The Luxury Letter Blog


Guide to Luxury Brand Success in Economic Downturns
November 4, 2008, 2:43 pm
Filed under: Uncategorized

By Milton Pedraza, CEO of the Luxury Institute, LLCfinalcrop1626-12

First the story was that luxury was omnipotent and luxury consumers were immune. Even the “affluents” were trading up, they said, and luxury could do no wrong. Now the story is that luxury has lost its luster and even the wealthiest are bailing out. Makes for great headlines.

Neither view was, or is, an absolute truth. The luxury market and wealth segments are very dynamic, comprised of different products and services categories, and different segments of wealth that respond differently to economic cycles. The responses are driven by both consumer demand and psychology.

It is true that things are never as good, or as bad, thankfully, as we make them out to be. Even consumers, reporting their expenditures, past and future, and their attitudes and sentiments, tend to get it very wrong most of the time. For proof, go no further than current political polls. Try to correlate consumer sentiment indexes with retail sales over a long period of time. It is tough to achieve. That is not to say these are not useful exercises conducted by well-intentioned professionals, and may be good indicators of consumer perceptions at the time. Overall, however, we believe that current rumors of luxury’s demise are greatly exaggerated—as exaggerated as the previous estimates of never-ending growth.

Luxury Institute and Global Insight research show that the reality is that luxury is cyclical and always has been, as are all other industries, and that the luxury winners take a long-term view and business approach. We believe strongly that despite the recent crisis of confidence, the global economic fundamentals make it likely that millions will continue to be lifted from poverty and that millions more will become millionaires around the world in the next few decades.

Freely available technological innovation and emerging market population growth in economies that have the legal frameworks to support entrepreneurship and property ownership—and the eventual availability of capital—bode well for the future of luxury goods—and especially luxury services. In more mature markets, this economic cycle, like all others preceding it, will turn. When it does, the current mentality of retrenchment will yield again to one of acquisitiveness.

Downturns, however, do not need to be downtime for luxury executives. Here are seven “tough-love” steps from the independent and impartial Luxury Institute, to ensure that your brand not only survives, but thrives, in this current serious economic downturn.

1.) Eliminate the Hobbies: Many luxury brands have entered into categories where they have no expertise or credentials, merely because they want to be “lifestyle” brands. Some categories are logical extensions for a luxury brand. Most are not a good fit, and will be marginally profitable. Fashion brands are notorious for pasting their logo on anything that they think will generate growth regardless of the impact on the long-term brand equity, and the long-term bottom line. Wealthy consumers are highly discerning, educated buyers. Several years of Luxury Institute empirical research shows that wealthy consumers prefer, and are willing to pay a significant price premium for, brands that are specialists. Leiber in handbags, Harry Winston in jewelry, Christian Louboutin in women’s shoes, and Berluti in men’s shoes are brands that wealthy consumers rate highest as category specialists. Conduct a rigorous assessment of your brand’s category portfolio and unflinchingly eliminate the marginal “hobby” categories. Renew your focus on what you do best and innovate within those categories.

2.) Go Up-Market Right Now: One of the great ways to kill a luxury brand, albeit slowly, is to go down-market. Gucci was a great comeback story because someone had decimated it before Tom Ford saved it. It is the “boiled frog” syndrome. The warm water feels so good that the frog doesn’t know it’s being made into soup till the water starts to boil. By then, it is too late to bail. If you are a luxury brand that really aspires to be a mass brand, then create and execute a strategy to be distributed in as many mass-market outlets as possible. You have lots of choices. If you aspire to be a top-rated luxury brand, then Luxury Institute research says that you must serve high net worth consumers, be unique and exclusive, your distribution must be limited, and your service impeccable. Great quality is not enough. Focus on going up-market with bespoke, one-of-a-kind, custom made, made-to-order, or limited edition products and deliver service to match. Only then will the new, growing multi-millionaire consumers globally be willing to pay a premium for your products long term. That’s your growth strategy.

3.) Innovate and Dare to Be Different for a Change: Luxury firms have homogenized luxury to the point that 63% of wealthy consumers feel that luxury is being commoditized. Walk down most high streets such as Fifth Avenue, Avenue Montaigne, and Bond Street and you see the same look and feel in store designs and products, to the point that you can take away the store signs and logos and wealthy consumers would probably not be able to identify who is who. Same is true for services. It is time to stop emulating your competition and to begin innovating such that you are creating never-before-seen products and categories that are relevant and revolutionize your industry. Companies like Apple are beating luxury at its own game by creating great products and services, innovating features and benefits, and charging a premium. Now Apple stores are becoming high tech/high-touch destinations. If luxury has any claim to fame it is in innovation and novelty. Demand innovation and you will get it.

4.) Leverage Your PR, Not Your Advertising: Especially in challenging economic times, every communication dollar counts. Public relations is a far more effective and credible vehicle for persuasion of key constituents than advertising. Give your agency the opportunity to communicate the authenticity and rich history of your brand, your brand icon, your brand integrity, your brand’s corporate citizenship, your knowledge of the category via your vast internal data, and most importantly, your breakthrough innovations.

5.) Deliver Extraordinary Experiences: The truth about extraordinary customer experiences is that they are delivered not with gimmicks and props, but by talented, caring people who connect with customers one-on one. How much extra does it cost you to staff your company with people who are experts in your products, and even your competitors’ products? Who are trustworthy? Whose interests are aligned with your clients? Who are genuinely interested in helping people with a smile? Great people are the most difficult resource to scale, yet companies such as Ritz-Carlton and Nordstrom manage to do it despite their size. Wealthy consumers consistently tell us that both deliver extraordinary customer experiences. Apple now has better experiential stores than many luxury firms. And it is not the bricks and mortar—or frosted glass in the case of Apple—that are delivering that. When will wealthy consumers, the only constituents who count, rank your brand at the top for delivering a superior customer experience?

6.) Innovate Online: Luxury brands have been in perpetual debate over whether they should be present and sell online or not, and if they do, how to advertise online. Reminds you of the dotcom era when so many “experts” were vigorously debating whether content was king on the Internet, and whether technology would become a commodity. Thankfully, the Internet debate is over for most luxury brands. Now is the time to use this rich channel to reach wealthy consumers around the globe no matter where on earth you happen to be located. If a luxury brand asks whether they should spend scarce funds on opening another store, launching a print advertising campaign, or investing in a great website and online advertising, the Internet wins every time as the fastest, cheapest, and most effective way to leverage a luxury brand in today’s global marketplace.

7.) Let the Voice of Your Customer be Your Guide: Strategy meetings are great, but you will find yourself in circular groupthink in economic downturns. Everyone will want to play defense, but what you need now is a great offense. Inject the voice of the wealthy consumer into your strategy sessions. Use internal and external quantitative research, create an online community, mine your transactional database, engage customers one-on-one at point of purchase. In effect, do whatever it takes to understand what consumers are thinking right now and why they are behaving the way they are. Find ways to put consumer feedback into practice immediately. Your customer will guide you to succeed in any landscape, including a downturn. This, too, shall pass, and your brand will be the stronger for it.

8.) Outbehave Your Competition: In his book, How, Dov Seidman explains that in a commoditized and undifferentiated world, you not only have to outperform your competitors; you must outbehave them. The Luxury Institute has found that 57 percent of wealthy consumers prefer products and services from companies that are socially responsible. That means being completely ethical with all of your constituents, being charitable, and being eco-friendly. The recent events on Wall Street, and their effects on the world economy, have heightened what it means to be socially responsible. Recession or no recession, brands that meet those standards will ultimately survive and thrive.

Business & Finance Publications – Brand Status

Luxury Institute Survey: Wealthy U.S. Consumers Rate the Most Prestigious Business and Finance Publications: Wall Street Journal, the Economist and Morningstar

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3 Comments so far
Leave a comment

We need to be better constantly, I believe this is the message to get across. Great input by Milton, reinvent ourselves and the brands we represent became just another day on the job for us marketeers.

Whatever happens, people don’t change that much, desires will be there, and will find its consumers if the product, communication, place, and all our known key points are sharp and well.

The thing is, it’s not that easy anymore, we will all have to push to new ways to seduce the consumers so that they just cannot resist, just as they once did before.

Best,
Reynaldo Pasqua
Director of Marketing/CARMIM

Comment by Reynaldo Pasqua

Great piece and timely article. To bring a bit more reality to the financial implications and reality for protecting the luxury brand, I would challenge the author to take a stab and define/identify some historic cycle patterns and timelines. Take a bigger risk and be innovative! What is left unsaid is still very relavent.

Comment by Gregoire

Trends about futur are very clear with you. Is it possible to publish your paper on my blog with your name and all references ??? thanks

Comment by Duringer




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