Resilience of Luxury Companies in Times of Change

Gabriella Lojacono, Laura Ru Yun Pan

• Editorial: De Gruyter
• Año: 2021
• ISBN:
  9783110723540
• Edición: 1
• Categoría: Business
• Categoría: Management

Why do some luxury companies remain resilient through times of change, while others do not? The reason is that these companies have unique skills to diversify their revenue generation by being ambidextrous. Luxury companies today cannot depend on their reputation or their creativity alone to remain resilient, rather they require the ability to be ambidextrous – to explore new trajectories for future growth and exploiting their iconic values. In past decades, the industry has shifted from product to customer centric and forced companies to adopt new strategies and approaches to succeed. This includes the adoption of digital platforms such as ecommerce, social media and mobile enabled tools to continually elevate customer experience. In addition, new business models have emerged to address growing pains, particularly in inventory issues, over manufacturing and sustainability. Brands today are forced to adopt evolution through innovation that is anchored by new values without compromising their DNA. Based on in-depth research and interviews with CEOs from leading luxury companies, Lojacono and Pan show how companies can hedge their risks and remain resilient in times of change.

1 The Fundamentals of Luxury

Although luxury has some shared management challenges and logics, the actors have extremely varied physiognomies. In all the industries that we will deal with in this book, we find the coexistence of companies that are family owned and companies that belong to financial realities (i.e., financial holding companies, investment funds, private equity funds, etc.). These companies differ not only in governance structure, but also in their degree of industry specialization. At one extreme, there are mono-business companies and at the other large luxury conglomerates. Furthermore, large luxury conglomerates can have different profiles and exploit a wide range of different strategies. For example, LVMH and Kering have portfolios composed of different luxury companies from various industries. Concentrators such as Richemont, on the other hand, maintain a continuous flow of investments across a much narrower range of industries – in Richemont’s case, watchmaking and fine jewelry.

The uniqueness of the choices made by these companies makes it inappropriate to divide them into generic groups, and we must therefore analyze their strategies case by case. In addition, the specifics of company structure in luxury makes it especially difficult to measure performance, for three reasons:

1. In luxury conglomerates made up of multiple brands, the group may choose to aggregate its portfolio, which means some brands will not be subject to independent economic-financial indicators.
2. Certain luxury groups are privately held by families or investment firms that are not listed on the stock exchange. These companies are not required to publicly release detailed information.
3. Many luxury groups are composed of both mass-market and prestige brands (e.g., L’Oréal). If their financial reports do not separate the two entities, it can be difficult to accurately measure the independent performance of the luxury business alone.

Because of this, it is more relevant to reflect on the growth path of these luxury companies rather than their financial standing. It is their evolution that has led to the uniqueness and originality of their brand identities.

The Luxury Panorama: A Rich Variety of Company Profiles

Luxury is not a sector, rather it is a culture. Because of this, it is difficult to set classifications for and make comparisons between companies. There are luxury companies that have activities in one or more of all the following industries: cosmetics, eyewear, textile and clothing, leather goods, hospitality, furniture, automotive, yachting, watchmaking, and jewelry.

For many, price point is the primary indicator of “high-end” or prestige products; if prices are relatively higher than the industry average, products are classified as luxury goods. This classification does not consider the perception of the typical customer of luxury goods who is led to make choices not merely based on price, but on the consistency between personal values and values and messages carried forward by brands. This would lead to the inclusion of various aspirational goods in the world of luxury, regardless of the price level. In some countries, luxury classification is based on a company’s membership in an association such as Altagamma (Italy) or Comité Colbert (France). In today’s dynamic economy, however, several phenomena are beginning to shift the way we classify luxury companies as such.

First, there is the prevalence of trading-down strategies among luxury companies and trading up strategies (premiumization) among companies in other market segments. This results in the intermixing of two worlds, creating a gray area that is not the exclusive domain of luxury brands.

Trading down means that a brand markets products in a specific category at a price point that is much more accessible than its core products but in line with the prices of the category. For example, eyewear and fragrances often lead luxury brands to compete directly with non-luxury companies in the same distribution channels (perfumeries, eyewear shops). This trend has been exasperated by the expansion of categories such as t-shirts and sneakers, which are often priced to put them within reach for younger generations. Bain and Company has reported that original and authentic entry-priced products surged during the Covid-19 pandemic, accounting for 50% of volumes of luxury personal goods in 2020 (D’Arpizio and Levato, 2020).

Premiumization is the act of elevating a product’s perceived value, which makes a customer willing to spend more. It is the ability to increase the price of a product or category, creating a driver for higher margins. Premiumization can often be achieved through levers that focus on increasing product quality, beautifying the external packaging, or introducing innovation that fulfils a purpose. However, when we look closely at a few recent examples of premiumization, it seems brands have been subconsciously creating value through emotional triggers.

There are many ways to elevate a product. According to research conducted by Nielsen (2016), the five most significant attributes for premiumization are: (a) the use of high-quality materials, (b) offering superior function or performance, (c) enhanced customer experience, (d) strength or credibility of the brand, and (e) the design or packaging. Premiumization is present in almost all industries, and brands tend to utilize the same five levers as a means of elevating the brand or the product. Their goal is to justify a high profit margin. While premiumization is an interesting strategy in marketing and product development, it has also become a new way for brands to engage and develop better relationships with their consumers, especially in the midst of changing circumstances.

In recent years, a wide stream of collaborations between luxury, premium, and mass-market companies have allowed premium and mass-market companies to achieve a higher positioning for their products. Giambattista Valli is known for his haute couture gowns, which are generally destined for red carpets or other important events or to be wedding dresses for an ultra-rich audience. The brand has been considered “unreachable” for the middle class because the average price of a dress is over €2,500. H&M, meanwhile, is a mass-market retailer better known for affordability than for exquisite craftsmanship. Collaborating with Giambattista Valli allowed H&M to infuse its product presentation with glamour and catch the attention of a different segment of the market. Seen in a different way, Giambattista Valli executed a trading-down strategy, allowing it to be accessible to the average consumer, with prices ranging from US$20 to US$650. It built a household name for an exclusive brand.

Adidas is considered a premium brand, and it has frequently collaborated with celebrities. One of its most successful collaborations was Yeezy Boost by Kanye West, which was coveted by Gen Z sneaker aficionados. How did it happen? The shoes were released as a limited edition, creating scarcity. They employed an innovative technology – Adidas Boost Styrofoam soles – that set them apart. The Kardashians, fashion models, and celebrities endorsed the Yeezy Boosts, giving them cultural cachet. And the shoes were introduced at the right time, exploiting the fashion sneaker trend. If the price of the standard Adidas Boost was around US$120 to US$180, the price of the Adidas Yeezy Boost was US$220, and it was extremely difficult to purchase. Current market price can reach US$1,500 to US$2,500.

A second consideration concerns some groups, especially in cosmetics or eyewear, that include luxury, premium, and mass-consumer brands. For example, P&G has both Olay, a mass-market beauty brand, and SK-II, a well-known Japanese skincare prestige brand, in its beauty division. The same applies to L’Oréal, which carries consumer products, such as Garnier and Maybelline, but also holds the licenses to manufacture beauty products for luxury brands such as Yves Saint Laurent, Armani, and Valentino, which are grouped into its Luxe division. Estée Lauder Companies’ portfolio includes luxury brands like La Mer, Joe Malone, and Tom Ford – and also Clinique, Smashbox, and Too Faced, which are sold at a different price point. Likewise, Luxottica produces a range of eyewear both through its owned brands Ray-Ban and Persol and licensed brands like Chanel and Dolce & Gabbana.

Chow Tai Fook Jewelry Group Limited is included among the top companies by sales in some luxury rankings (e.g., Deloitte’s Global Power of Luxury Goods report) and is one of the most dispersed jewelry companies in Hong Kong and some parts of Mainland China. The conglomerate that owns its jewelry subsidiary is also a major shareholder in New World Development, which operates in other industries such as property development, transportation, energy, telecommunications, and casinos, among others. More recently, the family-run company’s youngest generation has also acquired Rosewood Hotels and Resorts, a chain of five-star hotels across 16 countries, to extend their portfolio. As these examples show, group-level analyses of luxury groups and companies are apt to conceal important details related to the place of specific brands within a larger business structure or strategy. Therefore, if we wish to understand luxury companies, it is important to apply a rigorous analysis at the brand level.

Luxury brings together multiple entrepreneurial and managerial realities that share some basic logics (Keller et al., 2009; Kapferer, 1998; Barnier et al., 2012):

• Attention to (or obsession with) detail in all activities to ensure the highest quality
• The ability to create a timeless product that may have a secondary market price higher than the retail selling price and that can become a platform for subsequent launches
• Effective storytelling and impactful “theatricality”
• A deep connection with an audience through different touchpoints
• Strong specialization or a core business that is the origin point for the company’s expansion strategy
• Authentic corporate values
• Sensitivity toward legal aspects related to the protection of the brand and intellectual property
• Powerful identifiers (i.e., signs or persons that make the brand recognizable)
• Emphasis on the importance of country of origin
• Exclusivity, which is often expressed in the limited number of pieces available (see Chapter 2)
• Controlled distribution¹
• Aspirational and symbolic value in the eyes of consumers

All these aspects result in high-value brand equity. In particular, it will be useful to expend a few words on the meaning of “symbolic value”. Symbolic value is what separates luxury from other markets. Luxury consumers appreciate purchases for more than mere functionality – they can also represent personal gratification and social affirmation. As defined by Ravasi and Rindova (2008), symbolic value is “the set social and cultural meanings associated with a product, which enable consumers to use it to communicate about their identity and social and status group membership” (p. 3).

People are willing...