The Management of Luxury

An International Guide

Benjamin Berghaus, Günter Müller-Stewens, Sven Reinecke, Benjamin Berghaus, Günter Müller-Stewens, Sven Reinecke

• Publisher: Kogan Page
• Year: 2018
• ISBN:
  9780749481810
• Edition: 2
• Topic: Negocios y empresa
• Subtopic: Marketing internacional

Examine luxury branding on a global scale, with more than fifty cutting edge contributions from the foremost thought leaders in luxury management and marketing. The Management of Luxury, second edition, presents a unique snapshot of best practice insights into the increasing challenges faced in luxury business, with contributions shared by more than fifty global leaders on luxury management. The highly renowned editors draw these together into one essential handbook, ranging from luxury brand strategy, luxury consumer behaviour and market positioning, through to management succession, heritage, counterfeiting and competing effectively as a luxury SME. Fully updated in its second edition, The Management of Luxury explores the newly evolving direction of Asian market trends and how to integrate digitalization into sales and product strategies. Both are crucial for competitive advantage in the luxury market, featured alongside iconic case studies such as Burberry, Louis Vuitton and Leica. The book's value is not only in streamlining management processes and return on investment; but equally for those who marvel at an industry unlike any other, striving to trust both in the conventional and innovate new paths towards the extraordinary. Highly influential, applicable and enlightening, it is a vital addition to every luxury business manager's collection.

PART ONE

The Luxury Market

01

The market and business of luxury

An introduction

GÜNTER MÜLLER-STEWENS AND BENJAMIN BERGHAUS

Conventional business wisdom suggests low prices stimulate demand, business size increases competitiveness, and consumers shop for functional use. In luxury, however, these and many more conventions are turned upside down: demand can increase with price, a brand’s diffusion has a negative impact on its desirability, and consumers make extraordinary efforts to purchase products that usually do not exceed the functional performance of considerably less expensive and more reasonable alternatives. Luxury, thus, is a phenomenon that is quite real in today’s world. Luxury companies have to work more or less within the same mechanisms as other companies, but they apply a set of considerably different parameters. We aim to give an overview of the phenomenon that is today’s luxury business, taking snapshots of the market, the luxury organization, management challenges and the must-reads of research in luxury.

Introduction

Luxury goods do not constitute a discrete consumer goods industry in the strict sense, but rather a cross-industry luxury segment. This encompasses the watch and jewellery sectors, for example, but other sectors too, such as the hotel or yacht-building industries. This means that the high absolute and relative value of a product or service in consumers’ eyes, for which these customers are prepared to pay a relatively high to very high price, is taken here as a segmentation criterion.

The European Cultural and Creative Industries Alliance (ECCIA), the umbrella organization of five national European luxury goods associations, specifies five features of companies in this segment:

1. Aura: creation of a fascination potential for the customer.
2. Craftsmanship and creativity: guaranteeing the highest quality, especially through the use of well-trained and talented employees.
3. Intellectual property: substantial investment in design, innovation and brand development.
4. Selective distribution: strict control of distribution channels to avoid ‘free riding’ from discount providers.
5. Development of new markets that arise from the wealth accompanying the economic growth in emerging countries, but which can also build upon more favourable framework conditions in international trade.

This segment of luxury goods has existed in the (pre)industrial sense since the beginning of the 19th century, and many prestigious names from this era still exist as companies steeped in tradition. But this sector has experienced major changes over these two centuries, especially in the past two decades. In this chapter, we wish to trace these changes and also describe the special features that characterize the management of luxury goods today.

The legitimacy of the luxury goods business has always been questioned: some consider it to be ‘trivial’, as the cheaper counterparts of luxury goods are not functionally inferior. The sector is also often viewed as lacking in innovation compared with the IT industry, for instance. Another criticism is that the elaborate packaging of luxury goods is environmentally suspect. In the consumerism debate, luxury goods are often associated with conspicuous consumption and prodigality, primarily only serving individual social prestige; a kind of affluent disease, with unnecessary wastage and use of sensitive materials (ivory, furs, etc). But others also see consumerism as fortuitously counterbalancing religious fundamentalism. Luxury products give high-quality craftsmanship a chance, and many of these products will last for generations – the opposite of a throwaway society. These are critical issues that luxury goods manufacturers have to address in a serious dialogue with their stakeholder groups.

With the spread of hedonistic lifestyles and growing purchasing power in emerging countries, luxury goods have become an important driver of economic development. In the luxury goods producing nations, such as France, Italy, the United Kingdom, Spain, Germany or Switzerland, producers have become important employers and represent an export sector boasting above-average growth. The growing demand for luxury goods has also given a major boost to trade, primarily in the increase in the number of tourists as buyers – which in turn is connected with providing an impetus for tourism.

In this chapter, we pursue a four-fold objective. First, an overview will be provided of the historical development and dynamics of the luxury market; second, a summary of the most important management tasks for companies operating in this business is given; third, a review of the dimensions and substance of the scientific work in the field is presented; and finally perspectives on future research directions are described.

The luxury market

Data on the volume of the worldwide market for luxury goods varies considerably. This is mainly due to the different definitions and delimitations of this market, but also to difficulty in procuring data. According to the standard market reports, the world market for luxury goods is around €1.081 trillion. ‘Personal luxury goods’ form the historical core of this market with total sales of €249 billion in 2016.¹ Luxury goods categories beyond ‘personal luxury’ are, for example, yachts, cars, food and hotels.

Personal luxury goods

The sales volume of the worldwide market for traditional, personal luxury goods² has grown from €73 billion in 1994 to €249 billion in 2017, an average annual growth of 5.74 per cent (at current exchange rates) or a 3.41-fold increase in this period. Although it is said that luxury is always in demand, this market is not free of cycles and risk, as Figure 1.1 shows.

Figure 1.1 The development of the global market for personal luxury goods 1994–2016

The development of the global market for personal luxury goods 1994–2016

SOURCE Bain & Company, Fondazione Altagamma

The strong growth from 2009 to 2015 shows that the market recovered remarkably quickly after the financial and economic crisis – primarily on the back of Asian markets. Growth in these years was around 2 per cent above GDP. Most companies managed not only to expand their sales volumes, but their EBIT margins also grew considerably. The 2010s have been good years for most globally operating companies, even though the euphoria was somewhat dampened by growth bottoming out in Asia since 2012. Calculated at constant exchange rates, the sales volumes in many segments actually stalled. If the average growth rate of 5.74 per cent is maintained, the market will break the €300 billion barrier in 2019.

The current strong growth in the luxury goods market will be further strengthened by the following trends:

• The shift in understanding of which kind of luxury consumption leads to the highest possible direct, but also sustained, satisfaction. This trend mainly drives the demand for luxury services.
• The willingness to treat oneself to something as a reward for increasing workload.
• Luxury goods as status symbols still facilitate positioning in society, even though this varies markedly from country to country.
• The marked increase in High Net-Worth Individuals (HNWI). These are people with a net wealth of over US $1 million; at the end of 2006 this was almost 10 million people worldwide. These figures are growing strongly in emerging countries such as Singapore, India, China, Indonesia, the Arab Emirates and Russia.

Only the very expensive luxury goods from famous reference brands (‘star brands’), such as Cartier, Dior, Hermès, Patek Philippe or Van Cleef & Arpels are relatively untroubled by economic cycles. ‘Affordable’ luxury goods, such as writing instruments from Montblanc, react to recessive phases in the economy, however. Measures to diversify the brand portfolio or global diversification of the sales territories (associated with currency hedging) are important examples of ways companies can protect themselves from cyclical effects.

Currency fluctuations can also significantly influence result...