Friday, March 14, 2008

BRAND PULSE … Luxury Brands in Transformation (3 of 4): Luxury Brand Face-off, Winners and Losers

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

The second piece in this series identified the key positioning opportunities and challenges for luxury brand companies in the current market. Now we continue by looking specific brand companies – identifying potential 'winners and losers' and discussing their strategic opportunities and challenges ...

What companies are being impacted by this evolution in the luxury brand market, and what is the scope of this impact?

> Hermes vs. Coach: Perhaps a modern ‘Tale of Two Cities,’ these two brands – both prevalent and well-known in the luxury brand market – could not be more different and more-differently positioned to compete in a changing and ‘bi-furcating’ marketplace where the gap between the Super Luxury and Mass Luxury segments is increasing.

Hermes' vision of its target customer and of its brand value proposition has remained clear for decades. It is high-end; it is expensive; it is handmade; it is high-quality; it is exclusive; and it is targeted at a Super Luxury consumer. This is not the case for Coach; the company literally reinvented itself in 2001 as a fashion-forward manufacturer of mass luxury goods to better compete against stronger luxury brands: “The idea was to reposition the brand as an American alternative to Prada and Louis Vuitton, with prices ranging from $125 to $2,000. They called it 'affordable luxury,” explains Dana Thomas on the Coach business strategy in her recent book, DELUXE - How Luxury Lost Its Luster.

This strategy worked for nearly five years as the purchases of middle-class consumers and mass-affulents drove significant purchase volume within the luxury brand market. Coach customers were lured by its trendy image and accessible price points, and when the economic environment in the US and Japan was stronger, its Mass Luxury customers were willing to shell out for higher-priced items. In fact, this strategy of targeting affordable luxury even helped Coach better penetrate the Super Luxury segment and begin to offer higher-end goods to begin to compete with Louis Vuitton and Prada; however, this remains virgin territory for Coach. And the strategy has proven to be un-sustainable.

The company remains dependent upon spending for its lower-priced items, and unfortunately, the Mass Luxury segment is highly income elastic. So consumer behaviors have adjusted with a falling Dollar, weakening US and Japanese economies and increasing US credit concerns. A recent Financial Times piece captured this adjustment by Coach customers in the recent holiday season: “When they made a purchase they were opting for lower-priced items.” A Wall Street Journal article from the same time period similarly noted: “Coach, which pioneered accessible luxury in the U.S. with its $300 handbags, resorted to deep discounting to lure holiday shoppers into stores.”

Hermes, on the other hand, has maintained its consistent focus on the higher end – remaining unwavering in its brand merchandising approach and expanding its brand franchise very cautiously. This has allowed the brand to remain strong in a challenging market environment. Author Dana Thomas, cited above, notes: "In the world of luxury brand handbags, as in automobiles and clothing, there is a pyramid of quality: made-to-order down to mass-manufactured. The best – the equivalent of a Rolls-Royce or Chanel couture suit – is an Hermes handbag. Made of the finest leather and fabrics, sewed by hand, and with starting prices of more than $6,000 and years-long waiting lists, Hermes handbags are considered by many to be the last true luxury goods … ."

There is also a differential in how the two companies treat service. There is no question that retail service is very attentive at both Hermes and Coach locations; however, it is service with a very different goal. Coach wants its customers to quickly find an off-the-shelf ‘it’ bag, upsell accessories and care products, and then send the customer out the door with her impressive new, logo-emblazoned Coach shopping bag.

The experience at Hermes is very different, though, as Dana Thomas explains in her book:

Buying an Hermes handbag – or saddle, or luggage – on the other hand, is still a true experience in luxury. Hermes boutiques do receive a few bags each season to sell to customers who walk in – a bit like a good restaurant always saving a table for a regular who drops in without a reservation. But generally, if you want to buy an Hermes bag, you have to order it. The bags on display in the store are just that: display models to show you the options. You choose the material: cowhide, reptile, ostrich, or even canvas. You choose the color and the kind of hardware: silver, gold, diamond-encrusted. And for the Kelly, you choose if the seams are on the outside turned in. And then you wait several months while it is made to your specifications. When it arrives in the shop and you are invited to come pick it up, it is your bag. Any other woman may have a navy blue cowhide Kelly with gold hardware and turned-in seams, but that was her idea, just as yours was yours.

Hermes is incredibly-well positioned to weather a tough economic environment by relying on its traditional customer base. Its Super Luxury customers are very resilient and not likely to bolt; moreover, its classic designs, conservatism, discreetness and ability to offer a unique customer experience make it a good match for the new opportunities and challenges facing luxury brands (as noted in a previous blog posting on this site).

Coach, meanwhile, must batten down to weather the storm among its core customers. A recent Forbes piece noted this trend: “There are cracks in Coach’s glam facade. During 2007’s holiday season many skipped the iconic bags for cheaper items like its key chains and fragrances, notes Todd Slater of Lazard Capital Markets. Also, sales increases at Coach’s lower-margin factory outlets are now far higher than at its retail shops.” If Coach wants to remain true to its Mass Luxury customer, it may have to go down market – finding a new product mix and price points and better catering to the needs and capabilities of this customer; otherwise, it may need to shift to new retailing concepts that can better attract the Super Luxury customer … assuming that customer is not turned off by every teenager in America already sporting a Coach bag.

> Armani vs. Burberry: Whereas Hermes vs. Coach was a look at how luxury brands can sometimes aspire to cater to one segment but are in fact dependent on another, Armani vs. Burberry looks at the opportunities and challenges inherent in juggling multiple customer segments at the same time. Burberry has attempted to make the Burberry brand mean something relevant to an increasingly-diverse customer base – rapidly evolving and changing from its historic roots. Armani, by comparison, has always taken a careful brand-segmentation approach that has allowed it to seamlessly operate in multiple customer segments at the same time and with complete brand integrity. The different approaches have yielded wildly-different results.

Burberry executives might argue that the company targets many sub-segments within its larger brand; however, to the outside customer, there is only one Burberry brand, and it represents a confused jumble of associations – from stately, refined businessmen wearing trench coats to trendy women sporting the latest Burberry couture to teenagers wearing Burberry scarves with the signature tartan.

This ‘brand-diversification opportunism’ yielded short-term gain for the company in the early part of the new millennium, but at a sharp toll on the brand's sustainability: “Burberry, in particular, has benefited from consumers looking to trade up. Former chief executive Rose-Marie Bravo repositioned Burberry around 'accessible luxury,' and the results spoke for themselves,” comments Mark Ritson in a recent piece in Marketing. But now the company is off to a rocky start in 2008, reporting mixed financial performance. The company, thus, is trying to address this issue. “Burberry, for example, now places its famous check more discreetly, often on the inside of its high-end designs. It has developed a top-level premium brand, Burberry Prorsum, and uses a higher pricing structure to ensure an added degree of separation from its 'mass' offering,” noted Simon Brooke and Amanda Nottage in another article in Marketing. But is it enough?

Armani, however, has carefully extended the 'Georgio Armani' house brand into several different sub-brands, including flagship Georgio Armani, as well as sub-brand extensions Emporio Armani, Armani Jeans and AX Armani Exchange – with each sub-brand being carefully managed and having its own value propositions and price points for a given targeted customer segment. While the company is privately held, it reported that 2007 was another strong year for the company – proving its long-term strategy and careful approach to sub-brand cultivation.

Armani 'gets' the divide between Super Luxury and Mass Luxury; Burberry hurt its opportunity with Super Luxury by following the Mass Luxury segment and by becoming overly associated with younger, less-affulent customers. “Burberry et al are suffering because they've hitched their wagons to the so-called 'mass affluent' consumer—a demo that's one step below the recession-proof superrich and one, as luxury brands are now learning, far more susceptible to the vagaries of the economy,” comments Eric Newman in a January BRANDWEEK piece.

Armani has also placed a continuing emphasis on service and brand experience. “Has anyone noticed that part of the experience of a luxury brand, such as Armani or Gucci, is great, over-the-top, personalized service?” asks Milton Pedraza, CEO of the Luxury Institute in New York in a BRANDWEEK Q&A. Subtle innovations within the Armani brand have included increasing customization of fit for its customers. And as noted in a previous BRAND PULSE posting on this topic, the company is launching Armani-branded hotels to extend that experience. “Armani Hotels & Resorts will showcase the designer’s trademark minimal, clean aesthetic to create a feel of casual elegance,” comments Trevor Lloyd-Jones on website Business Intelligence Middle East.

Armani is a strong example of one company operating a brand portfolio that effectively captures opportunity with multiple segments – in our context, efficiently straddling both Super Luxury and Mass Luxury with differentiated experiences, quality and price points. Burberry is an example of a company trying to do this without carefully architecting the layers of sub-brands and their value propositions; it is also an example of how luxury brands cannot be changed overnight without doing long-term harm to the brand heritage. To better compete in the luxury brand market and to seize the new opportunities in a transforming luxury environment, Burberry must carefully re-architect its brand portfolio; however, this is not something the company can accomplish overnight, and it must manage its investors’ and customers’ expectations as it goes through this transformation.

> Bulgari vs. Tiffany: This matchup is somewhat similar to the analysis of Hermes vs. Coach; however, in this case, the company with the upper hand has the shorter history – proving that brand heritage can be damaged by schizophrenic marketing strategies. Compared to the iconic Tiffany, Bulgari is best positioned to benefit, given its long-term discipline of executing flawless but minimalist design, focusing on the Super Luxury segment, maintaining a balanced global sales portfolio and avoiding lower-priced, trendy, ‘aspirational’ luxury items.

Tiffany, despite a wealth of brand heritage, has ploughed a rocky row over the last decade. The company got itself into trouble by over-emphasizing inexpensive Tiffany-branded silver ‘baubles’ that brought teenagers into the stores and made traditional, Super Luxury, customers feel marginalized. Some worry the company is poised to repeat this mistake. Also, the company is driving its domestic expansion with a lower-end 'Tiffany Collections' store format – squarely targeted at the Mass Luxury segment at a time when the economy in the US is less than rock solid. Add to this the company's significant exposure in Japan, and what might be considered a high-end, globally-diversified company looks more like a brand needing to redefine its direction and meaning – and with too much exposure to the two industrialized countries experiencing the greatest economic woes – Japan and the US.

A recent MarketWatch piece captured the challenge facing the Tiffany brand: "Although Tiffany is perhaps best known for selling diamond engagement rings – the company claims to have introduced the ring as it is now known – it derives a significant percentage of sales from its silver jewelry collection. This features trademark items such as its $125 heart tag charm bracelet. / What's more, Tiffany recently emphasized the opportunities it sees in that silver jewelry segment, saying it wants to increase store traffic by driving more business at more modest price points." The question is whether a single brand can straddle both consumer constituencies – Mass Luxury AND Super Luxury – with the same brand identity. ‘Collections’ may be intended as a sub-brand, but is it sufficiently differentiated to not dilute the overall brand?

Bulgari has always operated in a different class than Tiffany, despite a shorter history and less brand awareness. First, its target group and product line is more narrow, as is its retail footprint; however, its depth in delivering products and services to this segment is arguably deeper than that of Tiffany. Second, Bulgari has a key focus on the uniqueness and exclusivity of the Bulgari brand experience – integrating both products and (an increasing focus on) services. Whereas Tiffany has focused on delivering an optimal retail environment (and is certainly customer-service-oriented), it remains very product focused. Bulgari on the other hand instills a certain 'mystique' to its brand, which has enabled it to expand the breadth of its offering and to focus on services. Bulgari retail is high touch, and the brand is expanding into new directions from fragrances to hotels – all extending the 'essence' of the Bulgari brand and enabling its Super Luxury target customer to wrap him/her self in a Bulgari lifestyle of poignant products and services. Finally, Tiffany and Bulgari have a strong divergence in their design approach – important to the increasingly-conservative consumer product preferences noted in the last blog post on this topic. Bulgari is clean and minimalist. Tiffany, by comparison, is ‘classic,’ but some of its collections and designs are complex and perhaps a best described as ‘Baroque.’

There is no doubt that Bulgari is better positioned to be successful with the Super Luxury customer. The CEO of Bulgari believes that this is the key to the company’s strength and long-term sustainability: “Bulgari is less exposed than other [luxury-goods companies], because it is high-end. In general, humans are not inclined to change their habits,” he commented in a recent Wall Street Journal article.

Tiffany will struggle serving both Super Luxury and Mass Luxury with a single brand. Perhaps it needs to rethink its brand strategy and, instead, create clearer distinctions between its customer-product lines and invest in sub-brands to better identify with both the customers and products in these lines. Or perhaps it should choose just one segment and optimize its offerings to that target customer’s needs.

And this is a ‘lesson learned’ for all brand marketers. You can’t be all things to all people. That’s just not the way brands work – especially not in luxury.

What is next for the luxury brand market? Our final piece will present some brief final thoughts – possibly add a few more ‘winners and losers’ and tie together the pieces in this series over the last month and a half …