BRAND PULSE … Luxury Brands in Transformation (1 of 4)

> Adam Needles, 2009 MBA Candidate, Center for Brand and Product Management

Note: This is the first in what will become a regular and evolving serial feature on this blog. MBA students in the Center for Brand and Product Management at the Wisconsin School of Business will present timely perspectives on issues facing the brand world. These topics will be delivered in installments – providing opportunities to comment and provide input into the overall analysis. Our hope is that the resulting discussion threads will advance the brand community’s collective thinking about some of the most important market issues of the day.


Trouble in luxury land has finally hit the front pages.

Recent headlines have included BRANDWEEK proclaiming “‘Mass affluents’ retreat en masse” and The Wall Street Journal editorializing “High-end sales are slowing down as ‘even the rich understand there’s some anxiety in the world.’” But do these headlines over-simplify the issue? Isn’t there more to the story than just a quarterly hiccup in demand?

In fact, the luxury brand market is rapidly evolving – transforming. Key drivers are re-shaping the luxury-brand category. They include a cooling North American economy (and it’s impact on the middle-class consumer), the growing cache of social and environmental awareness, increasing stratification between what will be termed the ‘working rich’ (with incomes between $100K and $1M per year) and the ‘ultra rich’ (with incomes greater than $1M per year) and a unifying, technology-driven ethic of simplicity in design. The end result is increasingly looking very different than today’s luxury environment.

Meanwhile, the concept of affordable luxury – after saturating the market with silver baubles, colorful ‘it’ handbags for every occasion and celebrity-branded fragrances – is losing much of its momentum. Milton Pedraza, CEO of the Luxury Institute in New York, argues in a BRANDWEEK Q&A: “Affordable luxury is a contradiction in terms. Those luxury brands racing to transform themselves into affordable luxury by making deals with mass retailers have forgotten that their business model is not just about stamping out more products.”

It is clear that to continue to be successful in the current and future market environment, luxury brand companies must shift their strategies. But how? And in response to what trends? This brings us to our first question …


What are the major marketplace drivers behind this evolution in the luxury brand market?

While newspapers are trumpeting a fall-off in demand for luxury goods, the recent, below-estimate financial results for luxury brand companies do not tell the whole story. Yes … these companies are struggling to maintain near-term quarterly growth in line with projections; however, something more subtle – but clearly market-shattering – is occurring.

There is a fundamental re-orientation of the luxury brand market that is occurring, and some of the key drivers that are emerging include:

> Cooling North American economy (and it’s impact on the middle-class consumer): Between 1996 and 2006, the luxury market doubled to $234B worldwide, according to Bain & Co. The major driver of this market expansion was the marketing of ‘affordable’ luxury to customers that had never purchased luxury goods before – so-called ‘mass’ luxury. And many of these new customers were in North America and, specifically, in the middle class. The products marketed to them were sold at lower price points, lower margins and lower quality than luxury goods companies had historically done – leading to the cultivation of an entirely new customer-goods segment outside the ‘upper crust’ of traditional wealth.

But nearly 18 months of a shaky economy in the US is strongly affecting demand from this segment. “... [T]he new luxury party is over,” proclaimed Mark Ritson in a recent piece in Marketing. “The middle-class consumer is under financial pressure and the first sacrifices are all the accessible luxury purchases that they made when times were good.” Ritson notes that many luxury goods companies, such as Coach and Tiffany, are experiencing very-different levels of success with their mass luxury customers as compared to traditional luxury customers. “The only bright spot [in its recent earnings announcement] for Coach was a 13% increase in sales of their [$400+] handbags,” noted Ritson. This was further echoed by Tiffany’s CEO, Michael J. Kowalski, in a recent interview with The New York Times, stating “The greatest amount of weakness was in the mid-tier luxury consumer.”

To respond to a cooling North American economy, companies in the luxury market must once again refocus their marketing portfolios on traditional, lower-risk, higher-margin customers, whose patronage has unconditionally funded luxury in both good times and in bad (a segment that will be defined in the next installment of this series as the ‘super luxury’ segment).

> Growing cache of social and environmental awareness: Led by standard bearers such as actor/activist Brad Pitt, entertainment-mogul Oprah Winfrey, Microsoft-founder Bill Gates and U2’s Bono, social and environmental awareness has caught on with luxury-goods customers.

ADWEEK Editor-at-large Mark Dolliver commented on this in a recent piece, titled “Resenting the Rich”:

Conspicuous consumption has been supplemented by conspicuously virtuous consumption, as the rich flaunt their devotion to the planet — say, by spending more on solar panels for a mansion than you spent on your entire house. Along those lines, a study by Scarborough Research "finds that almost half (42 percent) of the households in the U.S. that own or lease at least one hybrid vehicle have an annual income of $100,000 or more." The non-rich could mock the rich for the old style of ostentation. Because it does have real social utility, conspicuously virtuous consumption is harder to criticize — which makes it even more irksome.

> Increasing stratification between the working rich and the ultra rich: Much of the growth in patronage of the luxury market over the past decade is attributable to a segment often referred to as the ‘mass affluents’ or the working rich – sometimes characterized as the ‘upper’ middle class. “That broader audience … defined by having investable assets between $100,000 and $1 million, has emerged as 21st century marketers' demographic darlings,” commented Eric Newman in a recent BRANDWEEK piece. Yet this segment has very different characteristics from that of traditional wealth, a.k.a., the ultra rich. The working rich have often built their own fortunes as artists, entrepreneurs or professionals, and – for that reason – they are much more sensitive to protecting their own capital base; thus, in times of economic downturn, they are much more conscious of their spending habits and much more likely to value price versus quality.

> Unifying, technology-driven ethic of simplicity in design: Less is more – whether it is the home page of Google or the visage of an Apple iPod – and this concept has become infused into the consciousness of a society overwhelmed with media and information. As a result, luxury is increasingly defined by simple, clean lines and uncluttered execution. Nowhere is this more apparent than in the global makeover of The Ritz-Carlton brand, which is renovating nearly all of its properties to ascribe to more modern furnishings and displays.


So what should luxury brand companies do to ‘right’ their strategies? Check back here for the next installment, which will examine positioning opportunities in this evolving luxury brand market …