury is by definition durable. Certainly luxury highlights the inequalities of society, but it does not create these inequalities. Acting as a paragon of quality, luxury will need to act as a model in sustainability. All major real luxury brands have already responded to the demands of sustainability, but without much communicating. Can luxury brands be at the leading edge of sustainability? Much still remains to be done – and a luxury strategy is the most efficient way to foster ecological behaviours.
Luxury under pressure of sustainable development Sustainable development has become the major collective challenge on our planet. Although not all countries have signed the Kyoto Agreement, most manifest a concern about the limits of our natural resources and the need to find a new type of economic growth that takes into account the costs of its collective negative fallouts, so far unmeasured, which bear on future generations. Sustainable development (SD) is a global concept promoting a society that can persist over generations. As a result it should make prudent use of the planet’s resources
(physical, human, biological). Beyond ecology, sustainable development development promotes the conservation of biodiversity and natural resources, and is also concerned with social equity. At the extreme, some advocates of SD consider that growth in itself is the problem. Many countries have already incorporated this new paradigm into their public policies, legislation and regulations. Incentives and laws are being enforced that set quantitative targets for carbon dioxide emission reduction or pollution control. Sustainability demands impact consumers themselves – either as polluters through the type of purchases they make, or as guardians of suspect corporate actions. Active militant groups and NGOs scrutinize corporate and industrial behaviour and reveal the culprits to the public. Recently, the luxury sector has come under enormous scrutiny. Reports have criticized this industry for lagging behind (Bendell and Kleanthous, 2007). Some even say that sustainable and luxury are incompatible terms. To drive a Rolls-Royce, a Maybach or a Mercedes S Class would be a message that the owner couldn’t care less about overconsumption of fuel and the warming of the atmosphere. Although it is the projected mass diffusion of middle-range cars in China China or India that constitutes a threat for the planet, critics point at the behaviour of the richest, whose energy consumption per capita is disproportionate. As a consequence, many professional conferences and symposia on luxury and SD have emerged, where the stars of the sector have at first not been present.
Since luxury is supposed to mean excellence, the prospect of being criticized explains their initial reluctance. This does not mean that they were not concerned: as for corporate social responsibility (CSR), all luxury groups (LVMH, Kering, etc) had already put SD at the top of their agenda as early as 2001, but had not publicized it. Luxury has moved forward but does not talk much about it. The focus of this chapter is to analyse in depth the relationship of luxury to SD, both conceptually and practically. Conceptually, luxury is a fashionable word used by many companies and brands who are not in fact implementing a luxury strategy, but a fashion strategy or a premium strategy. For instance, L’Oréal Group can hardly be seen as a luxury group: it does not define itself as such. Its most known brand, L’Oréal Paris, is sold only in supermarkets, as well as Garnier, Maybelline, etc. There is a prestige division with Lancôme as flagship – a massprestige brand – and the fragrance licensees of major luxury or fashion brands. Yet both activities do not qualify as luxury due to their mass production and the predominance of quantitative goals over qualitative rare excellence. We need to give the word luxury its real meaning back. In terms of practical issues: to what extent can luxury brands incorporate sustainability demands and yet remain luxury? For instance, sustainability author Bendell (2007) mandates luxury brands to produce environment-friendly products and services. However, the world’s least fuelconsuming car is the small Nano made by Indian Tata and
sold at 2,629. Since luxury can be defined as the highest quality and creativity without constraint, hence disregarding costs, luxury cars will be more consuming than a Nano unless luxury takes on the mission to be the first to develop fully electric superb cars for those consumers who can afford them and will be pleased to show how rich and also environmentally conscious they are. This has been the success of Tesla. Nevertheless, in many other luxury sectors, a 100 per cent move to ethical trade and green concerns today would hurt the quality of their products. That said, all luxury groups have silently adopted the high goal of becoming sustainable luxury models. We do not talk here about ‘greenwashing’ such as sending money to some wild forest preservation group and letting it be known, but rather a true incorporation of the green concerns (another word for SD) into the whole value chain (sourcing, creating, manufacturing, logistics, distribution, marketing, servicing, waste and recycling).
Luxury and SD share two deep concerns: concerns: rarity and beauty A deeper analysis reveals that luxury and sustainable development converge: both focus on rarity and beauty. The essence of real luxury is to sell high-quality creative and rare objects with an image of good taste and elegance. Historically, luxury was the privilege of those who had
money, taste and power. Recently its growth – and deviation – is due to an overextension of its consumer basis, through accessible mass-produced accessories that cannot be qualified as luxury products, even if they are endorsed by luxury brands. But the recession triggered in 2008 2008 put luxury back into its rightful place. Beyond the brand exclusive image, luxury value is based on its objective rarity – rare skins, rare leathers, rare pearls, other rare materials, rare craftsmanship. Thus luxury is resource dependent and obsessed by the sustainability of its resources: high price limits the demand and is the best way to protect the future of these resources, hence the sector. What most threatens the resources of the planet is mass production, not small production volumes. The overconsumption of plastic packaging by mass consumer goods (bottled water, for instance) far exceeds the recycling capacities of the world. The sophisticated wrappings around luxury products, as a symbol of a gift to oneself or another person, are a tiny drop compared to this ocean of neglected ecological damage, more so if the paper today is recyclable. Luxury is the enemy of the throwaway society.
Distinguishing the luxury strategy from a fashion or premium strategy Can there be any beauty based upon a mass of disgraceful
pollution and unfair labour practices? Because the word luxury has become so fashionable, many companies use it to justify their own existence. However, to say is not to do. Kapferer and Bastien (2009) have shown that luxury is in fact a business model, created by the likes of pioneer companies such as Rolex, Louis Vuitton, Hermès, Ferrari and Chanel – and that many so-called luxury brands were in fact following another business model, closer to that of fashion or premium goods. Real luxury is not aimed at cost reduction but at the creation of value, through rare and unique singularitie singulari ties, s, like li ke no delocalization. delocali zation. Unlike fashion brands, which delocalize as much as they can, luxury adds up elements of uniqueness such as producing in its home country. The scandal of sweatshops in China was associated with mass brands such as Nike and with fashion brands who have all delocalized their production to the Far East in order to capitalize on low labour costs, and the corresponding work conditions that accompany this. In contrast, luxury brands stress: • Importance Import ance of crafted, craft ed, handmade handmade products and rare savoir faire. Far from exploiting unskilled labour forces, as does the mass fashion industry, either directly or throu t hrough gh its licensees, luxury l uxury brands brands need to sustain skilled skil led workforces and even recreate schools schools to t o revitalize revitali ze curricula that are disappearing. disappearing. • No licences. li cences. Luxury Luxury brands produce goods in-house, even their accessories. Chanel Chanel watches w atches are made in the Chanel factory. Chanel N°5 is made by the house
factory too. Fashion brands, on the contrary, multiply licences worldwide. This is built into their business model. Once a product is out of fashion, it must be sold with huge discounts on e-commerce sites, or factory outlets. This destroys the margin: delocalization and the use of licensees to meet the need of fashion to have the garments produced anywhere in the world at minimal cost often mean that licensees are rarely well controlled and licensees in turn can hire sub-licensees, with virtually no control over the labour conditions.
Luxury is by definition durable Durability is at the heart of sustainable development as well as luxury. Durability is the enemy of the fashion industry and of the mass-market industry, based on planned obsolescence. Luxury, on the contrary, is in the business of lasting worth: 90 per cent of all Porsches ever produced are still being driven; Louis Vuitton provides after-sales services to any genuine Louis Vuitton product, whenever it was bought. The same holds true for Ferrari: the Maranello mechanics will work on any old Ferrari, whatever its age. This is why there is a large aftermarket in the luxury business. At a managerial level, durability is a central tenet of luxury companies. The fashion business, on the contrary, lives on short cycles, short time spans and perspectives,
just like the next issue of Vogue. Luxury is managed with a long-term perspective. Often these houses are a century old and refer to a heritage that is a key part of their intangible extra value. New designers called to reinvent the brand, to make it relevant to the younger clients of the world, pay due tribute to this heritage and reinterpret it with respect. Often in family companies the managers are not pressed to deliver high growth figures at each quarter, whatever the economic circumstances. Finally, products are built to last and forgo obsolescence, their beauty should last, as should their functionality: hence the service associated with them. All Miele appliances, for example, are built to last up to 20 years. Why would such an industry that is obsessed with durability – and that is so resource dependent – overexploit its own resources? Jewellers care for their mines as their future depends on them.
Why this present SD focus on luxury? According to the estimates of Bain & Company, luxury total revenues amounted to €223 billion in 2014. Why would a sector a bit bigger than WalMart be so concerned about its sustainability? The answer: because this is a very visible sector, whose public attraction is linked to its highprofile consumers, VIPs and celebrities. SD advocates also c a r e about about social equity. equity. No sector reveals the t he world’ w orld’ss social inequality as much as luxury. Because economic
growth in most emerging countries is based on the desire of the middle class to emulate the richest, luxury is said to be a factor of social tension. Due to its conspicuousness, luxury encourages aspirational consumer buying beyond rationality. We should, however, remind ouselves of existing realities. Economic growth based on internal demand supposes that this demand exists: imitation is a potent lever of consumer behaviour (the famous ‘keep up with the oneses’). Moreover, we are in an era where resources will be scarcer. Is it due to luxury? Of course not: it is due to mass-consumption growth. The many low-cost airline companies have boosted global consumer demand for air travel – a high kerosene-consumption activity – not the private jets. So why this focused critique of luxury? The answer: because of the symbolic nature of luxury consumption as a human activity and the celebrity of its main clients. First, luxury purchases are by definition irrational. Why pay $1,500 for a handbag whose function is the same as a handbag at $150? What is bought for the $1,350 difference? The essence of luxury is singularity: everything that makes the piece appear out of the ordinary. It encompasses the objective extreme quality to the home country where it must be made, as well as handcrafting, time and the one-to-one caring service in exclusive retail stores. It also extends to the capacity of the brand to single out the buyer as a person of taste, elegance and status (Han, Nunes and Drèze, 2010). The consumer becomes
someone out of the ordinary, someone unique, as long as this is signalled by pre-eminent logos: hence the craze in Asia about luxury goods and brands (Chadha and Husband, 2006). After 50 years of communism and forced uniformity, the Chinese can dress as they want to be perceived, and show they are no longer poor. Consumption is thus a foremost zone of freedom and elevation. The irrationality of luxury is precisely what makes it stand apart from all other types of purchases (art excepted): in Maslow’s pyramid, buying objects beyond mere functional reasons is a sign of human elevation. Second, luxury means excess: it comes from the Latin root luxus. In luxury everything is in excess compared to standard industrial products or services, a fortiori to lowcost ones. Since the luxury industry exhibits the highest gross margins of all sectors (Kapferer and Tabatoni, 2011), it is not much concerned with cost reduction but with creation of value: making the buyer feel like a VIP, and stand apart. This starts at the ingredient level – only the best ingredients; then production (with much care, time, expertise, quality, craftsmanship, etc); retailing (in the nicest places and environments); and servicing and branding (the conspicuous name endows prestige, glamour and distinction on the buyer). This excess is by definition criticized in an SD perspective, which promotes a contrasting ethic: frugality and self-restraint today in order to ensure the happiness of the next generations. Why have big engines, for example, if small engines are sufficient to power cars – which in any case will be used only to go
from home to downtown and vice versa? A 6.5-litre Bentley engine for the pleasure of the few rich is a provocation. Thirdly, luxury signals inequality. Only the rich can buy Bentleys, huge gas-guzzling yachts, private helicopters or jets, etc. Beyond achieving their personal dream, these happy few are also destroying collective capital. Certainly there are very few rich compared to the billions shopping on the mass market. But, per capita, the rich would overexploit overexploit collective coll ective capital (natural resources that cannot be replaced). The SD critique of luxury points at emerging countries where the extremely poor coexist with the extremely rich. Interestingly, however, it is the biggest communist country in the world (China) that itself promoted luxury consumption in its own domestic market. After the Tiananmen Square protests in 1989, Chinese Prime Minister Deng Xiaoping urged: ‘get rich and glorious’, thus freeing the entrepreneurial forces of this giant country. He knew the force of the imitation motive as a lever of economic growth. Since then social inequality between urban and rural dwellers has grown. But luxury growth is a consequence of it, not a cause: China has become the number-two luxury market in the world. To summarize, luxury is criticized by SD advocates not so much because of its objective impact on the planet’s resources but because of its high visibility and its considerable symbolic power, much more than its real economic weight.
Acting as an SD model to preserve luxury reputation SD is not only an altruistic opportunity, it is a business imperative for luxury. Celebrities know they are opinion leaders and, as such, should act responsibly. Today, they demonstrate ethical concerns and substitute an ethical stratification for power stratification. Cautious of not endorsing brands that are insufficiently ‘eco clean’ or sustainable and, as such, would hurt their own reputation, they stimulate fast change. In fact, all luxury groups have already made structural decisions about this, either by creating cross-categories environmental task forces, or through charters that make SD an inherent criterion in all decisions. LVMH initiated an environmental charter as early as 2001 and SD is inseparable from its strategy. Like many others LVMH has been auditing its carbon footprint since 2004 and has taken as a managerial motto the four words: renew, recycle, reduce, review. The same holds true for Tiffany, a pioneer in that respect – as already mentioned, one cannot buy gems and not care about mining conditions. Real luxury brands have always created new extremes for quality. They set their own standards, superlative ones. These standards will have to become higher in new ways: the quality of a diamond cut should not obliterate the mining conditions. Soon, through the internet, bloggers’ rumours will reveal the real conditions behind the lustre
(at the sourcing level, or at the production level). Because luxury brands’ very high gross margins rely strongly on their intact lustre and immaculate integrity (Kapferer and Tabatoni, 2011), they have more to lose from any reputation crisis.
Is SD ready for luxury standards? In practice, how do we reconcile the demands of frugality, self-restraint and the built-in dimension of luxury – utmost quality, creativity, freedom, lack of constraints, excess of care? Should one ask Alexander Wang to halve the quantity of fabric he is using at each catwalk show? Should all fashion luxury brands adopt a minimalist look, thus losing all capacity to differentiate and surprise? What about Jaeger-LeCoultre’s use of rare dogfish skin, which cannot be found in sea farms, for their wristwatches? At the retail level, should Cartier cut the air conditioning in their luxury boutiques? Or stop wrapping their watches in a nice gift package? In the tourism business, a modern three-star hotel is more energy efficient than a Scottish castle. Should Should one destroy these castles? The question of the compatibility between SD and luxury is the same as the question concerning fair trade. We know the answer today. For instance, AlterEco, a brand of fair trade chocolate, soon realized that fair trade could not be the consumers’ number-one reason for purchase. A chocolate bar had to taste very good, first and
foremost: fair trade could not be an excuse for a less than satisfying palate experience. experience. One should not underestimate the practical difficulties or remain purely dogmatic. Two examples will illustrate the problem of compatibility. In skincare, innovation is of paramount importance, as well as preserving the health of the clients. Luxury is about excellence: more than any other, luxury brands guarantee zero risk. Now there are more and more pressures from lobbies and animal defence groups to forbid testing new molecules and skincare products on animals. But then how can any brand ensure that its radically new products in the future are harmless if they have never been tested? When Stella McCartney launches her new bio-organic cosmetic line, how can she be sure that it is really hypoallergenic and will not harm client’s skin if it has never been tested? She cannot. Today, sustainability creates difficulties to maintain the level of superior quality of premium brands. Created in 1933, the best polo shirt in the world, Lacoste 12 X 12, owes its reputed quality (softness, durability, resistance to repeat washing) to the exceptional Pima cotton from Peru. Its long fibres are used in making the 25 kilometres of thread needed for each Lacoste polo shirt. Buying cotton from sustainable trade would certainly demonstrate that Lacoste does actively contribute to the enhancement of the economic level of local producers in emerging countries: this would be an ethical achievement. However, Lacoste would not be Lacoste any more: at this time, sustainable cotton does not deliver the same quality and performance
as Pima cotton. In addition, no single source produces enough of it. Lacoste would have to buy ethical cotton from many suppliers in the world, thus introducing heterogeneity in the look and feel of one polo shirt to another. However, all luxury brands do advance fast to meet the demands of SD. Let’s take a Dior handbag as an example: • It is made in Italy, for this country country is reputed reputed for its excellent leather suppliers and their know-how. Also it produces less CO 2 than if it was made in China, as is the case for Coach. • These These better better leathers come from Italian bio bio farms. • Once sold, sold, the bag bag is put put in a ‘cover’, ‘cover’, then in a box, box, both being recyclable. • It is presented presented in catalogues catalogues (the main part of of a communication budget in luxury is edition) with superior qualit qualityy paper – coming from sustainable forests. Soon it should be replaced by online catalogues. Thierry Mugler’s recent fragrance Womanity advertises its taking care with its carbon footprint. This brand now sells refillable products. Dior cosmetics decided to forbid the use of silicons in their products. Doing so, they knew that these products would lose the experiential benefit of silicons: the soft touch and feel. Tiffany is another example of taking SD very seriously.
Looking at their brand website, one reads the Tiffany Commitments (‘Sustainability our most important design; Nature is our best designer’). Tiffany views it as a moral obligation to protect the places and communities where their precious material comes from. As a result, Tiffany cares about: • the source source of their gems gems and and the mining practices: practices: they do not buy Burmese rubies; • which countries countries it deals deals with – only only those who have have signed the Kimberley process; • local communiti communities: es: they support support the Alaskan Alaskan pledge for no mines there; Tiffany signed the Bristol Bay Protection Pledge; • large-scale mining; • collaborative efforts; • not using real corals corals since 2002; • energy conservation; conservati on; • recyclability: 95 per per cent cent of the paper paper for catalogues is certified certi fied by the t he Forest Stewardship Councils Councils (FSC) as well as the iconic Tiffany Blue Bag (FSC certified, plus biodegradable, recyclable plastic film). Another example, Fauchon, the luxury grocery store in Paris, has stopped selling counter-seasonal fruits and vegetables (ie buying summer fruits in winter) because they come from the other side of the planet and so are a CO 2
footprint disaster.
How SD needs a luxury strategy too There is a domain where SD now feeds the luxury dream itself: tourism. Today, the utmost rarity is unspoilt nature. But there would be a dramatic contradiction in visiting such places and polluting to go there or while living there. This is why new hotel chains have emerged where SD is itself the dream, like Explora in Chile with resorts in Atacama Desert, in Patagonia and in Rapa Nui (Easter Island). Their hotels have fully positive energy buildings, with no litter (everything is destroyed through organic bacteria) and food comes from the local communities. In addition, they work only with the local communities, sponsor local education for their children and engage in actions to compensate for the carbon footprint of travellers coming there by plane. It costs on average US$1,000 per night, which is one month of a worker’s pay. This raises a question: Is luxurious ecology still in line with the social ideals of SD, ecology as natural socialism? What good does it do to all the inhabitants of the planet? Well, as ever, luxury shows the way! A luxury strategy aiming at the rich is the best way to introduce and test new ecological behaviours and products in a market, thus stimulat sti mulating ing imitation by less affluent people when prices go down, thanks to lower production costs made possible by volume. SD needs luxury too!
Status redefined: from power to altruism Luxury can lead the way by redefining the notion of quality and the luxury dream, no longer a selfish dream of an individual, but one that takes into account environmental concerns. To remain a leader against mass goods and fashion, luxury will have to be sustainable in social, economic and ecological terms. This is built into its genes and business model. As a result, luxury groups will bear down upon their providers and distributors to accelerate behavioural changes and align faster with SD standards. By doing so they will play a leading role in the redefiniti redefinition on of the modern hero. hero. The The rich ri ch of tomorrow t omorrow will wi ll demonstrate, by their conspicuous choice of luxury brands, not only their taste and wealth but their sense of discernment and altruism.
References Bendell J and Kleanthous A (2007) Deeper Luxury Report, WWF, London Chadha, R and Husband, P (2006) The Cult of the Luxury Brand: Inside asia’s love affair a ffair with w ith luxu luxury, ry, Ni Nicholas cholas Brealey, Brea ley, Londo Londonn ee Han, Ha n, Y, Nun Nunes, es, J and a nd Drèze, Drèze , X (2010) (2010) Signaling status sta tus with luxu luxury ry goo g oods: ds: the role of brand prominence, Journal of Marketing, 74 (4), pp 15–30 Kapferer, Kapfer er, J-N and Bastien, V (2009 (2009)) The Luxury Luxury Strate S trategy gy:: Break Brea k the the rules of marketing to build luxury brands, Kogan Page, London Kapferer, Kapfer er, J-N and Tabatoni, O (2011 (2011)) Are luxury luxury brand bra ndss really re ally a financial financia l dream? Jou J ournal rnal of Strateg Stra tegic ic Manage Ma nagement ment Education, Education, 7 (4), pp pp 1–16
Further reading Ameldoss, W and Jain, S (2005) Conspicuous consumption and sophisticated thinking, Management Science, 51 (10), pp 35–45 Corneo, G and Jeanne, Je anne, O (1997) Conspicuous Conspicuous consum c onsumption ption:: snobbism and conformism, Journal of Public Public Econo Ec onomics, mics, 66, pp 55–71 Hurth, V (2010 (2010)) Creating Cre ating sustainable s ustainable identities: identities: the signifi sig nifica cance nce of the financially affluent self, se lf, Sustainable Susta inable Deve De velop lopment, ment, 18, 18, pp 123 123–34 –34 Kapferer, Kapfer er, J-N and Michaut, A (201 (2014) 4) Are luxury luxury pu purchas rchasers ers rea r eally lly insensitive to sustainable developm dev elopment? ent? New insights from researc rese arch, h, in Sustainable Susta inable Luxu Luxury, ry, Chapter 7, eds M-A Gardetti G ardetti and a nd A Torres, Greenleaf Gre enleaf Pu Publi blishers, shers, London London Kapferer, Kapfer er, J-N J -N and Michaut, A (2014) (2014) Is luxury luxury com c ompatible patible with sustainability? Luxury consumers’ viewpoint, Journal of Brand Management, 21 (1), pp 1– 22 Mandel, N, Petrova Petrova,, PK and a nd Cialdini, Cialdini, RB (2006 (2006)) Images Imag es of success succes s and a nd the the preference for luxury brands, Journal of Consumer Psychology, 16 (1), pp 57–69 Rucker, DD and Galinsky, AD (2008) Desire to acquire: powerlessness and compensatory consumption, Journal of Consumer Research, 35 (August), pp 257–67
PART THREE
The business side of luxury brands’ growth
09 Not all luxuries act alike
The distinct business models of luxury brands
Luxury is everywhere, in the media and on the streets. Socalled luxury brands are nearly countless, which is a signal of post-modernity. The right to be happy is claimed by everyone, leading to extended desires for the symbols of happiness, namely, possessions. Such ubiquity suggests that all these luxury brands grow similarly. This chapter shows that even when different brands are described by the word ‘luxury’ ‘luxury’ – a catch-all term adopted by consumers and managers managers – they adopt disparate business models, with contrasting contrasting managerial implications for growth. An interesting interesting finding reveals that each major luxuryproducing producing nation is predominantly associated with one of these these models. At a global level, beyond the brands, these models models compete compete to establish a singular, definitive version of what w hat constitutes constitutes luxury, as well as what does not.
The desire d esire for luxury Luxury is in fashion. What once was the ordinary for extraordinary people has become the extraordinary for ordinary people. Accordingly, Accordingly, the luxury sector sec tor has experienced continuous growth since 1980. In reviewing only the personal luxury goods market (eg leather, clothing, jewellery, fragrances, skincare), Bain & Company (2014) estimate the 2013 global market to be worth €223 billion (retail); though the United States remains the top market (and New York the most luxury-centric city), China accounts for most current growth. Noting the various explanations available elsewhere, we simply summarize them briefly here: • There are more rich people than ever before, especially in high economic-growth countries. A strict correlation arises between gross domestic product product (GDP) (GD P) growth and luxury market growth. Examples appear in virtually all emerging economies: Forbes Forbes notes that Moscow Moscow has more m ore billionaires billi onaires than any other city. The richest individual in the world is a Mexican business telecom entrepreneur. But these billionaires and millionaires do not constitute a huge or growing market on their own. They feed the ‘absolute luxury’ industry (eg yachts, private jets, real estate, hotels and palaces, Rolls-Royces Rolls-Royces or Bentleys), Bentleys), but the growth of the conventional conventional luxu l uxury ry sector stems more from ‘ordinary people’,
categorized in the upper middle class. cl ass. • The extension extensi on of the desire for luxury now encompasses all strata of society, and especially young consumers. This factor explains why the accessories market has grown so fast. Few people can buy a Dior haute couture dress or even an iconic, classic Chanel tailleur. In contrast, Dior-branded eyewear is much more accessible, as is a Chanel watch. They also grant an instant reputation for f or class to the person wearing them. • For many modern consumers, a luxury purchase remains an exceptional event. Accordingly, Chanel, Hermès and Cartier have raised some of their t heir products to the status of ‘icons’, with their own cults. These product icons are timeless and must remain so to attract and maintain desire from ordinary people over the long term. If a person will buy only one Hermès bag in their entire life, they should buy the iconic version (ie Kelly or Birkin). For watch brands, iconic products could lose their attraction if they have been owned already for a long time, if the most expensive version is already held by the consumer, or a consumer even has a collection of them. To refresh the iconic dream, luxu l uxury ry brands issue limited editions, designed by artists and priced at highly discriminatory levels, which can re-spark desire.
Behind a single term, multiple business models Through its growth, the luxury market has emerged as an attractive sector to corporate investors; luxury thus has been called a ‘financiers’ dream’ (Kapferer and Tabatoni, 2011). Business angels, investment funds and luxury groups (eg LVMH, Kering, Richemont, Starwood) seek out emerging brands with high luxury potential that are in need of cash or expertise to fuel their retail expansion (Ijaouane and Kapferer, 2012). But learning how to grow or build a luxury brand requires further consideration in practice. The answer cannot be asking consumers, who would likely just parrot the marketing lessons that luxury brands have taught them. A classic pitfall of luxury research thus is asking consumers: what is luxu l uxury? ry? First, ‘luxury’ is a word derived from Western languages, and most consumers’ knowledge stems not from the essential concept but rather from their experience of what a majority of others describe as ‘luxury brands’. Thus, definitions of luxury stemming from consumer research tend to look like circular reasoning, offering mere descriptions of the generalized marketing practices of brands brands (usually international ones) that the local vox populi refers to as luxury brands. Typical terms used to define luxury include expensive, high quality, or beautiful products sold in select stores on the high street. Second, on a related note, the definitions reflect
consumers’ subjective perceptions of what is expensive, selective or beautiful. Luxury consumer surveys are inherently limited; samples recruited on the street or through internet internet panels – not to mention menti on academic academic research that makes abusive use of college student samples to talk about luxury – cite what people from their social or economic class consider to be luxury. The resulting definitions depict what a luxury brand ‘looks like’ to a regular layperson, not the richest consumers. For example, would the billionaire Bill Gates or a Russian oligarch necessarily consider Cartier or Louis Vuitton luxury brands? Definitions depend on the identity of the persons being interviewed, so brands that fit the definition of luxury for a young Indian or Chinese manager, just hired by a multinational company for their first job, likely do not match the brands identified with luxury by someone with extensive, lifelong experience with expensive, rare, hand-crafted products. Third, consumer-based definitions ignore the managerial process of value creation and the brand’s profit equation. In response, this chapter analyses some of the business models that predominate in this sector. For wellknown luxury brands, their business model reflects the manner by which they deliver value to customers, entice customers to pay for that value, and convert those payments into profit (Teece, 2010). According to Moingeon and Lehmann-Ortega (2010), a business model describes the mechanisms that enable a company to create value through:
• the value proposition proposition made made to clients; clients; • its value architecture; • the ways ways it harnesses harnesses this value to transform transform it into profits (profit equation). Kapferer and Bastien (2012) define and differentiate a luxury strategy, a fashion strategy and a premium strategy; this chapter extends that analysis to masstige (mass + prestige) or fast-moving luxury goods (FMLG). Our analysis reveals different business models taking priority in different countries: most Italian brands (eg Armani, Prada, Versace, Dolce & Gabbana) follow a fashion business model (Corbellini and Saviolo, 2009), and those that do not (Loro Piana, Bottega Veneta, Bulgari) have generally been purchased by French luxury conglomerates. In addition to abundant cash infusions, these purchases granted the luxury brands access to a culture devoted to their existing business model, which we refer to as a luxury strategy strat egy.. In contrast, contrast , in Germany, Germany, known known for its it s high-performance cars, where any extra costs must be justified rationally by additional quality, Mercedes-Benz, Audi and BMW enact a premium strategy. Finally, the United States has developed a worldwide masstige model, offering ‘luxury for the masses’ (Silverstein and Fiske, 2003), with brands such as Ralph Lauren, Coach and Victoria’s Secret. These brands have gained a high-end image, despite being mass-produced and distributed widely rather than exclusively in moderately selective channels.
The United States is also the only country where stores can provoke headlines such as ‘Luxury at $10’, promoting the idea that luxury is not necessarily tied to high prices and instead can be for everyone. Even the Luxury Marketing Council, based in New York, promoted the idea of ‘Health, ‘Heal th, the Luxury everyone can afford’. afford’ . Table 9.1 summarizes these business model comparisons; we illustrate the models by their most typical brands.
What discr d iscrim iminant inant criteria criteria differentiate diffe rentiate business models? In a recent survey of luxury consumers (BVA, 2013), identified as such when they declared purchases of personal goods above a specified price, 200 persons indicated whether they perceived listed brands as luxury or not. The results for a few brands are insightful (percentages of people perceiving them as luxury brands): Ferrari 54 per cent, Rolex 45 per cent, Chanel 45 per cent, BMW 39 per cent, Audi 38 per cent, Mercedes-Benz 32 per cent, Armani 30 per cent, Ralph Lauren 22 per cent, Prada 22 per cent and Lacoste 23 per cent. These data do not claim universality; like all samples, the findings are situational, tied to the nationality and profile of respondents. Yet even among the last three brands listed, we find approximately equal luxury scores but widely divergent business models: Prada is managed like a fashion house, Ralph Lauren is a
typical masstige brand, and Lacoste is following Ralph Lauren by trading in its premium image for a masstige plan, with a touch of the fashion model. TABLE 9 . 1 Comparison Comparison of of business business models operating on the luxury market Luxury
Fashion
Premium
Masstige (Mass prestige)
Value versus volume
Value
Mix ed
Volume
Volume
Pric e polic y
Alway s up
Up and down
Trade up
Up and down
Rarity
From s c arcity to v virtual irtual rarity
Limited series, ephemeral
None or lack of demand
None or alibi for higher image
Time
Timeles s
Fas t, now
Today ’s technology
Invented legend and history
Produc tion
Atelier, vertical integration
Small factories
Fac tory
Mas s production
Cos t s av ing
No c onc ern
Es s ential
Normal
Es s ential
Reloc aliz ation
None
Nec es s ary
For c us toms
Nec es s ary
Quality orientation
Respectful of tradition, tradition, craft c raft
Good enough
Performanc e
Good enough
Innov ation
Trans gres sion
Creativ ity
Break throughs
Serv ic e, digital
Discount pricing
Nev er
Nec es s ary
Limited
Fac tory outlet, internet
Lic ens ing
Nev er
Alway s
Limited
Always
Portfolio growth
Brand extension
Brand stretch
Limited
Brand stretch
Role of marketing
No marketing: offering
Sales analysis
To test new advances
To orient design, and products
Role of retail
Select buyer yers; nurture cult Directly operated stores
Distribute and sell
Sell and service
Create prestige impressions
When we refer to a fashion business model, it does not necessarily imply that the brand’s offerings are perceived as fashionable by consumers but rather that it is managed as a fashion house. For this chapter, the terms masstige, fashion, premium and luxury refer to operating principles, not public perceptions (which likely would tend to lump all these models together under the umbrella term ‘luxury’).
Value versus volume orientation Ferrari purposely limits its sales to around 7,300 cars, and Rolls-Royce has announced that it will not increase the volume of production (3,630) but rather aims to enhance
the value of each automobile it produces. In contrast, there are no set production limits for Porsche, BMW, Mercedes or Audi. That is, production capacities might create de facto limits for specific times, but these limits can be removed by the construction of new facilities, usually in proximity to high-growth geographical areas such as China. A luxury strategy does not pursue such volume increases, because rarity is an intrinsic part of the creation of value. The production of iconic Hermès bags is limited by a deliberate production bottleneck, tied to the time it takes for a single craftsperson to make one bag (20 hours) and the need to coach newly hired craftspeople for months; such training by expert craftspeople leaves them less time to devote to making their own exceptionally crafted leather bags. Furthermore, the wait is part of the construction of desire. If a consumer could buy a bag as soon as the desire appears, without waiting, then the risk exists that one day soon the consumer might start to want another bag, from another brand. This factor is also a prominent concern related to selling product ranges on the internet. For the sake of modernity, or convenience, or just because other brands are already doing it, luxury brands often are urged to have an online presence and fully embrace e-commerce. But should they really? Time is essential to a luxury strategy: on the production side, sufficient time is needed to provide excellence, and on the demand side, more time increases desire, even if it might frustrate younger luxury consumers. Fashion, by its very nature, has none of these concerns:
the focal consideration for a fashion model is remaining in fashion and not having a large inventory remaining when the season ends. Thus, fashion businesses like limited series that not only create artificial rarity (a key part of Zara’s business model) but also mitigate concerns of overly large unsold unsold inventories. Finally, neither the premium nor the masstige model hesitates to increase volume, without limits. Lexus aims to become the ‘number-one imported luxury car brand in the United States’, such that it explicitly seeks to surpass the German brands in volume. For the masstige brand Ralph Lauren, which is now a publicly listed company, the objective is clearly unlimited growth; Ralph Lauren himself is less a designer than a businessperson. Although the company has introduced some high-end labels (Black Label, Purple Label) to create a trading-up, halo effect, the emphasis on the rarity of these options in advertising messages mainly serves to compensate for the model that dominates the core business, Polo Ralph Lauren: nicelooking products, mass-produced and sold in prestigeendowing stores. In addition, Ralph Lauren needs a counterweight to high factory outlet sales and latent commoditization, which threatens masstige brands, once everyone is seemingly wearing a Polo Ralph Lauren shirt.
Relation to to scarcity sca rcity This facet is a corollary of our preceding discussion: luxury
is essentially rare. It takes time to produce excellence, using handmade parts. Richard Mille launched his first watches at €250,000 and produced very little volume (fewer than 50), not because of the absence of demand – the orders flew in as soon as news of their availability was released – but because of the time it took to produce a single unit. For a luxury strategy, volume is not an objective, and growth is merely a condition for building reputation and the company. Reputation is primary over volume. In contrast, fashion is not rare, even if it seeks to create some rarity artificially, to avoid leftover inventory. Masstige imitates luxury codes by talking about, idealizing and practising rarity for a few specific items, usually used for marketing purposes. But masstige also loves volume and produces products in large factories in order to lower the cost of goods. Mass fashion-retail brands, such as H&M, rely on virtual rarity, such that they create a lowcost series by a famous, well-known designer that they plan to sell out within a few days. This ephemeral rarity is also implemented by pop-up stores or limited editions.
Relationship to time The luxury strategy aims at timelessness. The luxury business model seeks to create long, not best, sellers. Thus each true luxury brand is expressed mainly by its iconic creations, each tied to the brand heritage and expressing a
facet of it, though also with its own story and legend. Cartier is not only the name for crowns for royalty but also the brand on Tank or Santos watches. Fashion is, by definition, innovative and linked to its time. Fashion says ‘Buy this now!’ because the item is the ‘it’ thing. We can differentiate between slow fashion, such as Italian brands that express the spirit of their homeland, and fast-fashion exemplars such as Zara, H&M and Mango that use the rapid rotation of limited series to encourage shoppers to buy immediately. Luxury is the exact opposite of this push to repurchase; luxury brands expect that consumers take time to invest thousands of euros in a particular watch, for example. Other than the ultra rich, people also need time to build their desire and capacity to buy a specific, seemingly timeless model. Thus, there is never any rush. Premium brands are threatened by obsolescence. Their appeal is based on progress and product comparisons (unlike luxury, which aims to be non-comparable). Technological progress is a temporary ally. Consider the battle between Samsung and Apple. The Californian brand thought it would remain in a state of monopoly, but Samsung’s technological savvy and rapid reactivity have dulled Apple’s competitive edge and market share advantage. Thus, Samsung is now the world leader in the super premium smartphone market. This is why Apple is now adopting a luxury business model.
Production Production process proces s Even when retail strategies appear identical (exclusive stores, prestigious addresses), radical differences mark production and logistics across brand types. Masstige, as noted previously, is an efficient business model that convinces people they are buying class when actually the goods are mass-produced. Ralph Lauren again offers an instructive case: its superb stores are filled with nice products, with a wealth of small details that provide visible markers of class and quality. Thus, a classic navyblue blazer, with four embossed buttons on each sleeve and a visible royal blazon on the chest, can sell for £250 in the New Bond Street store in London, before having its price cut in half at the end-of-season super-sale. The product likely came from a plant in Hong Kong, purchased for around £18. At the other extreme is the vertical integration of the atelier, the workplace of craftspeople who personify luxury brands, whether they produce watches, suits or jewels. High-end fashion, typified by the Italian brands, is instead associated with small factories. Fast fashion makes use of huge factories, though Zara has developed a cluster of small subcontractors subcontractors in Spain to produce produce small, on-demand on-demand series that can be tested within two weeks in any store of the retail chain. Finally, the premium strategy, which relies on comparisons of performance, needs to find ways to reduce human factors, which from an engineering
standpoint are simply potential sources of flaws. Again, this view contrasts directly with the prioritization of the human touch in luxury models. The premium business model is highly industrialized, because it needs to be. High fixed costs in the automotive industry require these premium brands to leverage group synergies. Thus the Porsche Cayenne features many parts that are not genuinely or exclusively made by Porsche: its platform is equivalent to that of a Volkswagen Touareg; however, the engine and gear mechanisms are definitely Porsche products, as is the overall look of the car.
Cost-saving orientation The cost of goods sold is an essential entry in any firm’s profit and loss (P&L) sheet. However, the preceding discussion suggests that the various business models treat these costs differently. At Hermès, the CEO insists that the company should not spend time on cost reduction but spend it instead on value creation. This call is not to suggest that the brand should overspend; rather, the function of luxury brands is to fight against the boredom created by a saturation of desires and products. Thus product designers seek not to renegotiate a better price for alligator skins, for example, but to find new, exceptional skins that can be tanned with incredible, rare, new colours while also respecting the environment and thus creating a timeless, beautiful object like no other. When Ford Motor
Company bought Jaguar, it applied Ford management methods, such that the brand became a victim of cost controllers, whose job was solely to reduce the manufacturing costs. The shift eroded the Jaguar dream so badly that ultimately Ford was forced to sell the brand to Tata, the Indian car manufacturer. In a luxury strategy, traditional marketing laws are turned upside down (Kapferer and Bastien, 2012). Fashion brands are concerned about manufacturing costs for one reason: they can charge full price for only about half the shelf life of any product, after which it will be discounted. What we call ‘shelf life’ is the time that a given item from a fashion brand can stay in a regular store, on the shelf. At the beginning it is 100 per cent fashionable, hence expensive, but with time it becomes bought by all and loses its edge. In the final months it is ‘yesterday’s’ fashion: it is then time to move it to factory outlets and slash its price, since it has lost value. Even at a discount, the product needs to remain profitable, so the cost of manufacturing is always an issue. Masstige brands tend to be adept at ‘design to cost’ lean management. Coach, to earn its exceptional operating margins, relies on three factors: 1) a high level of renewal (eg introducing new colours and designs every month); 2) moving production to China to reduce costs and make prices accessible (50 per cent less than luxury brands); and 3) the cultivation of a luxury image (imitating the codes of luxury, opening exclusive stores in major capital cities). Coach thus offers a very successful fast-moving luxury
goods (FMLG) model, directly inherited from its former owner Sara Lee, a fast-moving consumer goods (FMCG) conglomerate. Just as any mass-market brand must launch line or brand extensions every year, 70 per cent of Coach’s net sales come from newly newl y introduced products. products.
Relocalization of production production facilities facil ities Most Coach production takes place in Asia or elsewhere. Not so for Hermès. Although both brands are extremely profitable, only Hermès commands extremely high brand equity, as directly measured by its pricing power. For a luxury strategy, the manufacturing site is part of the dream, the construction of singularity, the incomparability and, thus, the high price (Karpik and Scott, 2010). Luxury brands’ obsession with localization is part of the construction of their intangible value. Why would a Chinese consumer queue in front of the Louis Vuitton temple on the Champs-Élysées in Paris if the products came from China? Each Louis Vuitton bag is not only made in France but also ‘made of France’. Only wines from the sacred Champagne region, in the east of France, may be called champagne. Places, lands and countries of origin thus act as a type of endorsement. Yet Italian brands have found a way around the constraint of producing in Italy; they sell the very powerful ‘Live Italian’ dream. For Zegna or Prada, Italianness is part of their business DNA, so local factories add little, especially when compared
against the advantages of producing outside Italy. Martin Margiela makes some sweaters in Rumania: beyond the cost factor, the company was able to find plenty of people in that country who could sew wool sweaters well. Most French luxury brands’ shoes are made in Italy. Still, many luxury brands insist on the ‘made in’ factor, for both cultural and strategic reasons. A country is more than a place; it is a source of know-how and magic, which can create incomparability and symbolic authority. Some Australian sparkling wines might taste like champagne and could not be distinguished in blind tests, but they are not champagne. Whereas with a premium strategy, the brand seeks to reduce the wine to a mere sensory experience – exhibiting Robert Parker’s grade, describing the technology and efforts required to achieve this result – luxury brands do compete on intangibles. Wine becomes time, heritage, culture and the human community, all embedded in an elixir. This distinction explains the mistake made by counterfeit goods resellers: they say a Louis Vuitton counterfeit looks like the original, but it lacks the aura and extra value of owning an original. Only the original carries the magic to build self-confidence. self -confidence. As early as 1935, Walter Benjamin (2010) insisted on the value of the original, even as technical reproductions of art became possible. Thus, thousands of people wait in line to see famous, original paintings at mass exhibitions. Luxury brands have yet another reason to prioritize location: the more global the market, the more luxury brands should localize themselves. This reasoning does not
apply to masstige brands, whose business model relies on delivering high operating margins. Coach features the words ‘Luxury, New York, 1941’ on its website, but really it acts like an FMCG brand, to ensure its profitability. Similarly, a premium strategy sells strong performances and thus comparability. The place where Lancôme products are made is relatively unimportant for most women (though it is crucial for Chinese high-end consumers who worry about buying counterfeits). In most cases, Lancôme looks French and embodies French beauty, and this is enough. Of Porsche’s line of cars, only its 911 continues to be built in Germany; the Cayenne, Boxster, Macan and other models are assembled outside the country. In the BRIC countries, automotive industry importers face high customs barriers, so brands seek ways to move their production closer to their targeted markets. In China, Communist Party officials are not allowed to drive imported cars, a lucky regulation for Audi, which uses the same industrial platforms as Volkswagen, a brand with plants already in place in China. In contrast, few buyers would think of obtaining a Rolls-Royce that had not been made in its iconic UK factory. Rolls-Royce is made ‘of’ not just ‘in’ Britain. This This argument does not hold for fashion brands. When Burberry adopted a fashion business model, it stopped producing in the United Kingdom; embracing a British pop fashion image was enough. From this standpoint, MINI coupés are closer to a luxury strategy than Burberry.
Quality orientation orientation No brand would ever admit that it does not aim to provide the highest quality, at least for its price. But the notion of quality can also differ, or at least have different importance, across business models. By definition, premium brands seek the gold medal for performance. In the wine industry, these brands compete for the highest grades from Robert Robert Parker or victory in i n a juried j uried tasting contest (such as the one that Grey Goose won, to warrant its advertising claim: the world’s best-tasting vodka). Lacoste’s early premium strategy led it to promote its iconic shirt on the basis of its exceptional durability, which used 2 kilometres of cotton thread to produce the chic, 280-gram cloth. The premium car industry is judged by JD Power surveys on customer satisfaction or car reliability, measured for each model of each brand. Beyond tangible measures, though, another question arises, related to the delight created by possession: What is quality? Can we compare a Porsche, which likely is the single car an owner might have and will be used to go from home to work to the stores every day, with a Ferrari, which mainly stays garaged and is used only from time to time? Driving a Ferrari has a dimension of folly and excess that characterizes people’s expectations of luxury as a source of freedom, similar to art. In a Ferrari, the roar of the engine is part of the experience; it would be considered a flaw by German engineers working at Porsche or Audi. If
we take away the noise, is it still a Ferrari? This question will become more than just rhetorical if, or when, an electric Ferrari is launched. For many years, the intangibles tied to Jaguar were the only solace an owner could take to forgive the car its unreliability. This dimension of folly is unique to luxury; it is absent from the premium business model. Thus Baccarat crystal may have some flaws that consumers regard not as faults but as the handmade signature by an artisan. Similarly, whereas an haute couture dress will be hard to wash and require careful dry cleaning, premium and masstige dresses need to be easy to wear and wash.
Relationship to innovation Because luxury is the embodiment of heritage and a bridge between the past and future, innovation rarely is involved in a luxury strategy, though this tendency is changing somewhat. In a recent Ipsos (2012) World Luxury Tracking Survey, the item ‘is most advanced in terms of innovation’ received more votes among people interviewed about their perception of what a luxury brand should be. This perception appears symptomatic, in that to avoid being trapped in an antique image, luxury brands must never stop innovating. Chanel thus experiments with new connected fabrics or new modes of production. Innovation is the only way for the brands to unlock the power of their past but still maintain vibrancy for today’s exacting,
trendsetting clients. However, the brands’ heritage means the innovations cannot be radical. Luxury brands aim for long lives. In contrast, fashion creators take more risks in order to capture the present and future. Masstige brands introduce new stock-keeping units (SKUs) systematically, to encourage people to make repeat visits to their stores. Furthermore, innovation goes beyond products. Everything a brand does can be a source of innovation: one-to-one services, CRM, store design, digital merchandising, window dressing, communication offline and online. Take Dom Perignon champagne, for instance: in 1961 – then the most expensive champagne of the time, with the name of a legendary monk – it appeared in the first James Bond movie as an ally of 007 in his seduction enterprises. This radical innovation changed the whole champagne industry – a true disruption.
Discounts Discounts and a nd super-sales The luxury strategy is very strict about this policy: at Louis Vuitton there are no sales, super-sales or discount channels. The price of a Louis Vuitton attaché case will never depend on the month or day or channel from which it was purchased. Recall that luxury sells long-term value; fashion sells short-term value, such that wearing this particular shirt or ‘it’ bag is a sure way to look trendy. Because trendiness is ephemeral, the fashion business model has no alternative but to offer discounts on products
as soon as the season or trend ends. Masstige uses discounts too, to be able to fill its stores again with new collections. Thus 34 per cent of Ralph Lauren’s US revenues come from its factory stores, where discounts reach 40 per cent. To reduce the risk of cannibalization, Coach opens its flagship stores in central locations but its factory outlets outside town.
Licensing policy Who manufactures Chanel watches? Chanel. Who produces Chanel fragrances? Chanel. With a luxury strategy, the brand can extend its scope and move to new product product categories, but it remains the manufacturer in every case. (The exception to this rule at Chanel is eyewear, licensed by Luxottica – a decision regularly debated within the company.) Yet Ralph Lauren watches are made by Cartier, while Ralph Lauren’s fragrances are produced by L’Oréal. Fashion houses (eg Versace) and masstige brands (eg M Kors) that seek market leadership use their licences systematically. Masstige brands use brand stretching and manufacture only a small portion of their portfolios. Luxury brands reject both these strategies, for one simple reason: their greatest asset is their name. Licensing means abandoning the fate of the name and reputation to the hands of some other party, which may have different goals. In a luxury strategy, full control of production and distribution must remain with the brand.
At Hermès, it is the only way to know what the alligators are fed. Quality in luxury settings cannot be limited to any single part of the value chain. In turn, the price of luxury brands reflects the assumption that they are responsible for anything going wrong, anywhere in the value chain.
Role of marketing Luxury and fashion are creative industries that seek to be surprising, rather than flocking to where their competitors go – their aim is to stave off the boredom that can ensue from the accumulation of goods. Both focus on the offering, not the marketing. If a luxury house maintains a marketing department, it generally uses a different term and assigns this department to sales analyses. Coach annually spends US$3 million on consumer surveys to find out what consumers want. But as Tom Ford noted while he was managing Gucci, marketing research only indicates what luxury brands already have instilled in people’s minds; his ‘job is to invent what they will like in 12 months’. Premium brands also rely on consumer studies in order to reduce their risks and evaluate the dimensions of performance most relevant for their clients.
Role of retail ‘Luxury is retail,’ says Arnault, CEO of LVMH, the
world’s largest luxury group with more than 60 brands (Forestier and Ravai, 1992). But it is hard to differentiate luxury brands’ business models just by looking at their stores – which is probably why consumers tend to lump all brands with superb or impressive stores into the luxury category. Even Zara, the fast-fashion, low-price prototype, blurs the frontiers by opening flagship stores on blocks amidst luxur l uxuryy brands. Nor do Zara stores look like typical, t ypical, low-price retail brands. They seek to boost the self-concept of buyers, making them forget the price. Luxury brands sell icons and tend to think of themselves as religions. The community of believers must be permanently reinforced by the symbolic authority of their cult brand, which is the purpose of flagship stores, conceived of as cathedrals (Dion and Arnould, 2011). In these cathedrals, products are disposed of as pieces of art, disguising the commercial nature of the luxury business. The magic goes to work. Thus the fundamental role of retail in the luxury business model is to select the clientele. The doors of luxury flagship stores generally remain closed until opened by a door attendant; this symbolic obstacle signals selectivity and privilege. Furthermore, the luxury business model prefers directly operated stores to franchises, so that clients come into real, one-to-one contact with the brand, not with a subcontractor or franchisee. At the other extreme, masstige brands rely strongly on the impressions that the shop produces on visitors. Each Ralph Lauren store thus is designed to make people believe
that Ralph Lauren interacted with glamorous stars of the past, such as Cary Grant, Greta Garbo or Gary Cooper. The dozens of black-and-white photographs seem to prove it. The brand tells an invented story that, little by little, comes to be accepted as the ‘truth’. Each store also projects the sense of being in Ralph Lauren’s house, to the extent that shoppers can even buy the furniture and carpets, as well as the clothes they display. To adopt this East Coast gentry lifestyle, clients need the entire panoply, sold in stores at accessible prices. Although fashion brands need selective distribution, they do not sell a dream in this way, so their stores are far less ornamented. Finally, with a premium strategy, automotive showrooms, for example, allow buyers to see, touch and sit in each model. Unlike showrooms for luxury brands, these stores focus on product performance, not on unlocking the power of their legend. Audi Audi City is an innovative digital car showroom using state-of-the-art technology. Visitors can experience every possible combination of the Audi range. This experience demonstrates Audi’s Audi’s cult of high technology. technology.
Global competition between models of luxury We started this chapter by raising the issue of the elusive definition of luxury. Having detailed how different
business models operate in the luxury market, it becomes necessary to address the question ‘What is luxury?’ from a new angle. Because luxury is a buzz word, which often creates value, many brands seek to embrace it. Beyond this competition, another battle rages that is deeper and of much greater strategic importance: the competition between visions of luxury, including the criteria and thresholds needed for a brand to qualify as luxury. The dominant vision de facto excludes competitors from joining the ‘luxury’ closed circle and its magic. With their long history, European brands have made heritage central to inclusion in the luxury definition. This standard is a barrier to entry: it prevents newcomers from entering their closed circle. The vision even imposes itself outside Europe, such that masstige brands from the New World (the United States) need to adopt it. Ralph Lauren is a recent brand (1967), but everything the brand does, from the product design and style to retail store decorations, aims to simulate the brand’s history. Coach’s website similarly reflects the European-imposed demand for heritage, when it recounts, ‘Since 1941 Coach has designed and created luxury leather goods in New York City.’ Yet because Ralph Lauren and Coach are US brands, they also express their home culture and promote a ‘luxury for all’ vision, using accessible prices and discount channels. Marc Jacobs, another US designer, even pleads for a vision of luxury in which price is no longer an issue (though not while he was working for Louis Vuitton). The United States thus nurtures a masstige business model, as
exemplified by US brands such as Michael Kors and Victoria’s Secret. The comparison of Italian and French brands also reveals striking differences. For example, the mission statement of the Altagamma Foundation, which counts most Italian luxury brands as its members, is noticeable for excluding the word ‘luxury’. Comité Colbert in France instead introduces the site by stating: ‘with a membership of 78 luxury brands, and the mission to implement the collective policy of French luxury’. The words that Altagamma uses are very significant: its members stand out for their ‘innovativeness, quality, service levels, designs and prestige … and express the Italian culture’. Thus, it excludes terms such as heritage, history, exclusivity, privilege, rarity or timeless, but it features ‘service’ (both to consumers and to customers, or the trade) and a reference to Italianness. Collectively, it promotes ‘Brand Italy’ as a highly cultural, stylish capital. In this sense, Italian brands appear to be adopting a high-end fashion model, which may explain why the iconic Italian brand Prada is increasingly produced in China. Relocalization is less a problem for fashion brands than it is for a luxury strategy. Unsurprisingly, the German luxury brands are also adopting the premium business model, because the German technical culture obliges this shift. Similarly, Korean car brands that seek to trade up (Hyundai) adopt premium business models too. t oo.
References Bain & Company (2014) The Luxury Market 2013, official report, Paris Benjamin, W ([1936] 2010) The Work of Art in the Age of Mechanical Reproduction, Reproduction, CreateS Crea teSpace pace Independent Independent Publishi Publishing ng Platform BVA (2013) (2013) Luxu Luxury ry and Sustainable Dev D evelopm elopment ent Survey Surv ey,, Paris Corbellini, E and Saviolo, S (2009) Managing Fashion and Luxury Companies, Etas edition, edition, Italy Dion, D and Arnould, Arnould, E (201 (2011) 1) Retail Reta il luxury luxury strate s trategy gy:: assembli as sembling ng charisma c harisma through art and magic, Journal of Retailing, 87 (4), pp 502–20 Forestie Fo restier, r, N and Ravai, Rav ai, N (1992) (1992) The Taste Tas te of Luxury: Luxury: Bernard Arnault Ar nault and the Moet-Hennessy Louis Vuitton story, Bloomsbury Publishing, London Ijaouane, V and Kapferer, JN (2012) Developing luxury brands within luxury groups: synergies synerg ies witho w ithout ut diluti dilution on,, Marketing Rev R eview iew St S t Gallen, Ga llen, 1, 1, pp 24–29 24–29 Ipsos (2012 (2012)) World Luxu Luxury ry Trackin Trac kingg Survey Surv ey,, Paris Kapferer, Kapfer er, JN J N (201 (2012) 2) Abundant Abundant rarity: rar ity: the key to luxury luxury growth, g rowth, Business Business Horizons, Horiz ons, 55 (5), pp 453–52 453–52 Kapferer, Kapfer er, J-N and Bastien, V (2012 (2012)) The Luxury Luxury Strate S trategy gy:: Break Brea k the the rules of marketing to build luxury brands, 2nd edn, Kogan Page, London Kapferer, Kapfer er, J-N and Tabatoni, O (2011 (2011)) Is luxury luxury really rea lly a financial dream? Journal Journal of Strategic Strate gic Manage Ma nagement ment Educa Education tion,, 7 (4), pp 1–16 Karpik Kar pik,, L and a nd Scott, N (2010) (2010) Valuing the Unique, Unique, Princeton Unive University rsity Press, Princeton Princet on NJ NJ Moingeon, B and Lehmann-Ortega, L (2010) Creation and implementation of a new business business model: model: a disarming case ca se stud s tudy, y, M@n@gement, ge ment, 13 (4), pp 266– 266– 97 Silverstein, Silve rstein, M and Fiske, Fiske, N (2003 (2003)) Luxury Luxury for the masses, mas ses, Harv H arvard ard Business Review, 81 (4), pp 48–57 Teece, Teec e, DJ D J (2010) (2010) Business Business models, business business strate str ategy gy and innovation, innovation, Long Long Range Planning, 43, pp 172–94
10 The LVMH–Bulgari LVMH–Bulgari agreement
What changes in the luxury market lead family companies to sell up?
This chapter was originally published as an article in ournal ournal of Brand Strategy, 1 (4), Winter 2012–13, pp 389– 402, co-authored with O Tabatoni.
On
7 March 2011 the world-leading luxury group LVMH VMH acquired a majority stake in Bulgari, a famous Italian Italian jewellery house. The deal reflects reflects a major revolution revolution that is occurring within the whole whole luxury sector: the transformation transformation of manufacturers of exclusive exclusive products into creators of exceptional branded retail experiences. Furthermo Furthermore, re, as luxury companies expand their businesses
into Brazil, Russia, India and China (the BRIC countries), particularly China, the demands of these huge new markets put great financial and managerial pressures on familyowned companies. The purpose purpose of this chapter is to to analyse the LVMH–Bulgari deal from interrelated marketing and financial strategic perspectives, and to show why companies who insisted they would remain familyowned have had to abandon this policy and join luxury groups instead.
Introduction Although rumours had been circulating beforehand, the Italian luxury industry was stupefied by the announcement on 7 March 2011 that Bulgari, one of the most famous luxury companies, would join the world-leading luxury group LVMH. The main features of the LVMH–Bulgari deal (Bulgari, 2011) were as follows: • The The Bulgari Bulgari family would abandon abandon its controlling stake in Bulgari (152.5 million shares) in exchange for 16.5 million newly issued shares of LVMH. • This This transaction would make make the Bulgari family famil y the second largest family shareholder of LVMH. • LVMH LVMH would subsequentl subsequentlyy launch a cash tender offer for all other outstanding shares of Bulgari at the price of €12.25 per share.
• Francesco Trapani – Bulgari’s Bulgari’ s former CEO CEO – would join the board of directors of LVMH as a representative of the Bulgari family stake, together with a second representative. representative. • Francesco Trapani would also head LVMH’s LVMH’s enlarged watches and jewellery activities and become a member of the executive committee. This announcement raised questions about the long-term sustainability of family-owned luxury companies. Bulgari has given its answer to such questions by agreeing to the deal in the first place. But Hermès, another company at which LVMH has taken aim (LVMH had a 20 per cent stake in Hermès), has thus far fiercely resisted all offers from LVMH, be they friendly or hostile. It claims that it wants to remain family-owned, a strategy that has been extremely rewarding thus far, with Hermès ranked as one of the world’s most profitable luxury brands. This chapter will analyse the LVMH–Bulgari deal from interrelated strategic and financial perspectives, which concern the whole luxury sector today. Strategically, the deal is indicative of a major shift that is occurring within the luxury industry, as luxury companies make considerable investments in retail in an effort to acquire and maintain leadership in the leading luxury markets of the future: f uture: the BRIC countries. countries. This This shift shi ft is critical for many Italian luxury companies in particular. These companies, typically family-owned and undercapitalized, may feel that their only option is to join
luxury groups – today French but most probably Chinese tomorrow. The financial perspective examines the nature of the deal itself, especially the very high price/earnings (P/E) ratio of 69. Why is the P/E ratio so high? Certainly, it is based on the assumption that Bulgari will be more profitable as a member of a luxury group (LVMH in this case) than as a stand-alone company.
The Bulgari acquisition: a model for family-owned family-owned luxury brands? b rands? Bulgari is one of the flagships of Italian luxury. This renowned 128-year-old company, descended from an ancient family of Greek silversmiths, has created its own style, and has become a world symbol for high-end aesthetic jewellery. The fact that the Bulgari family decided to transfer ownership of the company outside the family is extremely significant. Until 2011 Bulgari always claimed they would remain family-owned. Such an ownership transfer must have been the last option that the family ever thought that it would consider. Certainly, the fact that Antonio Belloni, the number two of LVMH, is Italian may have eased the approach and the negotiations. Nevertheless, the Bulgari family must have had very important reasons, including reasons related to the company’s economic prospects, to transfer ownership to
LVMH. The LVMH–Bulgari deal does not imply that all family luxury companies should sell to a consolidated luxury group. Hermès has refused all offers, both peaceful and hostile, from LVMH. Only by understanding the multifaceted rationale for the LVMH–Bulgari deal does it become possible to draw conclusions for other luxury companies. A first reason for the LVMH–Bulgari deal concerns the Italian luxury sector as a whole: the flagship companies are family-owned, and as such many of them are managed by people aged over 55 and even 65. Donatella Versace is in her fifties, as are Domenico Dolce and Stefano Gabbana. Miuccia Prada is in her sixties, as are Roberto Cavalli, Renzo Rosso (Diesel) and Diego Della Valle (Tod’s). Giorgio Armani is now 80, as is Karl Lagerfeld (Fendi). The question of the transmission of their companies is now a priority on their agendas. The difficulty is that heirs and heiresses are most often unwilling to manage such companies, leaving aside the main question of their own ability or expertise (Ward, Schuman and Stutz, 2010). This is why it has been said in a recent article that Italy is for sale (Segal, 2010). A classic solution is to hire outside talent, typically from fast-moving consumer goods companies, so as to instil modern management methods. As with any type of transplant, however, these grafts are not always successful. Often, they give rise to legitimacy problems in the governance of the company. Within a family-owned luxury
company there is usually, on the one hand, an official organizational structure in which clear powers and responsibilities are allocated to certain people. On the other hand, there are family members within the company, often major shareholders, who feel that they have an inherited and inalienable responsibility to give their advice on all strategic issues, even those that are clearly beyond the powers and responsibilities that have been officially attributed to them. This is likely to create friction between managers who have been hired externally, and who experience two systems of legitimacy within the company: a managerial system based on credentials and know-how, and an aristocratic system in which birthright as a full family member is synonymous with co-ownership of the family famil y company. company. A key question is why the Italian luxury industry has not given birth to luxury groups such as LVMH, Kering, Gucci or Richemont. At least two reasons can be advanced. The first is that the CEOs of famous Italian companies are entrepreneurs rather than organizers. Luxury bosses such as Diego Della Valle (Tod’s), Francesco Trapani (Bulgari) and Domenico De Sole (formerly of Gucci) have considerable talents in developing brands in foreign markets, but not in managing multisector groups. A second reason concerns leadership and financial power. A group is not an association of peers. The Italian Altagamma Foundation is the association that represents the majority of the Italian luxury and fashion companies and brands. As such, it behaves as a common defender and
promoter of shared causes. In contrast, a group capitalizes on synergies (sourcing, purchasing, manufacturing, human resources, legal, fiscal, servicing and institutional) and parenting benefits to create greater value for shareholders (Ijaouane and Kapferer, 2012). For the member brands, this implies that their growth and profitability, while still being recognized as their own, are greater within a group than they would be as independent entities. This issue is hotly debated, and research has not yet demonstrated whether one of these strategies has a clear advantage over the other. The hostile reaction of the Hermès Group to LVMH’s silent acquisition of 20 per cent of its shares has been accompanied by a fierce claim that the company’s future should be as a stand-alone company (or group) in order to preserve its culture and identity, two essential elements of its business strategy and success.
Luxury transformation: from manufacturer of rare products to creator of retail experiences Why was it that Bulgari did not simply go to the stock market to finance its growth, or expand its existing financing activities from licences (hotels, spas, restaurants, skincare, eyewear, etc)? The reason is that the problems it faced were not restricted to liquidity and long-lasting negative cash flows.
The luxury brands are at a turning point in their evolution. Luxury began based on the model of the craftsperson making unique pieces for very rich clients, cl ients, such as heads of state and celebrities. This is still the mythical image of luxury that is presented to the public, to be worshipped like a religious icon. However, large luxury companies such as Bulgari and Cartier exist precisely because the luxury jewellery sector has nearly abandoned the business model of the niche craftsperson. Niche luxury craftspeople still do exist, but they are less well known. One example is Mellerio dits Meller, a jeweller located in Paris at Place Vendôme. Members of its founding family have managed the business for seven generations (with today’s generation having MBAs from prestigious business schools). On the former business model, production, sourcing and manufacturing are the major constituents of the creation of value. Zegna insists on the preciousness of its fabrics, especially its rare wools. Corneliani tells consumers about its unique Mantovan know-how. Kiton describes the rare ability of its tailors in Naples to design and cut a suit (Marafioti and Saviolo, 2010). This type of luxury appeals appeals to male clients, cl ients, often conservative, conservative, who like li ke knowing that their new suits are unique, one-of-a-kind specimens, made with the best fabrics and specialist knowhow. It is a lasting value, and illustrates the important point that luxury, unlike fashion, must be made to last. However, luxury has felt the constant pressure of the consumption society in which happiness derives from
objects and possessions. Today, the luxury market expands not by appealing to more people who are truly living in luxury (the happy few), but rather by appealing to all those more ordinary people who deem that they have a right, once in a while, to some luxury, so as to bring some exceptionality into their daily lives. This insertion of luxury can be achieved by dining at a three-star Michelin restaurant, or by savouring a glass of Dom Perignon at the bar of an elegant establishment. For consumers, the search for an exceptional experience starts at the retail level, and retailtainment (the collision of retail and entertainment) today also affects the luxury industry (Thomassen, Lincoln and Aconis, 2006). Consumers like to visit luxury brand stores, which are now incredible, magical places deserving of a visit in their own right. The flagship stores of luxury brands are particularly captivating. The world’s most famous architects – who act for luxury brands much as Leonardo da Vinci did for King François I of France in 1517 – often design them. Luxury focus has moved from upstream to downstream. This explains the crucial importance of directly operated stores (DOS) in the construction of an exciting experience for clients – a first contact with luxury – worldwide (Dion and Arnould, 2011). This revolution directly affects many Italian luxury houses, for a Zegna shop is not, by itself, very exciting – it is simply a place where one finds Zegna products. The same is true for Brioni, Kiton, Canali Canali and Bulgari. At the time of Bulgari’s acquisition by LVMH, it had
thus far followed the principles of the luxury strategy. It had integrated upstream by acquiring Crova, a historically high-end jewellery manufacturer, among others. Furthermore, in order to extend the Bulgari brand into timepieces, without licensing, it had also acquired two watchmakers, Daniel Roth and Gérald Genta. Following these acquisitions, Bulgari, like other luxury companies, was faced with the problem of financing the international and accelerated expansion of its DOS network in an effort to deliver a truly great experience for consumers. To do this, one needs talent, know-how and financing capacities that Bulgari did not have. The economic crisis hurt the company, with revenues falling 18 per cent in 2008–09 (Saviolo, 2011). In addition, the company had suffered from large increases in the price of gold and gems, which, because of currency effects, damaged their current earnings. These profits were also badly affected by sales decreases for timepieces (down 25 per cent) and accessories (down 27 per cent), lines that generally provide higher margins (Saviolo, 2011). But because these lines were recent, less legitimate, and aimed at less well-off clients, they suffered more than the older, more well-established lines during the economic downturn, especially in mature markets such as the United States and Europe.
Closing the gap with Cartier and Tiffany
In modern luxury, size is important. Luxury companies start small, but they cannot stay that way if they wish to survive. In Asia, powerful is glorious. This is why the growth of Louis Vuitton has not yet been accompanied by a loss of prestige there. In terms of sales, at the time of the LVMH acquisition, Bulgari had overtaken Mikimoto (which had €1 billion in sales), but lagged far behind Tiffany and Cartier (which had sales of €2.5 billion and €5 billion respectively) (Saviolo, 2011). The same held true for earnings before interest and taxes (EBIT) (with €70 million for Mikimoto, €330 million for Tiffany and €700 million for Cartier in 2010) and net profit (€40 million for Mikimoto, €200 million for Tiffany and €560 million for Cartier). Beyond the rapid expansion of Bulgari’s distribution, its future growth will be driven largely by the acquisition from LVMH of considerable know-how with regard to bags and leather goods, which have been weak areas for Bulgari thus far. LVMH, on the other hand, had a weak watches and jewellery division. As of today, its 2001 deal with De Beers had not yet produced significant results: only a few stores were opened. The addition of Bulgari’s €1 billion in revenues has changed the scope of this division, but the breakthrough came from somewhere else – Bulgari’s growth has been obtained by treating jewellery with the rules of fashion. In fact, Bulgari is the most fashionoriented jewellery brand. By offering former Bulgari CEO Francesco Trapani a position as the head of its watches and jewellery division, LVMH is attempting to diffuse,
throughout the entire group, the unique Bulgari know-how in these areas, with the goal of enabling several LVMH fashion brands to develop soon their own jewellery lines. In fact, growing luxury brand extensions seems to be the norm now at LVMH. Louis Vuitton has decided to launch a fragrance, and Berluti will sell not only its iconic shoes but also ready-to-wear clothes for men, just as Bulgari the jeweller expanded into leather bags – although this was unsuccessful, as this brand had no credentials in leather. This acceleration of extensions has one cause: China. One cannot open exciting stores in the best locations by selling just one line of products: increasing store size necessitates line extensions. Furthermore, Chinese consumers are discovering luxury. Unlike Western clients, who already attach a specific positioning and type of know-how to each luxury brand, Chinese clients perceive brands as names that add prestige to the fundamental giftgiving rituals that accompany all business and personal relationships. This is why, once the desire for luxury brands has been created in China, it will be important to leverage it into many product lines. This is how brand loyalty can be created and maintained – by providing clients with new reasons to visit the store.
China: the th e capital cap ital dilemma dilemma for familyowned luxury companies
For luxury companies, the future is China and the BRIC countries as a whole (Bain, 2011; Chevalier, 2009; Xiao Lu, 2008). These markets will help companies to diversify their geographic risks and avoid overdependence on mature markets or on Japan, which is in an economic and psychological depression. In contrast, the BRIC countries are optimistic, the fuel of luxury indulgence. That said, one does not penetrate China by opening a few stores here and there. Louis Vuitton currently has 47 stores in China. It started in the capital cities, then moved to Tier 2 cities (those that have more than 5 million inhabitants) and is now moving to Tier 3 cities (more than 2 million inhabitants). Interestingly, Zegna has systematically opened new stores in the same cities that Louis Vuitton has recently entered. The capital requirements involved in mastering remote end-user experiences through DOS are especially high in China, where clients have grown accustomed to being courted by the highest luxury brands. The experiential economy is a reality there, as can easily be seen by visiting the new luxury shopping centres that open each month. The experiential economy necessitates rethinking logistics, especially the management of local staff and salespeople who have contact with consumers. The classic export model, which was valid when luxury was about manufacturing highly crafted products, is now dead. The whole organizational model of the family company is changing. These changes raise the question of how growth in the
BRIC countries should be financed in this era of experiential luxury. The question is even more acute for a jeweller, since in this industry buyers need particularly strong reassurance from a trusted brand. Although one may become fashionable in a few months, it takes years to create trust, and brands are trust, especially in the jewellery industry. They cut transaction costs by building reputation. It is for this reason that a diamond is forever. But a brand also endows the product with an emotional message about oneself and, in the case of jewellery, about love. It is high time for jewellers to enter China, as a major disruption will soon seize consumption in this market: a cultural shift from non-branded to branded jewellery. In fact, across the world, jewellery is underpenetrated by brands, which account for only 12 per cent of the overall market (Carcano and Ceppi, 2010). The ‘democratization’ of diamonds diminishes the rarity effect, and this must be compensated for by the charisma and trust endowed by brands. Former luxury brands such as Mauboussin have been forerunners. Although Mauboussin keeps its store on the highly exclusive Place Vendôme in Paris for matters of prestige, the brand’s strategy is to capture and meet the growing demand for low-cost jewellery. On one hand, it leverages the resilient awareness of a brand name built gradually over the last 160 years, while on the other hand, it outsources its production to low-cost areas. Of course, there is no comparison between Bulgari’s decrease in trade and Mauboussin’s deliberate trading-
down strategy; however, both will capitalize on this major shift towards branded jewellery. This is why LVMH needed Bulgari – and vice versa. LVMH did not have a high-end jewellery brand in its portfolio to compete against Cartier and Tiffany. A total of 88 per cent of the world’s sales of unbranded jewellery are made in China (Carcano and Ceppi, 2010). It follows that size is necessary to compete successfully in this market. Operating in China requires not only a large investment (in order to build and manage a DOS network), but also a long-term one (in order to build brand awareness and trust). This is a real problem for Italian family brands, and for family luxury brands generally. These firms are typically undercapitalized, and the family’s desire to maintain full control is often a clear limitation. This raises the critical question of where the required capital may be found. In order to grow in China, Zegna created a 50/50 joint venture with a Chinese group and began delocalizing more and more of its production, thereby twisting one of the core principles of a pure luxury strategy as defined by Kapferer and Bastien (2012). Prada went public on the Hong Kong stock exchange, a place close to its target market: mainland China. Hong Kong welcomed this luxury star with open arms, and without posing too many questions. It was the ideal place to raise brand awareness among the Chinese political elite and to thereby gain institutional support. In China, it is important for companies to demonstrate that they give some of the
benefits earned within a host country back to it. In the meantime, Prada has announced that it will manufacture 20 per cent of its products in China (Passariello, 2011). In contrast to these strategies, however, Bulgari took a very different approach, choosing to access much-needed capital by joining the French luxury conglomerate LVMH, thereby relinquishing its it s indep i ndependen endence. ce. Why?
Why the source of capital is not inconsequential FMCG brands can be sold from one company to another. Coca-Cola targeted Orangina, the premium orange soft drink, but in the end Schweppes acquired it, and now apan’s Suntory is managing it. Such ownership changes can occur fluidly, because an FMCG brand is defined by its positioning: the consumer problem that it aims to solve. It is a virtual construction that is embodied by products and communications, both online and offline. Consumers do not care, however, who owns FMCG companies such as Gillette, Philadelphia cream cheese or Orangina. In the governance of FMCG companies, it is not a problem to have completely distinct stakeholders: investors, managers and employees. Investors contribute financing, and managers sell their time and know-how. Both are transitory. Only employees add some of their identities to the brand.
In contrast, luxury brands are completely defined by their identities – they have no positioning (Kapferer and Bastien, 2012). Heritage, history, style, roots, values and culture all contribute to such identities. It follows that luxury brands cannot be transferred from one company to another without losing part of their identities, just as trees often die when moved from one garden to another. Luxury brands thrive in an eco-cultural system – this is their humus, the underlying source of identity and future growth that is of crucial importance and understood by all serious gardeners. This is why LVMH always maintains brands as they are. It wants to preserve the intangible and extremely fragile parts of their identities. Pernod Ricard Group follows a similar strategy. It bought the prestigious cognac brand Martell from Seagram, an American company. Seagram had managed Martell from the group’s headquarters in New York before delocalizing it so as to be closer to the brand’s target markets. However, after acquiring Martell, Pernod Ricard sent it back to Cognac, to its roots. This strategy worked. Whereas Martell was losing market share under Seagram’s management, it is now growing rapidly under Pernod Ricard’s governance – and is catching up with Hennessy. The same holds true for money. Receiving money from a hedge fund is not the same as receiving it from LVMH or another luxury group, because luxury groups understand the principles of a luxury strategy. Their money comes with skills, expertise, synergies, talents, institutional
support and, above all, respect for time. No financial fund can grant the time needed to build prestigious brands, such that Bulgari needs to make itself as prestigious as Louis Vuitton and more appealing than Cartier. The LVMH–Bulgari deal has granted Bulgari a unique opportunity to obtain talent and financial resources while maintaining its identity and simultaneously benefiting from being within a group that reinvents luxury worldwide each and every day. The deal also solves the succession problem, with Francesco Trapani, the former CEO, becoming the head of LVMH’s LVMH’s watches w atches and jewellery division. Meanwhile, the Bulgari family, by becoming the second family owner of LVMH itself, is losing neither its independence nor its personality. It is joining a larger destiny, while keeping an eye on, and some degree of control over, its eponymous brand. As Bulgari reaps these benefits, LVMH is succeeding as well, by developing its watches and jewellery division – which was lagging behind Tiffany and Cartier – and, more importantly, by capturing the world’s new and growing demand for branded branded jewellery. jew ellery. It is the very specific win–win elements of this deal that make it emblematic of the radical evolution of luxury brands. brands. And And it is only through these win–win elements that t hat the deal can be considered a model for other family companies to follow. Accordingly, many Italian family companies, who have not obtained such win–win elements in proposed deals, have ultimately decided not to sell their family assets (Carnevale-Maffè, 2011).
The price of Bulgari: too high, or an accurate measurement of the financial dream? Turning to the financial perspective, many observers were very much impressed by Bulgari’s P/E ratio of 69 (Bforbank, 2011). Was this ratio the result of irrational behaviours, especially LVMH’s craze? Are such ratios common in the luxury industry? Or does such a high P/E ratio differentiate Bulgari as a special gem worthy of any sky-high valuation? More generally, what elements and what strategic intent, if any, would justify such an apparently extraordinary P/E ratio? These are the questions that we would like to answer in the remainder of this chapter. The P/E ratio is a measure of the price of a company (its market capitalization) relative to its earnings (usually computed as net income after tax). Investors often use this measure to evaluate whether the valuation of a company is expensive or not vis-à-vis its profitability. In other words, the P/E ratio tells us how much investors are willing to pay for each euro of current profit, and thus how many years they are willing to wait to get back their investment. A high P/E ratio indicates that investors are so enthusiastic about a company that they are willing to pay a high price for it relative to its current earnings. It is important to note that in the P/E ratio, price and earnings are two very different concepts. On one hand,
‘earnings’ refers to the net income that was obtained over the previous year (and which by default is expected annually within the foreseeable future) (a forward P/E ratio is typically calculated using earnings estimates for the next 12 months; these estimates are usually derived from the projections of a group of analysts). On the other hand, ‘price’ refers to the market capitalization, which summarizes expectations regarding all future earnings (ie cash flows) that the firm will generate throughout the remainder of its life. Whereas ‘earnings’ is an accounting measure, ‘price’ is based on expectations about the company’s future results. As has been argued at length elsewhere, price is about ‘dreams’ (Kapferer and Tabatoni, 2011). Dreams are about two main elements that impact the firm’s value (ie value drivers): profitability and growth. Without any foreseeable profitability, a firm has no value. Incidentally, some people wonder how young, moneylosing start-ups sometimes achieve incredible valuations. The answer is simple – investors are convinced that the company will generate positive earnings in the future, even though it may pile pil e up losses during the ramp-up phase. The second value driver is growth, which is usually measured as sales growth. As mentioned before, growth without profitability yields no value. However, once the firm passes a threshold level of profitability, growth becomes the main value driver. For financial specialists, ‘enough profitability’ means a rate of return that compensates investors for the risk that they take (Stewart,
2003). In summary, a firm’s P/E ratio will depend on the relationship between observed earnings and investors’ expectations expectations about future profitability profitabil ity and growth. We should therefore be very careful when we implicitly compare firms using their PE ratios. The P/E ratio is a comparison between results and expectations. It follows that a high P/E ratio can be achieved when bad results are achieved within a context of reasonable dreams, or when reasonable results are achieved within a context of aboveaverage dreams. In order to fully appreciate the significance of a particular P/E ratio, it is therefore necessary to carefully examine both the results that have been achieved and the dreams that define the context. It is therefore useful to examine data that has been collected on publicly traded firms in the luxury sector. Table 10.1 presents the P/E ratio and profitability of several luxury firms for 2012. We collected trailing 12 months’ (TTM) profitability data from the Thomson Reuters website (Thomson Reuters, 2011). Profitability is measured as net profit margin (ie net income after tax divided by revenues). We have also collected the same information for several successful firms in other industries for 2012, as shown in Table 10.2. This information does not, by any measure, constitute an exhaustive benchmark. It does, however, provide a good means of comparing the P/E ratios and profit margins of these luxury firms with a group of wellknown firms.
TABLE TABLE 1 0 . 1 Price rice/ea /earni rning ngs s ratios ratios and and profitab profitabiility of major luxury companies Firm
PER
Net profit margin (%)
Bulgari
69
7.0
Hermès
51
20.3
Shis heido
39
2.4
Prada
36
12.5
Estée Lauder
30
8.7
Tiffany
25
11.9
Ralph Lauren
24
10.5
Ric hemont
20
17.0
L’Oréal
19
12.0
LVMH
17
16.9
Pernod Ric ard
17
14.1
Swatc h
17
18.4
PPR
16
5.6
Price/ea e/earni rning ngs s ratios ratios and and profi profi tabil tability ity of of TABLE TABLE 1 0 . 2 Pric other companies Firm
PER
Net profit margin (%)
Google
20
26.8
Peps ic o
16
9.9
P&G
16
13.9
IBM
15
14.7
Apple
15
24.1
Exx on
10
8.9
BMW
7
7.8
Exami Exam i ni ning ng Tables 10.1 and 10.2 yields at least l east three interesting observations. First, P/E ratios for non-luxury firms are below 17. Even very successful firms such as Apple Apple typically typical ly do not exceed 17. In Table 10.2 only Google has a P/E ratio in the 20s. Today, P/E ratios between 15 and 17 are typical for large companies. As of August 2012 the current average P/E ratio from Standard & Poor’s 500 firms is equal to 16.1. Over the 140-year period 1871–2011 the average P/E ratio is equal to 15.5 (Multpl, 2012). Second, most companies in the luxury sample have above-average P/E ratios irrespective of their profitability. This suggests that financial markets tend to have higher expectations for luxury firms than for other large firms. As we have previously argued, it appears that luxury firms literally make financial markets dream (Kapferer and Tabatoni, 2011). The high expectations that financial markets have for luxury firms can most likely be attributed to their assessment of the appetite for luxury in emerging economies, which could yield fast growth.
Third, within the luxury sample Bulgari, Hermès, Shiseido, Prada and Estée Lauder are in a league of their own, with P/E ratios above 30. But when assessing the profitability of these firms, Shiseido and Estée Lauder should be analysed differently from the others. Their relatively low profitability (2.4 per cent for Shiseido and 8.7 per cent for Estée Lauder) seems to indicate that their high P/E ratios are derived from below-average earnings. This is especially true for Shiseido, considering the many difficulties that Japan encountered in 2011. It is likely that, once these firms generate better results, approaching those of Ralph Lauren and Tiffany, their P/E ratios will return to between 20 and 30. In contrast to Shiseido and Estée Lauder, Prada’s profitability is more in line with the industry and should thus fetch a P/E ratio comparable to Ralph Lauren or Tiffany. It follows that Prada’s very high P/E ratio of 36 can only be justified by strong growth expectations. These expectations may be attributed to its recent IPO in Hong Kong, which should provide the company with the funding to back strong growth. The situation of Hermès is different still. The market values its above-average profitability of 20 per cent with a P/E ratio of 51. When comparing Hermès to Google and Apple, which have similar profitability, Hermès’s extremely high P/E ratio implies extraordinary expectations. The only explanation is that financial markets expect that Hermès will maintain its profitability while growing at a very fast pace. Clearly, Hermès makes
financial markets dream.
High growth assumptions: no brand equity dilution We are now left with Bulgari and its P/E ratio of 69. Given that its 7 per cent profitability is comparable to that of Estée Lauder, one would expect Bulgari to have a P/E ratio in the 30s. It is therefore clear that there must be more to this story. The only possible explanation for such a stratospheric P/E ratio is that financial markets have exceptionally high expectations for the company’s future growth. Growth expectations of this magnitude imply the existence of deeper expectations regarding strategic changes within the company that will enable such growth and perhaps increase profitability as well. Will such strategic changes occur at Bulgari under LVMH’s tutorship? One indication that they will is a promise that Bulgari’s CEO, Francesco Trapani, made in the following statement about the LVMH–Bulgari deal: ‘Our entrance into LVMH will allow Bulgari to reinforce its worldwide growth and to realize significant synergies.’ If such changes do not occur, it is likely that Bulgari’s P/E ratio will rapidly decrease to the 30s range, and perhaps even below, once its normal profitability has been established. All of this raises a key question: What was the impact of the LVMH–Bulgari deal on LVMH’s share price? Did
the market think LVMH paid too much? Bloomberg noted at the time that the cost to LVMH including stock options and the purchase of a convertible bond amounted to a total of €4.3 billion. It is important to note that LVMH’s acquisition of Bulgari was financed by an issuance of 16.5 million new shares. Initially, investors wondered if a dilution of about 3 per cent of the firm’s earnings per share (EPS) would decrease LVMH’s value. After all, when a firm issues additional shares its earnings are then divided among more investors. Nevertheless, one should be cautious when considering dilution. Although issuing new equity will dilute current EPS, it is important to keep in mind that a firm’s value is the sum of its future cash flows, not its past ones. It follows that the key question is: What effect will additional financing have on the firm’s future earnings? To answer this question, it is necessary to examine how the new funds will be invested. If a company issues new shares but is not able to convince the market that those new funds will be properly used, then there will indeed be a dilution effect, and the share price will decrease. But if the market instead believes that those new funds will generate sufficient cash flows, the firm’s share price may increase even as its EPS decreases. Within hours of the announcement, analysts agreed that LVMH’s costs in the acquisition would be moderate – nine months of cash flows according to Cheuvreux analysts – while the acquisition would give LVMH a significant competitive advantage. By the end of
the day, LVMH’s share price rose by €3 (2.7 per cent), a clear sign that the market considered the operation as relutive (the opposite of dilutive). In the ensuing year, as Figure 10.1 shows, LVMH (shown on the graph as a black line) has outperformed the CAC 40 index (dotted line), that is to say, the average of the 40 highest market capitalizations on the Paris stock exchange. Also, when comparing LVMH Group to PPR Group (the owner of Gucci and other luxury brands; shown on the graph as a broken line), it seems that LVMH has not suffered as a result of the acquisitions. But it is important to keep in mind that Bulgari represents only 5 per cent of LVMH’s sales and thus can have only a limited impact on LVMH’s share price. Looking next at Bulgari’s share price over the same year, as shown in Figure 10.2, it seems that the market has not significantly revised its initial estimates. estimates. In summary, Bulgari’s P/E ratio is clearly greater than those of its peers, indicating strong expectations of higher profitability and accelerated growth. The Bulgari acquisition does not appear to have had any dilutive effect on LVMH, thus supporting initial views that synergies and LVMH’s umbrella would contribute to Bulgari’s profitability.
Conclusion This chapter has addressed the question of the long-term
sustainability of family-owned luxury companies. As we have seen, they have to transform themselves from manufacturers of rare products into creators of exceptional branded retail experiences. This means managing a paradox: at all times they have to maintain their values, their excellent craftsmanship and their ties to a family name, but must also go beyond their traditional clients to consumers consumers looking for retailtainment. retailtai nment. The The latter l atter implies i mplies huge investments in DOS, D OS, brand brand building and achieving the necessary size to exist in the high-growth markets. Profits can rarely finance such massive investment. Only the most successful groups – such as LVMH, Richemont, Hermès, Pernod Ricard and Estée Lauder for public firms, but also Chanel, Armani or even Lacoste for the family ones – are able to generate enough cash flows to finance their thei r expansion; others will have more difficulties. This will be especially true for firms that started their globalization too late, those that did not have their brand established (we know how much it costs to build a luxury brand) or those that have made unsuccessful strategic choices (this was the case for Bulgari, which had some years of negative cash flows because of failed diversification; The Economist, 2011). 10 . 1 Stock returns in 201 2011: 1: LVMH LVMH vs PPR PPR and FIGURE FIGURE 10. CAC 40
SOURCE http://fr.finance.yahoo.com/ [accessed [accessed 7 November 2011]
FIGURE 10.2 Bulgari share price in 2011
SOURCE http://fr.finance.yahoo.com/ [accessed [accessed 7 November 2011]
For these latter firms only financial markets will be able to provide the necessary funding. It still remains for them to choose between doing it alone or in a partnership, usually with an industry leader (LVMH, Richemont, Swatch, Kering, etc). We have seen with Bulgari the limits of the first option: they went public in 1995 but their continuous financing needs constrained their ability to expand. Also, the cost of money is higher for smaller firms and their access to funds is more limited than for larger groups. The family’s wish to retain the majority ownership was another constraint: diluting the family ownership
would have put them in the hands of investors who would be paying more attention to their return than to the power of the brand, and would thereby destroy it. Their alternative was, then, to choose the LVMH umbrella to leverage their brand and achieve their high growth targets (New York York Times , 2011). 2011). As we have shown, s hown, the price paid by LVMH fully integrates such a high growth assumption and financial markets supported that view (if not, the acquisition would have been severely sanctioned in LVMH’s share price). LVMH should thus be able to finance Bulgari’s development and provide them with the competences, skills in brand development, access to information technology, logistics, retail experience, synergies and other assets that are necessary to transform Bulgari into a successful industry leader. One should note that luxury groups do not suffer from conglomerate discounts, where the group’s value is smaller than the sum of its parts. In other more mature industries this discount typically amounts to 10–20 per cent of the firm’s value (eg ThyssenKrupp, Siemens, Total, etc). In fact, financial markets acknowledge that the group’s moneymakers will subsidize the less successful parts, but believe that luxury groups will be able to turn them around. This is probably a specificity of the luxury industry: the growth potential is so high for a strong brand that the market trusts that money reinvested in the group will, in the end, create value. LVMH’s challenge will now be to avoid disappointing the financial markets. It should seek to develop Bulgari
without diluting its fragile and unique charisma. The value of a luxury brand lies in this precious intangible. Thus far, LVMH has succeeded in not focusing too much on group synergies, thereby preserving the independence of the brand in its portfolio (Ijaouane and Kapferer, 2012). But in its newly enlarged watch and jewellery activity, the question is: Will it still be able to resist the temptation? The answer to that question will probably influence the decisions of other family-owned luxury firms to either accept or refuse the offers of industry leaders.
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11 Developing luxury brands within within luxury groups groups
Synergies without dilution?
This chapter was originally published as an article in Marketing Review St Gallen, 1, 2012, pp 24–29, coauthored with V Ijaouane
The
recent acquisition of the famous luxury jeweller Bulgari by LVMH, the world’s leading luxury conglomerate, foretells a wave of consolidations. In order to grow, many family-owned luxury brands will join existing existing conglomerates or form new groups. This chapter explores explores the value created by the corporate level of luxury groups. groups. Their level of integration is moderate, reflecting a balance balance between search for synergies and preservation of the autonomy autonomy of luxury brands, essential to sustain their their symbolic power.
Luxury concentration in question In most industries, concentration has been a trend, with major groups leading the sector. The benefits of size (big is beautif beautiful) ul) are well known. known. The The luxury industry itself, itsel f, although attached to images of independent family brands, is no longer the exception. LVMH originated in 1987 from the merger of a leather company with a cognac and champagne house and is now home to more than 60 brands. More recently, PPR (now called Kering), originally a wood and retail conglomerate, added a luxury arm with the purchase of the Gucci Group, with the ambitious goal to make it the world’s number-two luxury group. Richemont (Cartier) and Prada (Miu Miu) are other famous examples. Some doubts have been expressed about the validity of such concentration. Rigby, D’Arpizio and Kamel (2006) argue that: ‘the usual benefits of being big – leverage with suppliers, shared marketing and administrative expenses, and high volume, strategic customers – just do not seem to apply for most multibrand luxury players’. They add to their critique some disturbing facts. In the luxury industry, single-brand companies actually grew 60 per cent faster from 1994 to 2004, compared to brands owned by the multibrand conglomerates, without showing weaker profitability (Rigby, D’Arpizio and Kamel, 2006). It has been highlighted that luxury brands could be in danger when integrated with and managed by non-luxury
groups (eg Jaguar and Ford) (see Kapferer and Bastien, 2009). But why should luxury groups be a special case? Because, unlike FMCG brands (Kapferer, 2012), the brand equity of luxury brands depends on their very high symbolic power. When a change of ownership takes place, there is therefore a risk that stakeholders will lose confidence in the sustained authenticity and inherited culture of the brand.
How luxury groups grow As luxury groups have transformed into listed companies, they have come under growing pressure to exhibit growth figures while simultaneously maintaining their high brand equity. However, the feelings of privilege that they create are threatened by pressures to increase penetration, diffusion, trading down, and the introduction of so-called ‘accessible luxury’ options (Kapferer and Bastien, 2009). De Sole, former CEO of Gucci Group, puts it straight: ‘When you are a public company and you want to continue to create value for your shareholder, you have no choice. You cannot go downmarket because of the effect on margins and profitability’ (Galbraith, 2001). The recent wave of acquisitions has been enabled by the desire of many well-known family companies to give up their autonomy and by the search for synergies.
Theoretical background: how groups create value Unlike all other sectors, luxury groups cannot be based only on cost-reduction motives. If they were, how would they create value? A review of diversification theory highlights that the performance of multibusiness firms (MBF) is related to their capacity to generate corporate effect rather than industry or business effects (Brush, Bromiley and Hendrickx, 1999; Rumelt, 1991). The corporate effect can be defined as value creation at the corporate level, which corresponds to both the vertical relationships between the corporate centre and the businesses, and the horizontal relationships between the businesses (Knoll, (Knoll, 2008). 2008). Search for synergies is another goal of groups. Synergy is the effect that the combined return of two or more parts together is greater than the sum of the return of each part individually. Usually the study of synergies has been limited to efficiency-focused synergies or hard synergies (economies of scope). Following Knoll, we integrate it into a more global scheme: operative synergies, market power synergies, financial synergies and corporate management synergies, which are respectively derived from leveraging operative, market power, financial and corporate management resources across the businesses (see Figure 11.1).
Research objectives and methodology A brand joining a group has to add value to the group. Reciprocally, the group has to add value to the brand. But what is the reality of this parenting advantage with which luxury groups are said to endow their brands? As Moore and Birtwistle (2005: 257) put it: ‘Little, if any, consideration has been given to how luxury brand conglomerates secure what Goold, Campbell and Alexander (1994: 13) described as “parenting advantage” – those strategies, structures and processes whereby the “parent works through its businesses to create value”.’ For them, luxury brand development and sharing of group resources are the main sources of parenting advantage that luxury groups can create. Is this really the case? FIGURE 11.1 How luxury groups create creat e added value
To answer this question, we engaged in a comparative/collective case study. As mentioned earlier,
three major conglomerates dominate the luxury sector: LVMH, PPR-Gucci (now Kering) and Richemont-Cartier. All of them are multibusiness firms in the sense that they own different brands and offer a very diverse group of products within the luxury industry – fashion and leather goods, watches and jewellery, fragrance and cosmetics, pens, wines and spirits. These cases are selected because they are representative of luxury conglomerates. Fifteen interviewees were selected following a competence and relevance criterion. We met with at least two interviewees from all three companies investigated in the collective case study, including the chief financial officer of each one. Semi-structured and open-ended interviews were used; the findings are explored below.
Findings of the transversal analysis Operative Operative synergies The first finding is that operative synergies are not as important as they are in other consumer goods industries. However, we found that efficiencies and growth synergies do exist and contribute to the corporate effect. We furthermore found that efficiency synergies, by which value is created through economies of scope, result from the pooling of common resources. These can be split into two distinct parts: resources required for production and
resources related to support activities. In the luxury industry, support activities can usually be pooled without much concern, but pooling production activities is a different matter entirely. As we have shown, this is due to the nature of luxury, and specifically to the importance of having a distinct brand identity. For a luxury brand, integrating production with other brands could potentially damage its image as well as its integrity in the minds of its customers. However, we saw that depending on the product category, numerous domains can generate efficiency synergies: research and development (R&D) in fragrances, purchasing in leather, sourcing and manufacturing in watches (see Figure 11.2). The synergies regarding support activities are much more obvious and generalized across all investigated companies and businesses. These synergies simply come from the possibility to share costs in functions that are not intrinsic to the luxury product. In the luxury industry they are systematically present at two different levels: 1) centralized support functions (for operations impacting the whole brand) operated as shared centralized services; 2) regional support functions (for operations impacting the brand in a specific area) operated as support support platforms. The latter represent an opportunity for brands to successfully combine the efficiency of centralization and the need for local responsiveness. Efficiencies in regional support functions primarily come from logistics, including cross-docking, warehousing, human resources, IT and media buying.
Regarding Regarding logistics, distribution distri bution and deliveries are often centralized within timepiece brands. Similarly, the distribution in spirits is fully integrated. The use of common regional warehousing platforms has been generalized across different product categories. For timepiece brands, the pooling of after-sales services is a major source of synergy, as these brands utilize common regional technical centres to ensure after-sales service. Furthermore, there are a few functions or shared services that generate synergies that are not always pooled, depending on the level of integration. Real estate (store development), IT and ERP, regional marketing (especially for timepieces), media buying, human resources and diverse back-office operations are generally organized on a product category basis. .2 Degrees Degrees of synergy synergy within within luxury luxury groups FIGURE 11 FIGURE 11.2
Within operational synergies, the frontier between efficiency synergies and growth synergies is loose. This is illustrated by the transfer of know-how, which generates both efficiency synergies and growth synergies. On one hand, transfer of know-how allows the brands to share best practices that help to reduce various costs
(manufacturing, contract manufacturing, licensing, processes, etc). On the other hand, it also results in other opportunities, such as allowing brands to stretch their existing product offering. Timepieces being offered by fashion brands provide good examples (Tag Heuer and Louis Vuitton, Boucheron and Gucci, Richemont and Ralph Lauren). Furthermore, transfer of know-how can enable brands to expand more easily and rapidly in new markets, due to the existing knowledge and stakeholders’ relationships in local luxury markets possessed by those brands in the portfolio that already operate there (eg LVMH access to the US fragrances market thanks to Bliss, Hard Candy, Urban Decay). Finally, brands can exchange about market trends across different businesses and therefore better adapt to current demand or simply have an enhanced vision of the luxury market. In addition to the transfer of know-how, we have uncovered through this multiple case study another major source of cross-business growth synergies: access to scarce resources, resources, which w hich can be divided into: • access to raw material such such as as precious precious stone stone or specific fabrics or grapes (eg the instrumental purchase purchase of wine w ine domains); • access to specific specific technology, technology, componen components ts or products products such as movements in watches (eg Gucci G ucci Group’s stake in the Sowind Group – GirardPerregaux and Jean Richard brands – and purchase of Sergio Rossi Rossi and its i ts manu m anufacturing facturing plant, or LVMH’s LVMH’s
purchase of Roger Dubuis and its manufacturing capacity). oint development platforms are relatively insignificant for luxury brands, because this kind of synergy is often seen in highly technological products, and because one result of the dream function often being superior to the utility function for luxury products is that these products are more about creativity and affection than about innovation and perfection (Kapferer and Bastien, 2009). Finally, it should be noted that typical soft synergy opportunities (eg cross selling, lead sharing, cross-business bundling), as well as joint marketing activities (eg joint image campaigns, joint customer loyalty programmes) and extended umbrella brands, are not relevant or are highly marginal in the luxury industry, due to its specific relationships vis-à-vis its customers and the fact that sales and merchandising teams are kept autonomous. There are two domains in which non-luxury groups usually realize synergies that are not relevant in the luxury industry: creation and distribution. In luxury, exclusive distribution is the ideal for selling the singularity of the brand experience. Creation and distribution are usually not organized to create synergies, because the risks that they generate (eg value destruction by damaging the brand equity of each luxury brand) are too high. Only the Poltrona Frau Group created its own multibrand flagship stores in the BRIC countries in order to break even faster, with mixed results.
There are also a few functions or shared services that generate synergies that are not always pooled, depending on the level of integration: real estate (store development), marketing and diverse back-office operations. Finally, in the watches business, the pooling of after-sales services is a major source of synergy.
Market power synergies When Knoll (2008) created his classification of crossbusiness synergies, he acknowledged that, due to limited empirical evidence, market power synergies might be speculative because of national anti-trust laws that increasingly hinder and jeopardize the legal realization of market power synergies. We agree on this word of caution, as in our specific case market power synergies have proven not to meaningfully contribute to the corporate effect. However, we also suggest two additional reasons to explain why their realization is difficult in the luxury industry. The first additional explanation is that in the luxury industry companies do not compete against each other in the same manner in which firms compete in other consumer goods industries. The second additional explanation is linked to the desire of most conglomerates not to impose their newly bred brands brands on their business partners (eg wholesalers) and thus not to leverage their existing ‘market share’. This is due to the fact that the long-term risks of damaging the
star brands are quite high, both in terms of image and regarding their own power, which is directly harmed if the brands pushed forward do not perform. However, we also identified two distinctive opportunities for value creation. First, luxury malls are multiplying throughout the BRIC countries. No luxury mall can be created without LVMH. With their portfolio of 60 brands, LVMH alone can make a luxury mall start and grow. Second, these conglomerates have one or several leading brands within their portfolio through which they enjoy bargaining power vis-à-vis their different stakeholders such as wholesalers, department stores or mall managers (for the choice of the best location), journalists (fashion or luxury magazines), and media space purchase.
Financial Financial synergies This point is often ignored yet matters greatly. Our study shows that all luxury conglomerates have implemented a pooling of financing resources. This means that the brands no longer have to negotiate their credit lines on their own, but rather receive funds according to a budget approved by each part, the brand and the corporate level. This allows the brand to enjoy easier access to credit, which can be very important, considering that brands in ramp-up often find it difficult to get the financial resources that they need to expand and reach their very high break-even point.
Moreover, brands are granted much better conditions for these loans, as the parent often has a better risk profile, as it is more diversified and larger. Finally, some conglomerates are cash rich and often only use debt to raise their leverage and the return to their shareholders. shareholders. We also identified the possibility for brands in conglomerates to protect themselves from currency fluctuations by pooling currency hedging at the corporate level. Doing so allows the brands to fully concentrate on their operational management, and to have a strong degree of confidence that their performance will not be greatly endangered by currency fluctuations. Eventually, thanks to a legal integration of local affiliates into the legal entities of the parent and other sophisticated legal schemes, the brands can have an optimized legal structure.
Corporate Corporate management synergies sy nergies These are often neglected in synergy studies, but our study shows that they are of prime importance, at least in the luxury industry. The different corporate synergies are derived from corporate capabilities, corporate initiatives, corporate planning and control, and corporate development. In the luxury industry, corporate parents create value when parenting brands by bringing specific expertise in distribution (eg shop experience, selective distribution,
internet distribution, licensing and market intelligence). Conglomerates have also displayed particular knowledge and proficiency in luxury branding (ie helping brands to position themselves as true luxury brands). brands). They have also every so often demonstrated a significant ability to turn around ailing brands – change management. Last but not least, the management of talents seems to be a significant vector of value creation among multibrand companies. Groups have been leveraging the potential of their talents across brands by offering them attractive career paths. Luxury groups offer many more talent development opportunities than do most singlebrand companies. Indirectly, these human resource (HR) strategies help to attract, motivate and retain the best talents in the luxury groups. This is a major difference with family-owned companies. We found that corporate centres can, in addition, generate value in HR executive management: with operational top management by first allowing them to share high-level best practices and ideas through internal universities (such as LVMH House in London) and then by staffing them strategically at key positions across the different brands. These key managers represent a very scarce resource, as they need three complementary skills or competences that are fairly exceptional: rich understanding of the product, commercial and financial skills, as well as the ability to manage the creative leader(s) of the brand.
Implications Implications for fo r growing growing luxury brands within groups Synergies in luxury groups are not so much about costs. Given the industry’s high margins, cost reduction logic is not needed and cannot be done at all prices, and every search for synergy must be conducted carefully so as not to harm the brand. Usually, synergy is a word that is badly connoted from the employees’ point of view, but in the luxury industry managers themselves are willing to deal with the topic of realization of synergies with much care, remaining concerned with the potential drawbacks of such synergies. All activities that have contact with the end client show limited synergy potential and this is confirmed insofar as brands are expanding their directly operated network. Production, however, seems to follow a different logic. While production used to be fully autonomous, this might change and become dependent on customer perceptions. Regarding the governance debate between autonomy and centralization, we believe that with respect to the identity, culture and strategy of each brand, an organization by business branches can provide a powerful infrastructure and shared resources to the brands of the division, especially the weakest or smallest. Each entity (also called house, or maison) acts as a virtual company with its own CEO and its own head creative designer, both having a real ‘brand custodianship’. The difficulty comes in
finding the right balance between research for synergies and autonomy of the brands. We would like to warn corporate managers that cross-business synergies should be implemented carefully and that ‘the more synergies the better’ is a very dangerous point of view. Luxury brands’ symbolic capital is fragile. It is essential for them to keep their roots and ‘freedom within a framework’. When too many synergies are put through, brands tend to underperform, as sharing resources can reduce brands’ sense of accountability for the performance of these parts of their activity. However, entrusting a full P&L responsibili responsibility ty to brands brands driven by corporate corporate objectives jeopardizes coordination and collaboration mechanisms. Eventually, we draw corporate managers’ attention to human capital and knowledge management (including sharing of best practices), two indisputable strengths that groups should cultivate so as to outperform their peers on a long-term basis.
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Kapferer, J-N (2012) The New Strategic Brand Management, 5th edn, Kogan Page, London Knoll, Knoll, S (2008) (2008) Cross-Business Cross-Business Synerg S ynergies: ies: A typo ty pology logy of cross-business synergie sy nergiess and a midrange theory of continuous growth synergy realization, Gabler Edition Edi tion Wissenschaft, Wiesbaden Wies baden Moore, Moore, CM and a nd Birtwistle, Birtwistle, G (2005) (2005) The nature of parenting advantag adv antagee in luxury luxury fashio fa shionn retailin reta ilingg – the case ca se of Gucci Grou Gr oupp NV, NV, International International Jou J ournal rnal of Retail & Distribution Management, 33 (4), pp 256–70 Rigby, D, D , D’Arpizio, C and Kamel, M-A (2006) (2006) How more can ca n be better, Financial Times, 5 June Rumelt, R (1991) (1991) How much much does does industry industry matter?, matter? , Strateg Stra tegic ic Manage Mana gement ment Journal, Journal, 12, 12, pp pp 167 167–85 –85
INDEX
Note: Note: Italics Ita lics i inndica dicate a Tab Table or or Figure Figure in the text. Advertising Advertising Standards Agency (UK) 71 Africa 13 Ahrendts, Ange Angella 107 107 Altagamma see Fo see Fond ndaz azion ionee Altaga Alta gamm mmaa AlterEco 15 1588 Amazon.com 32 anti-laws of marketing 47–4 47–488 Apple 16, 49, 100 100,, 10 1088, 17 1733 Approche Approche Sur S ur Mes Mesure ure 119–20 Aristotle 69 Armani 98, 146 146,, 16 1699 Armani, Georgio Georg io 188 188 Arnault, Arnault, Bernard 7, 42 42,, 92, 180 ‘artification ‘artifica tion’’ 4, 63–8 63–844 books 82 ladder 81 market entry entry through through art 74–75 relation rela tionship ship betwe between en art a rt and a nd luxu luxury ry 71 71–7 –722 Aston Martin 48 Audi 2, 10, 28, 102, 169, 177 Audi City 181–82 Bailey, Lachlan 33 Bain & Company 2, 9, 27, 46, 99, 131, 154, 166 Bastien, Vincent 2 Baudrillard, Baudrillard, Jean Je an 15 Baümer, Baümer, Lorenz 74 Bell & Ross 60
Belloni, Antonio 187 Benjamin, Walter 177 Bernstein Research 9, 42 BMW 2, 10, 102, 169 Bottega Veneta 68, 92 brand stretchin stretc hingg 18 1800 brands 8–9, 18, 90, 92 advertising and 34–35, 48, 53 building 32, 167 cars 8 consumer consumer loyalty loya lty and a nd 20 20 content 118 counterfe counterfeit it 14 dream value v alue 18, 30 30 followers followers 32 iconic products 56 internet and 29 locations locations in Asia 27 luxury 8, 20, 24–25, 57–58, 101–03, 153, 180, 189–91, 196 ‘made in’ 107–09 masstig mass tigee 175, 175, 179, 180, 180, 181 Niche 146 positioning positioning 8 premium/super-premium 8–9, 49, 104, 105, 109, 143–44, 180 Bravo, Rosemary 28 Brazil 13, 38 BRIC countries 3, 13, 42, 46, 90, 106, 177, 185, 193, 218 Bristol Bay Protection Pledge Pledge 16 1600 Bulgari 3, 45 price/earnin price/ea rnings gs ratio 201–02 201–02 share price in 2011 205 see also LVMH-Bul LVMH-Bulga gari ri agreement ag reement Bündchen, Gisele 33 Burberry Burberry 14 delocalizing deloca lizing production production 97, 98, 107, 107, 177 dependence dependence on Japanese Japanes e market 28 digital strategy 118–19 worldwide web 116
business models 165–84 comparison 170 cost-saving cost-sav ing orientation 174–75 174–75 criteria criter ia for luxury luxury 16 169–82 9–82 discounts/su discounts/super-sa per-sales les 17 1799 fashion fas hion 171–72, 171–72, 179 French luxury brands 183 German cars 16 1699 innova innovation tion 178–79 178–79 Italian luxury brands 168, 183 production process 173–74 quality orientation 177–78 relocalization relocaliza tion 176–77 176–77 size of business business 191 US luxury brands 182 value creation 168 value va lue versus ver sus volume volume 171–72 171–72 Cartier 75, 80, 82, 124, 141, 158, 173, 192 Cartier Car tier Fo Foun undation dation for for Con C ontempo temporar raryy Art 80 Castarède, Castarè de, J 44 44 celebrities 15, 68, 90 promoting promoting brands bra nds 33–34 Chanel 2, 3, 16, 20, 33, 34, 45, 47, 56, 57, 68, 102, 107, 108, 153, 166 China 127 consumer perception of 169 innova innovation tion 178 internet 126 Japan Japa n 76 76 pricing 144 sustainable develop deve lopment ment 35–36 Chanel, Coco 76–78, 79 China 3, 9, 13, 27–29, 43, 54, 55, 90, 127 advertising adve rtising 36, 69–70 69–70 art and a nd 75 delocalization 108, 177 family-owned brands 193–95 jewellery jewe llery industry industry 19 1944 Louis Vuitton 28
luxury consumers 7, 10, 14, 17, 20, 21–22, 27, 32, 106, 193 luxury sales 27, 193–95 middle middle classes class es 66 Nike 153 single-child policy 29 sustainable developm dev elopment ent 38 urbanization 90 Chinese Chinese Authority Authority for Industry Industry and Commerc Commercee 36 Cicero Cicer o 6699 CIVETS countries countries 42 Coach 23–24, 31, 47, 68, 104–05, 169, 175, 177, 179, 182 ‘accessible ‘acc essible luxury’ luxury’ 10 1055 delocaliza deloca lization tion of production production 98, 176 176 Coca-Cola 127, 195 Combas, Robert 80 Comité Colbert 18, 46, 99, 100, 124, 183 ‘conformists’ 133 Corneliani Cornelia ni 46, 190 190 counterfeit counterfe it good g oodss 14, 67, 176–77 176–77 consumer view of 139, 140 grey market 120–21 logos and 92 Crova 191 customer customer relation rela tionship ship manag management ement (CRM) 12 124–25 4–25 Dali, Salvador Sa lvador 80 delocaliza deloca lization tion (of production) production) 97–111, 153 153 challenges 110 consumer opinion 106–07 ‘made in’ and a nd 109 109 see also relocalization relocalization designers 33 33,, 57 cult of 41, 52 stratification stra tification of 52–54 52–54 Dior 45, 81, 127, 138, 146, 159, 166 price and 138 sustainable development and 159 directly operated stores (DOS) 122
Dom Perignon champagne 125, 179 ‘dream equation’ 30, 54 Duchamp, Marcel 80 eBay 12 1211 e-commerce 32 see also internet Estée Laud La uder er 201 exclusivity factor 1–2 Facebook 29, 120, 123 fair trade 158 family-owned luxury companies 203, 206, 209 see also LVMH-Bul LVMH-Bulga gari ri agreement ag reement fashion 2, 17–20, 68, 119 business model 19, 95, 104, 171–72 desire and 17, 47 ‘shelf life’ 175 strategy 15 1533 fast-moving consumer goods (FMCG) 134, 175, 195 Fauchon 160 Ferrari 1, 8, 10, 16, 22, 45, 47, 57, 102, 114, 154, 171, 178 Fondazione Altagamma 18, 46, 99–100, 183 Forbes 166 Ford Motor Company 175 Ford, Tom 180 Frankfort, Lew 105 Galliano, Ga lliano, John 15, 52, 52, 80 Gap 33 Gates, Ga tes, Bill 168 168 Gehry, Gehry , Frank 80 80 Girard, René 17 Godin, Seth 131 ‘green ‘gre en con c onspicuo spicuousness’ usness’ 38 Grey Goose vodka 49, 132, 178 Gucci 3, 17, 20, 33, 45, 47, 92, 127, 180, 210 H & M 33, 173
Haring, Keith 80 Helleu, Jacques 34 Hermès 1, 3, 16, 18, 25, 59, 65, 75, 95, 107, 108, 140, 166, 171, 180 ‘Artists’ Residence’ Res idence’ 80–81 80–81 China and 75, 127 internet and 124, 126, 127 Japan Japa n and 76 localiza loca lization tion of production production 176 LVMH and 186–87, 188, 189 price/earnin price/ea rnings gs ratio 201 Hirst, Damien Da mien 72 72 innova innovation tion 178–79 178–79 Interbrand 23, 94 internet, the 29–33, 171 accessibility 114 communication 30, 125 communities of consumers 31 consumer data and 123–24 consumer services and 31–32, 119, 126 customer customer loyalty and 120 120 e-commerc e-commercee 115 loss of control c ontrol 122–25 122–25 luxury luxury brands and a nd 30, 30, 113–28 113–28 potentialities 117–22 Internet Corporation for Assigned Names and Numbers (ICANN) 124 Ipsos 45, 106 World Luxury Tracking Survey 69, 135, 178 acobs, Marc 15, 18, 26, 182 e-boutique e-boutique 53 aeger-LeCoultre 158 aguar 48, 175, 178 apan 47 attitudes to luxury 54–55 delocalization 106–07 Louis Louis Vuitton 75–76 eju Island, Korea 21
Kenzo 98 Kering 2, 13, 42, 79, 80, 94, 151, 167, 188, 199, 203, 204, 206, 210, 213 Kiton 190 Klein, Yves 81 Koons, Jeff 72 Kyoto Agreement Agr eement 150 Lacoste Lac oste 46, 100, 100, 158–59, 158–59, 169 Lagerfeld, Karl 33, 52, 82, 188 Lauder, Estée 45 Lexus 2, 16, 38 Lifshitz, Ralph 101 ‘lipstick ‘lipstick effect’ effe ct’ 45 logos 46, 91–93 Longinotti-Buitoni, Longinotti-Buitoni, Gian-Luigi Gia n-Luigi 8 L’Oréal 31–32 Loro Piana 3 Louis Vuitton 1, 2, 12, 14, 22, 43–44, 45, 47, 58–59, 68, 74, 80, 92, 94, 179 advertising 71 after-sales 15 1544 brand dimensions 26, 107 brand equity 23 China and 3, 127, 193 consumers’ perceptions of 23, 139–40 designers and a nd 52 52 flagship stores 66, 106, 176 growth and 26, 93 internet and 58 Japan Japa n and 75 75–76 –76 levers leve rs of dream potential potential 26 local loca l production 103 103 origins 210 strategy 93 luxury ‘abund ‘abundant ant rarity’ rar ity’ strategies strateg ies 4 advertising adve rtising and a nd 34, 34, 53–54 53–54 art and 52–54, 59, 63–84 as absolute concept 44–45 as business model 47–49, 100, 103 103
attitudes to 69 beauty and 152 brands and a nd 8, 24–25, 24–25, 101–03 confusion with fashion fa shion 19–20, 19–20, 153 consumers’ perceptions 11, 18, 19, 48, 122, 155, 167–68 craftspersons and 140–41, 153 cult of 55–57, 114, 181 definition 2, 10, 11, 17, 65–66, 88, 130–31, 155–56, 167, 168, 182 democratization 54, 66 dimensions of 130–31 diversification diversifica tion 3 dreams and 7, 8, 109, 117–18, 142, 161 durability and 154 eBay and 121 121 economic economic rece r ecession ssion 87 entry lin lines es 14 144–45 4–45 experiential 15, 32 facets 24 future 12–17 gifts 10 1022 halo effect 14 1466 heritage and 142, 182 horizontal expansion 3 internet and 29–33, 113–28 ‘invisible’ 59 irrationality of 155 licences and 152 152 lifestyle and 131–32 131–32 ‘look of’ 100 magic and 57–58, 142 market marke t value v alue 9, 10, 46–47, 46–47, 99, 132, 154, 154, 166 meaning 44–49, 99–100 new 132 niche 190 power and 89 price and 131–32 price/earnin price/ea rnings gs ratios/profitability ratios/profitability 19 199, 9, 200 provenance 10 101–03 1–03
quality and 141–42 rarity 51–52, 142, 152 relative 88 88–89 –89 retail experience 21–22 scarcity 49–50, 59, 104 selective labels la bels 67 67 singularity of 155 155 social function of 88–89 stores 121–22, 190–91 sustainable models 152 symbols symbols of wealth we alth 15 uniqueness uniqueness 47 urbanization 13–14, 66 vertical expansion 3 Wall Street and a nd 3 luxury experience 15, 32 luxury groups 209–21 added value 212, 218 benefits 210 brand autono a utonomy my and a nd 220 220 corporate management synergies 219–20 financial synergies 218–19 growth of 210 market power synergies 217–18 operative synergies 213–17 survey surve y findings findings 213–20 see also Kering, LVMH Luxury Marketing Council 169 luxury-ra luxury-rarity rity relation rela tionship shipss 43 luxury strategy 11–12, 41–61, 58–59, 93, 95, 97–98, 123 challenge of growth 2, 12, 22, 41, 63–65, 191–93 competition 68 digital 127 internet and 120, 122–25 122–25 qualitative rarity 41 satura sa turation tion of consumption consumption 12 scarcity 22, 49–50 sustainable development and 160–61
timeless timelessness ness 17 1722 see also price of luxury luxury LVMH (Louis Vuitton Moët Hennessy He nnessy)) 2, 7, 13, 42, 46, 59, 59, 80, 92, 92, 94, 167, 167, 180 Hermès He rmès and 186–87, 188, 188, 189 sustainable development and 151, 157 LVMH-Bulgari agreement 185–208 background 186–87 benefits 196–97 BRIC countries and 218 China and 193–95 family-owned brands 187–89 financial impact 202–03 growth assumptions 201–03 price of 197–201 reasons rea sons for 188–89 188–89 LVMH Hou H ouse se 21 2199 Lynch, David Dav id 81 81 Madonna 33 magic 57–58 Manet, Edouard 81 Mango 173 marketing 180 Marx, Groucho G roucho 1 Maslow, A 56 masstige mass tige brands/products 2, 25, 64, 68, 132, 132, 133, 133, 168, 169, 169, 172–74 mating society 90 Mauboussin 135, 137, 194 price of 137 Mauss, Marcel 45 McCartney, McCa rtney, Stella S tella 33, 50, 50, 158 158 McKinsey 106 McLuhan, McLuhan, Marshall Ma rshall 77 Mercedes-Benz 2, 48, 57, 169 Michael Kors 33, 182 Miele 154 Mikimoto 192 Millerio dits Meller 190 MINI 49, 100
MINT countures 3, 13 Moët Hennessy Hennessy 2 Moscow 166 Moss, Kate 33 Murakami, Takashi 52, 80 Nespresso Nespre sso 16, 49, 100 100 Net-a-Porter 135, 144 New York 166 Nigeria 69 Norlha 140 Paris 21, 106 106 Patek Pate k Philippe Philippe 17, 92 Pernod Ricard Group 196 Pinault, François 80 Pitt, Brad 34 Polet, Po let, Robert 7–8 7– 8 ‘populance paradigm’ 94 Porsche 17, 56, 102, 104, 174, 177, 178 Porsche, Ferdinand 11 PPR see Kering Prada 13, 25, 27, 42, 47, 68, 71, 97, 99, 127, 169, 176, 183, 195, 201 Prada, Miuccia 105, 188 premium brands 2 price/earnin price/ea rnings gs ratios/profitability ratios/profitability luxury companies 199 other companies 200 price of luxury 129–48 effects effec ts of redu re duction ctionss on status sta tus 137–39 137–39 high prices 141–42 how ho w consumers consumers eva e valuate luate 143 how ho w exp e xpensive ensive is expensive 13 132–35 2–35 management manage ment of 144–45 144–45 minimum 136 psychology of 133–34, 136 restaurants 133 survey surve y of consumers consumers 134–44
Ralph Lauren 25, 48, 60, 64, 90, 92, 98, 100, 130, 135, 169, 179, 180 Black Label 148, 172 ‘luxury for all’ 182 Purple Label La bel 148, 172 stores 18 1811 Ray, Ray , Man 80 80 reference refe rence price 133–34, 133–34, 143 143 relocalization of production 176–77, 183 see also delocalization restaurants 133 ‘retailtainment’ 43, 190 Richemont 13, 167, 213 Ritz-Carlton Ritz-Ca rlton 45 45 Rolex 47, 92, 127, 169 Rolls Royce 2, 10, 64, 150, 171, 177 Royal Roya l Salute Sa lute 8, 51, 51, 100 Saint Sa int Laurent, Laurent, Yves Yv es 80, 81 81 Samsung Sa msung 16, 108, 108, 173 Sara Sa ra Lee 175 Schiaparelli, Elsa 79–80 Schneider Electric 27 Scorsese, Martin 81 selective distribution 25, 50, 122 Seneca 69 ‘snobs’ 133 Sprouse, Stephen 52, 72 Starbucks 64 Starwood Sta rwood 167 167 status 92 storytellin storyte llingg 91 sustainable developm dev elopment ent (SD) (S D) 35 35–38, –38, 149–62 149–62 business bu siness imperative imperativ e 15 1577 buye bu yers’ rs’ sensitivity to 37 37 definition 150 luxury strategy 160–61 quality qu ality standards 15 157–60 7–60 Tesla 16, 151
T omas, Dana 98 Thomas Thomas,, Patrick Pat rick 18, 59, 59, 65, 108–09 108–09 Tiffany Tiffa ny 136, 157, 192 192 sustainable development 159–60 Trapani, Francesco 186, 189, 192, 196 ‘überluxury’ 66 Uniqlo 12, 34 Van Gogh, G ogh, Vincent Vincent 72 Vente-Privée.com Vente-Privé e.com 144 144 Versace 33 Versace, Versac e, Donatella 188 188 Victoria’s Secret 132, 133, 169, 182 virtual rarity 51–52 Warhol, Andy 72 Wilde, Wilde, Oscar Osca r 73 wines 131, 131, 177 Xiaoping, Deng 90, 156 Yamamoto, Yoji 80 Yi, Ding 75 Zara Za ra 21, 34, 34, 173, 173, 174 business model 172, 181 Zegna 20, 27, 46, 71, 176, 190, 191, 195
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First published in Great Britain and the United States in 2015 by Kogan Page Limited Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this this publication may only only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermenti undermentioned oned address addresses: es: 2nd Floor, Floor, 45 45 Gee Street Street 1518 1518 Walnu Walnutt Street, Street, Suite Suite 1100 1100 4737/2 4737/23 3 Ansari Ansari Road Road London EC1V 3RS Philadelphia PA 19102 Dary aganj United Kingdom U SA New Delhi 110002 India www.koganpage.com © Jean-Noël J ean-Noël Kapferer, Kapferer, 2015 The right of Jean-Noël Kapferer to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. ISBN 978 0 7494 7436 2 E-ISBN 978 0 7494 7437 9
British Library Cataloguing-in-Publication Cataloguing-in-Publication Data A CIP record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Cataloging-in-Publication Data
Kapferer, Jean-Noël. Kapferer on luxury : how luxury brands can grow grow yet remain remain rare / Jean-Noël Kapferer. pages pag es cm Includes bibliograph bibliographical ical references and index. ISBN 978-0-7494-7436-2 978-0-7494-7436-2 – ISBN 978-0-7494-7437-9 978-0-7494-7437-9 (ebk) 1. Luxuries – Marketing. 2. Luxury goods industry. industry . 3. Product management. management. I. Title. HD9999.L852K367 HD 9999.L852K367 2015 658.8’27—dc23 2014050213 Typeset by Amnet Amnet Print production managed by Jellyfish Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY
