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Published: October 15, 2010

 
 

Forecasting the Winners in Luxury’s Slow Recovery

The most successful luxury companies in the slow recovery ahead will be those that persuade aspirational buyers to resume spending on their brands. First, they will change the assortment of products they offer and modify their advertising messages to lure aspirational buyers back to the market. If they haven’t already, successful luxury companies will consider creating or acquiring mid- or lower-tier brands to attract aspirational buyers who can no longer afford their premium brands. Ralph Lauren, Giorgio Armani, and Calvin Klein have long provided good models for building a multi-tier brand portfolio. Now, high-end designer brands such as Stella McCartney, Roberto Cavalli, and Jimmy Choo are following this strategy. Jimmy Choo recently announced that it would create a lower-priced “limited edition” designer collection for retailer H&M.

Second, the successful companies will find ways to drive customer loyalty without resorting to overt or extreme discounting — dangerous practices that devalue luxury brands over the long term. (Louis Vuitton, for example, destroys unsold merchandise rather than cut prices.) But the savviest strategists can occupy a middle ground: Carefully targeted discounting can enhance a brand’s value proposition, if it is offered selectively to high-spending, loyal customers in a manner that allows them to perceive it as a generous gesture during difficult times. Luxury companies can also safely discount if they are discreet — for example, engaging in limited “secret sales” on websites such as RueLaLa.com and Bluefly.com.

Third, successful luxury companies will continue to grow their presence in the digital world — one of the few remaining pools of growth. Traditionally, luxury retailers avoided online selling, claiming that the luxury goods buying process required human interaction and a superior in-store experience. Their stance was fueled by fears that price would trump prestige in the disembodied online world. However, a 2008 study conducted by Google found that 94 percent of buyers said making a luxury brand purchase online would not cheapen their image of the brand. (See “Time Is Money: Wealthy Drop Dollars Online,” by Natalie Zmuda and Abbey Klaassen, AdAge.com, October 20, 2008.) Ninety-one percent would prefer to see their favorite luxury retailers offer their goods through the Web.

Forward-looking luxury retailers are now responding to this feedback by bringing their unique branded experiences to the Web. Burberry has created a social networking site, Art of the Trench, where customers can go to submit photos of themselves wearing their Burberry trench coats, comment on others’ photo submissions, and post their comments to Twitter or Facebook. Gilt Groupe, an invitation-only online retailer of luxury brands, offers mobile shopping via iPhone, iPad, and Android apps, in conjunction with a presence on Facebook and Twitter. Louis Vuitton offers nearly all of its products through its website, and although Prada offers only accessories online, it predicts that within five years 40 percent of its U.S. revenues will come from online sales.

Finally, many luxury companies will also treat the challenge of reducing costs and building their business portfolios as a strategic opportunity to identify and reinforce their key capabilities, particularly with respect to manufacturing and quality. “Beyond ephemeral fashions, the values of quality and durability…take on particular importance for clients in the search of solid values,” LVMH CEO Bernard Arnault wrote in the company’s 2009 first-half interim annual report. Jean Baptiste Debains, president of Louis Vuitton Asia Pacific, adds, “People are more conscious about quality.… In short, luxury retail players have to up their game.… That’s good news for us, because we have always banked on quality. We consider each item an investment.”

As they work to shore up their base in the more developed markets, luxury companies must also begin planning for the next wave of growth. Opportunities with high potential will largely be found in emerging markets, where increasing demand for luxury goods is expected to double the size of the luxury retail market over the next 10 years. In the same time frame, BRIC consumers’ share of global luxury spending is expected to dramatically increase from 30 percent in 2009 to 50 percent in 2020.

 
 
 
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