Part One the Luxury Market

Part One The Luxury Market

NOT FOR REPRODUCTION

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M01_BERGHAUS_1827_02_C01.indd 2 12/29/2017 7:37:08 PM The market 01 and business of luxury: an introduction

Günter Müller-StewenCOPYRIGHT MATERIALs and Benjamin Berghaus NOT FOR REPRODUCTION

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.

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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 aCOPYRIGHT fascination potential MATERIAL for the customer; 2 craftsmanshipNOT and FOR creativity REPRODUCTION: 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; and 5 development of new markets that arise from the wealth accompa- nying 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

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goods is environmentally suspect. In the consumerism debate, luxury goods are often associated with conspicuous consumption and pro digality, primarily only serving individual social prestige; a kind of affluent disease, with unnecessary wastage and use of sensitive mat erials (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 COPYRIGHT MATERIAL nations, such as France, Italy, the United Kingdom, Spain, Germany or Switzerland,NOT producers FOR REPRODUCTION 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.

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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. The strong growth from 2009 to 2015 shows that the market re covered 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 thoughCOPYRIGHT the euphoria MATERIAL was somewhat dampened by growth bottomingNOT out FOR in Asia REPRODUCTION 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 Singa- pore, 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. Afford-able’ luxury goods, such as writing instruments from Montblanc, react to

M01_BERGHAUS_1827_02_C01.indd 6 12/29/2017 7:37:08 PM 249 251 224 13 14 15 16 218 2.8 2,8 12.1 –0.8 212 192 11.3.11 Chinese shopping frenzy New normal 173 Earthquake Fukushima 153

COPYRIGHT MATERIAL .4 13.1 11.0 10.4 –8 Crisis 167 Subprime and NOTfinancial crisis FOR REPRODUCTION 170 159 147 136 128 Democratization 133 SARS-Pandemia 133 128 Terrorist attack 9/11 ltagamma 108 A Burst of the 96 dotcom bubble 92 8.2 4.3 12.5 18.5 3.9 0.0 –3.8 6.3 8.1 8.2 6.9 –1.8 85 Sortie du temple 10.4 The development of the global market for personal luxury goods 1994–2016 goods 1994–2016 The development of the global market for personal luxury 77 9594 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

5.5 73 50 50 1 100 250 200 Year CAGR Phases Bio. € Figure 1.1 Figure Bain & Company, Fondazione Fondazione Bain & Company, SOURCE

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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 results. For instance, Richemont mainly produces in the Euro/Swiss Franc region and generates its main growth in the US dollar/Yen region. This can lead to jobs migrating from regions with a very strong currency to countries with a weaker currency. The volatility of commodity prices (gold, platinum, diamonds, etc) can significantly influence the profits of luxury goods manufacturers.

Market structure by industries in 2016 COPYRIGHT MATERIAL Five significant industry sectors can be distinguished in this personal luxury goods market:NOT FOR REPRODUCTION

1 Apparel: €57 billion sales (23 per cent; women’s 13 per cent, men’s 12 per cent, CAGR 06–16: 302 per cent). 2 Hard luxury (watches, jewellery etc): €54 billion sales (22 per cent; watches 14 per cent, jewellery 6 per cent, CAGR 06–16: 6.4 per cent). 3 Accessories: €75 billion sales (30 per cent; handbags 18 per cent, shoes 6 per cent, CAGR 06–16: 9.9 per cent). 4 Beauty (perfumes, cosmetics etc): €52 billion sales (21 per cent; perfumes 8 per cent, cosmetics 11 per cent, CAGR 06–16: 4.6 per cent). 5 Others (tableware etc): €10 billion sales (4 per cent; CAGR 06–16: 5.8 per cent).

Apparel The global market in this segment amounted to around €57 billion in 2016, which equates to a 23 per cent share of total sales volume. The share of women’s apparel is, at 13 per cent, still slightly higher than that of men’s (12 per cent). The 2.6 per cent average annual growth between 2006 and 2016 is below average in relation to the overall market of personal luxury goods (CAGR 06–16: 5.1 per cent). The special challenge facing the apparel business is that with two collections per year, the products have to be sold over the counter within around four months. They then drop out of the range. This results in strong pressure to constantly develop (see, for example, the case of Akris3).

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Watches and jewellery A distinguishing feature of the luxury watch business is that almost all the leading competitors are based in Switzerland and most of them also produce in the Swiss franc region. The business model of these watch companies is currently undergoing upheaval in the form of a wave of vertical integration. On the one hand, the result is backward integration in the development of watch movements through internal development or acquisitions; on the other, forward integration is driven by the large brands increasingly operating their distribution themselves.

Accessories The most important sub-areas in this sector are leather goods and shoes, but it also includes sunglasses, gloves, etc. The trade in accessories is of special importance, because, among other things, they often representCOPYRIGHT for the customer MATERIAL entry into a diversified luxury brand, eg startingNOT with FOR a handbag. REPRODUCTION Perfumes and cosmetics This sector has experienced extreme industrialization over recent years. As a result, the market for fragrances is today dominated by a few international corporations. These often come from the chemical industry, as synthetic fragrances rather than natural ingredients are mostly used in mass markets. These companies have also been enticed by relatively high margins, leading to a sharp rise in competition. With substantial investments in branding, every year hundreds of new creations are brought onto the markets, usually in collaboration with the luxury brand companies, but the vast majority disappear fairly quickly. Besides the fragrances created by company groups, there are also small niche providers in many countries.

Tableware Tableware (cutlery, crockery, etc) is the only sector that has shown negative average annual growth since the financial crisis.

Market structure by regions Here is a look at the regional development of the market for luxury goods:

Europe: €82 billion sales (33 per cent; CAGR 06–16: 3.4 per cent). Asia-Pacific: €50 billion sales (20 per cent; CAGR 06–16: 11 per cent). Japan: €22 billion sales (8 per cent; CAGR 06–16: –0.8 per cent).

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Americas: €82 billion sales (33 per cent; CAGR 06–16: 8.7 per cent). Rest of the world: €12 billion sales (5 per cent; CAGR 06–16: 7.2 per cent).

Current growth is predominantly in emerging countries. As a result of the enormous growth in China (as Figure 1.2 shows) all other purchaser regions have lost their relative importance. This is particularly the case for the classic purchasers of luxury brands from Japan. What is also remarkable is that in 2013 around 40 per cent of worldwide total sales were undertaken by ‘luxury tourists’, which means that luxury consumption and tourism are becoming increasingly inter woven. Almost 600,000 Chinese tourists visited Switzerland in 2012; in 2008 it was only 129,000. Only around 2 per cent of Chinese people have ever travelledCOPYRIGHT abroad. MATERIAL NOT FOR REPRODUCTION Europe From a consumer perspective, sales of personal luxury goods in 2016 were €82 billion, which corresponds to around 33 per cent of global consumption. But from a manufacturer’s perspective, European companies dominate with a share of around 71 per cent of the global market for luxury goods. These companies produced in 2013 an output of over €440 billion across all luxury sectors, which equates to about 3 per cent of European GDP. In the case of personal luxury goods, this is around 74 per cent, for furniture 90 per cent, for cars 84 per cent, for food products, wines and spirits 63 per cent, for yachts 47 per cent, and for hotels and leisure 32 per cent.4, 5 Around 1 million people are directly employed by these European companies, and another half a million indirectly. The export value of the sector is over €260 billion, which is more than 10 per cent of all European exports. It is a driver of tourism, as it is assumed that around half the sales in personal luxury in Europe (approximately €37 billion) are made by tourists. Roughly €110 billion of revenue is generated in tax. The luxury goods segment also grew well ahead of the overall European economy over the past decade. By 2020 the luxury goods segment could generate between €790 and €930 billion in sales and directly employ between 1.8 and 2.2 million people. Nonetheless, a supportive political environment is necessary to tap this potential. This relates to, for example, international implementation of rights to intellectual property or the removal of trade barriers.

M01_BERGHAUS_1827_02_C01.indd 10 12/29/2017 7:37:09 PM 4% 249 21% 30% 22% 23% 2016 bio. € 4% 153 19% 28% 2009 bio. € 24.5% 24.5% 3% 159

24% COPYRIGHT23% MATERIAL21% 29% 2006 bio. € NOT FOR REPRODUCTION Hard Others Luxury Beauty Apparel Accessories 5% 9% 249 33% 20% 33% 2016 bio. € ltagamma 5% 153 30% 12% 15% 38% 2009 A bio. € 4% 159 35% 13% 11% 37% 2006 bio. € Structural changes in the global market for personal luxury goods 2006–2016 changes in the global market for personal luxury Structural

Asia- Japan Pacific Europe Rest of Americas Figure 1.2 Figure the World Bain & Company, Fondazione Fondazione Bain & Company, SOURCE

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Asia-Pacific Over the last decade the percentage of the sales from the Asia-Pacific region almost doubled from 11 to 20 per cent (from €18 to €50 billion). With a CAGR 06–16 of 11 per cent it is far above the market average (5 per cent). Specifically the years 2010–14 were very much driven by the strong demand coming from China. The increase in Chinese luxury tourism, alongside increased purchasing power, was made easier by simplification of visa policies and through the weak euro. On top of this, the prices for luxury goods in China are around 20–30 per cent higher than in Europe due to luxury taxes and import duties. Since 2014, China has seen a flattening of performance; however, in 2016, the first sign in three years of a revitalization was visible. Chinese sales reached €17 billion. Chinese consumers were COPYRIGHT MATERIAL buying again in their home market, because of tighter custom con- trols to limit shoppingNOT FOR abroad. REPRODUCTION Altogether, Chinese consumers still contributed a significant share of 30 per cent to global luxury goods purchases.

Countries and cities ‘Greater China’ (China, Hong Kong, Macau and Taiwan), with sales of about €31 billion in 2013, is behind the United States, which is the biggest national market with €62.5 billion. Countries as regional units were losing their importance to major cities such as Dubai or New York as tourism and shopping destinations (luxury hubs). Around a third of the turnover generated in Europe in 2013 is accounted for by London (€9 billion), Milan (€5 billion), and Paris (€11 billion).

Other types of luxury goods In addition to personal luxury goods (sales in 2016: €249 billion), there are other ‘luxury goods’ as well as ‘luxury services’ which contributed to the worldwide luxury market of €1,081 billion: luxury cars (€438 billion), luxury hospitality (€183 billion), fine food, wines and spirits (€112 billion), fine art and designer furniture (€72 billion), private jets and yachts (€25 billion) and luxury cruises (€2 billion).6

Luxury services The biggest and currently strongest growth segment in the overall business of luxury goods is luxury services and experiences (travel, hotels, art auctions, etc). There are several drivers of

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this strong growth. First, the customers are in developed countries; they stocked up on luxury goods in the 1990s and are now of an age when they hardly want or need more luxury products; instead they increasingly seek luxury. This is a development that will occur in developing countries in due time. Second, Generation Y is progres- sively entering the market. They define themselves less in terms of what they possess than what they have experienced (‘luxury experience’). It is the momentary pleasure that counts. Third, by reason of its greater recollection value, today’s customers derive far more satisfaction from luxury services than from the purchase of material luxury goods. Some of the leading manufacturers of personal luxury goods have reacted by diversifying into this segment to keep their customers involved with their brand world; for example, Bulgari COPYRIGHT MATERIAL operates several luxury resorts. Often partnerships have to be entered into toNOT provide FOR these REPRODUCTION experiences to meet the needs of the target group. The management of such ‘ecosystems’ requires specific components.7

The evolution of organizations in the luxury segment The luxury goods business is steeped in tradition and is built upon craftsmanship. For decades it has operated in European countries that once had powerful royal families, particularly France. To this day French companies shape this very globalized business. The way in which it operated remained unchanged for long period, but sweeping changes began to be introduced in the 1980s: production was industrialized; the products were branded; and product ranges were gradually expanded. Consolidation of the segment took place on the basis of these growth strategies. Diversified groups of companies emerged and started to seek competitive advantages. New consumer groups were accessed; communication and distribution were radically changed through the opportunities provided by the internet. Shopping benefitted from the strong growth in city tourism, especially in the major shopping districts of the world. All these advances meant new challenges in the management of luxury; expertise beyond marketing was required within to keep up with developments.8

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Luxury from the manufactory: between crafts and industrialization The historical foundation of the luxury goods business is the high- quality manufactory.9 This type of company originated in Europe in the 17th and 18th centuries and dominated the luxury goods business until the 1980s; countries were obliged to strengthen exports through the manufacture of their own products. This is, for example, how the Royal Porcelain Manufactory in Berlin came to be founded by Friedrich the Great in 1763. The manufactory superseded traditional craft businesses, as varied craftsmanship skills were now combined within one company to manufacture a product as an exclusive individual item. High-quality goods such as porcelain,COPYRIGHT silk, leather MATERIAL goods, weapons or watches were produced. The pursuit of quality and aesthetics dominated the business. The benefitsNOT FOR of scaleREPRODUCTION could not yet be exploited much, although awareness of them was increasing. Until around the time of World War I the focus in these companies was on the extraordinary products they manufactured. But more and more the mastermind and creator of these products – the designer, the artist – was becoming the focus of interest. Marketing was unnecessary for these companies, because the small and select circle of potential customers was known to the manufacturer. The companies were often icons of their craft. Some were even allowed to bear special titles. So, for instance, ‘royal warrants of appointment’ were conferred to companies that were permitted to supply the British Royal Family. These manufactories were usually run by the founder or his or her successors, who were frequently themselves talented craftsmen. The tradition associated with these businesses was of special importance.

Industrialization of luxury: scale effects and marketing While the manufactory had already taken the first small steps towards industrialization, at the beginning of the 1970s the quest for scale advantages became a focus of more and more luxury goods companies. The aim was now to make luxury goods accessible to a far larger group of buyers through more efficient manufacturing processes. This was described as the ‘democratization of luxury’. Whereas the world

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of luxury had previously been a largely closed, elitist universe, now access was opened up to anyone with the necessary purchasing power. This ‘democratization’ can be seen in the following examples:

●● Alongside premium items, a luxury brand introduces a less expensive/‘diffusion’ line.

●● Inexpensive distribution channels such as factory outlet stores or websites, sell designs from the previous season at reduced prices.

●● Lower-priced individual products are created to lure in customers.

●● In relation to its competitors, the entire brand is positioned at below average pricing (mass prestige). In striving for the greatest possible production volume, the marketing of COPYRIGHT MATERIAL luxury goods has also moved into the core of industrial logistics. Now the target groupNOT has toFOR be madeREPRODUCTION aware of the product through the development of brands whose positioning is charged with certain values. From now on, these brands are in increasing international competition with one another in terms of innovation, creativity, market access, etc. The customer is no longer some kind of ‘permanent shopper’ of luxury goods. Whereas the earlier elite remained very loyal to a limited number of manufacturers, many of the new luxury goods customers are ‘occasional shoppers’. They only allow themselves a luxury product now and then; to manage this they make savings elsewhere. Although these customers are much greater in number, they buy far less. So it has become unclear what luxury actually is. High quality and high price certainly no longer suffice as delimit- ing criteria, as very good quality products can be purchased in the non-luxury segment.

The emergence of luxury goods company groups: diversification and synergies The brands developed at great expense now have to be ‘levered’ to produce further growth. At first, this was achieved primarily through product diversification and a rather low regional diversification. The argument was that one had to offer the customer a comprehensive range. Fashion or jewellery labels started to offer perfumes or watches, but only a few were successful with this. Some even lost their independence through this diversification. For example, the level of development costs

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was underestimated, or central marketing, through which the distribution channels could be effectively controlled and the brand saved from dilution, was set up too late. Some companies then realized that they had developed a special skill through this brand growth: management of luxury brands. The question then arose: why should this knowledge not be applicable to other brands? Couldn’t the experience from very successfully managed brands be transferred to hitherto less successful ones? This was the birth of multi-brand company groups at the beginning of the 1990s, some of which only operated in one sector, such as Swatch with watches, or in several sectors, like the world’s biggest luxury goods company groups: LVMH (Paris), Kering (Paris) formerly PPR, Richemont (Geneva), the Prada Group (Milan), Labelux (Vienna/Caslano) and the COPYRIGHT MATERIAL luxury goods division of Joh A Benckiser SE, founded in 2007. Beyond marketing,NOT FOR a whole REPRODUCTION series of additional management challenges was associated with the creation of these multi-brand, multi- sector and multi-region company groups. How can such complex company groups behind these brands be successfully managed? What advantages does group affiliation offer the individual brands? How can it be ensured that the value realized by this advantage is greater than the cost of coordination and control of such a group of companies? This means that management of such company groups has now become an even more demanding task. Ensuring the existence of the individual brands independently of overwhelming, large company groups has become more demanding and not all have successfully managed this transition. As a result of this increasing ‘massification’ of luxury brands, many of them lost a great deal of their specificity. They now had to be positioned so that they were able to address as many cultural preferences as possible, which was frequently at the cost of their quality. In this manner, these products became more like convenience products; products almost like every other one. For example, often all the perfumes from a company group are produced in the same factories, regardless of their price group. It was a similar story with haute couture, which increasingly disappeared, to be replaced by ready-to-wear garments.

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With increasing competition, the competitive and cost pressures grew. Many companies confronted this by outsourcing production; to start with usually to specialized companies in their own country. Later, this was to other companies, often in Asia, that operated with far lower labour costs. However, the rising cost pressure made it necessary for other instruments to be used to ensure more efficient process flows. To introduce these and to economize is not an easy task in an environment with many creative individuals (designers, art directors, etc), because they usually have little interest in budgets, target costs, KPIs, etc.

Globalization of luxury: regional diversification and Web 2.0 In the new millennium there was a massive global expansion and regional diversificationCOPYRIGHT of the markets MATERIAL served. Once the economic crisis in the wake of the burst internet bubble at the end of 1999 had passed, there wasNOT an FOR unprecedented REPRODUCTION boom phase. Thanks to well- filled coffers, there was a series of acquisitions. This boom suffered an abrupt and severe blow in October 2008 with advent of the financial crisis. Warehouses were full and huge discounts were given. The big brands suffered from the crisis less than the small ones, and the whole segment recovered remarkably quickly: some segments attained re- cord sales in 2011. Once Japan and the United States had been the most important target countries; now the Near East and the BRIC countries have moved centre stage with their enormous growth potential and appe- tite for brands. This development is based on the new affluent middle class and a rapidly increasing number of top earners, evidenced by growing sales to tourists from these countries in the domestic market, as the luxury goods are usually considerably more expensive in their own countries. On the one hand, this regional expansion of the luxury goods segment offered enormous opportunities; on the other, it presented the companies with great challenges. Huge investment was required in new retail stores, logistics infrastructures, back offices, etc combined with the necessity of building new management competences. At the same time, the problems of fraudulent imitations (fakes) continued to grow, which large legal departments in the company group headquarters attempted to combat.

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Towards the end of the 2000s another development occurred, which significantly changed the luxury goods business: the new communication technologies. Even though the internet had been around for 40 years, its potential in the conservative setting of this segment was not recognized for a long time. Luxury and the internet were viewed as contradictory in many places, especially when it came to the use of the internet as a distribution channel – but a $6 billion turnover was made on the internet in 2010 with an annual growth of 20 per cent.10 Wealthy customers living in remote areas want to be able to buy their chosen brand products throughout the year without having to travel to one of the points of sale; these people helped fuel the growth. As the awareness of Web 2.0 technology slowly grew, many brands set up their own e-commerce sites.11 Many believed that just because COPYRIGHT MATERIAL they understood something about offline distribution of their luxury goods, they couldNOT also FOR build REPRODUCTION the internet as a new distribution channel; this soon turned out to be an expensive mistake. Success on the internet is based on a completely different business model and requires new competences. The main success factors are the user- friendliness (convenience), the breadth of selection and the entertain- ment value of the platform. These involve yet more competences (eg logistics). Selling via the internet has become even more demanding with Facebook, Twitter, Myspace, Second Life, etc. Today, almost every self-respecting fashion brand uploads its fashion shows onto the internet, to smartphones, to YouTube, etc. This means that those wanting to stand out from the crowd have to risk experimenting with new variants to gather experience ahead of the others. Further differentiation must be undertaken with a unique product range, exciting content, interactive community elements, etc.

Luxury management

This section outlines the specifics and current challenges in the management of companies in the luxury goods segment. We distinguish the challenges on the level of the individual brand or business unit (business strategy), as well as those arising in diversifiedcompany groups at the overall company level.

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The business level: value creation process and competitive strategy On the level of an individual brand or a business unit, the question always arises as to how it should position itself as uniquely as possible to achieve sustainable advantages. The starting point is the value creation process in the segment, from where the individual company can consider how it wishes to position itself in this value chain. Where are the success factors that could be activated on the basis of internal strengths to realize sustainable competitive advantages? For luxury goods businesses, the following value creation activities should be of equal validity: development of product range, procurement, production, logistics, marketing and distribution. Each element COPYRIGHT MATERIAL has to be meticulously optimized for the brand identity, and the individual elementsNOT have toFOR be trimmed REPRODUCTION for their mutual consistency to form a kind of ‘total work of art’. As little as possible should be left to chance. Not only the individual activities have to be optimized, but also the value chain as a whole, for example, with regard to the efficiency of their process flows (operational excellence). In a business shaped by so many masterminds, orientation towards a lean organization that focuses on a few key processes and operates with clear goals (develop-to-cost approach) to optimize the margin is very important. The process also has to be kept very flexible, as the company has to be in a position to react very quickly to strong growth or a sharp downturn, owing to the cyclical nature of the luxury goods business. Issues concerning the promotion of creativity and innovation are in focus across all value chains, however. So a successful company in this business must have very fine operational dynamics developed over many years, optimized again and again, which cannot be easily or quickly copied. In the following account these value creation activities are examined in some detail; activities that are of particular importance for the luxury goods business and are currently highly dynamic are addressed more comprehensively.

Development of product range Even though the luxury goods business is criticized for not being very innovative on account of its emphasis on tradition, it has to be recognized that the target group and its needs is subject to permanent change. This

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means that the company’s own concept of luxury also has to change continuously to stay close to a very discerning customer and to open up a new customer base. Luxury goods are extremely sensitive to their era and to the ego of their customer base.12 This generates pressure to innovate. And market research cannot do so much: in the field of luxury goods one often has to know what customers want before they know it themselves. People make a statement with their consumption as to how they want to be perceived, socially, physically and culturally. Tradition, prestige and quality are the hallmarks of classic luxury. But young customers may prefer a product that is fresh and unexpected. Hence traditional brands find themselves in a dilemma: how can a luxury brand find new enthusiastic customers without losing its own core customer base? Accordingly, it is a matter of following the dreams, COPYRIGHT MATERIAL wishes and needs of the target group, ie to be modifiable without neglecting coreNOT values. FOR In REPRODUCTIONthis phase of drafting and designing the product range, the company is reliant on a team of outstandingly creative minds and quality-conscious craftsmen, often headed by a famous art director who defines the style of the enterprise with which the team must also be able to empathize.

Procurement Depending on the industry in which the luxury goods segment is operating, very different procurement issues apply. In the watch industry, it is intermediate products, such as the movement, that previously had to be bought in. For many luxury goods manufacturers, commodity prices (of gold, silver, platinum, etc) also represent a considerable cost. Given high volatility, they threaten margins. In the apparel sector it is textile prices that may significantly contribute to the success of a collection. Here it is not only a matter of the quality of the textile, but also the creativity of the textile designer who, in collaboration with the designer of the clothing brand, has to bring an idea to life. In spite of all the differences in the procurement needs of the various luxury goods segments, what they all have in common is that the demands placed on suppliers are especially high so as to ensure the uniqueness promised by the luxury product. Outstanding quality and creativity determine the selection and control of suppliers. But considerations such as sustainability and adherence to global standards, compliance rules,

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regulations on hazardous substances, etc also play a role here. As the market is not always able to provide the necessary materials, many luxury goods manufacturers are also backward-integrated. The entire value creation chain should be under one’s own control as far as possible. This raises issues about one’s own flexibility if changes have to be rapidly implemented. The associated procurement logistics should be demand-driven and have a lean structure to be able to respond directly to changes in the markets (seasons, events, etc).

Production Production has to come up with what the brand wants to communicate. Conversely, in the long term the brand cannot communicate anything successfully otherCOPYRIGHT than what is deliveredMATERIAL by the product or service. The key challenge in producing the products/services offered is the broadest possibleNOT industrialization FOR REPRODUCTION of the processes so as to design them more efficiently while preserving the individuality of craftsmanship. It is always important to exploit the potential for automation wherever it exists. At the same time, high quality manual work has to be ensured wherever required. It is important too that the respective value creation activities do not proceed in isolation from one another despite their sequential nature. For example, the design team need to repeatedly feed back to production and vice versa to ensure the desired overall quality. The question of outsourcing also arises in production when considering cost and flexibility. Here the strong Swiss franc has presented production companies in Switzerland with major challenges in recent years, which has led to jobs moving abroad. The risk of outsourcing is, of course, that the quality promise made to the customer ulti- mately cannot be kept.

Logistics The traditional task of logistics is the design and handling of the physical movement of goods from the manufacturer to warehouse, sales and ship- ping departments for dispatch from there to the distribution centre of a market, and possibly to the wholesaler or direct to the subsidiary, and from there to the consumer. Thanks to the increasing availability of new technologies (scanners, RFID chips, etc), the organization and use of

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information is also covered. Software-based inventory control systems have helped solve complex logistics tasks more efficiently through an integrated view of the goods and information flows. This has enabled con- tinuous supply chain management to be aligned with demand. Today’s corporate logistics is always faced with a double challenge. On the one hand, it has to anticipate and adapt to strategic conditions more than perhaps any other function. Since the early 1960s, it has been ‘driven’ by the massive increase in world trade and ever-changing regional economic areas. Free trade zones and economic and currency communities without trade barriers (eg customs) like the EU, NAFTA or Mercosur have a strong influence on economic activities. These regional economic areas have to be taken into account when looking to provide an optimal structure for intraregional logistics chains. The COPYRIGHT MATERIAL changes in business models and new technologies place new demands on logistics, suchNOT as the FOR introduction REPRODUCTION of ‘same day door-to-door delivery’ promises from online shopping platforms. On the other hand, logistics is a major cost and it may be assumed that the cost will continue to rise over the long term, despite the cyclical nature of world trade. Prices will continue to rise due to high investment in logistics infrastructures. This means that logistics management is always confronted with questions of operational excellence. There are a number of approaches designed to improve process efficiency, such as Just in Time (JIT), Efficient Consumer Response (ECR), Direct Store Delivery (DSD) or Collaborative Planning, Forecasting and Replenishment (CPFR). These concepts pursue, among others, the following goals: reducing the logistics task workload for sales personnel in subsidiaries, optimized inventories and product availability, lower capital commitment and support for sales. Of course there is the make-or-buy question for logistics too: what do I do myself and where do I bring in specialized logistics service providers? Organizationally, the logistics competence can be bundled into a central department, for example, on the corporate level, where it can be an important source of synergy gains.

Marketing The uniqueness of a brand needs to be communicated strongly and au- thentically. Marketing is the value creation function that has to manage

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this. Since the 1970s, during the time of massification of luxury goods, marketing has been at the centre of company management.13 The luxury good and the wider target group had to be rendered accessible via the brand and its selective positioning. The product not only had to be made known, but a fascination for the brand had to be created. A luxury good needs a strong brand that tells the ‘story’ of the product. Aside from the tangible and craftsmanship-objective aspect of the products, there is the intangible and emotional part of what is sold. There are many ways to create this fascination and awareness for a brand: press days, sponsoring/charity, fairs and exhibitions, store design, brand stories, advertising, etc. Brands are strengthened by their local activities in the form of events and social occasions on the one hand, and occasions in social media on the other. The customers should COPYRIGHT MATERIAL always be able to experience the brand themselves. For instance in the fashion industryNOT thereFOR mayREPRODUCTION be fashion shows, road shows, special events for a collection, etc. In all these activities the values with which a brand is associated have to be made visible or palpable. Today the authenticity of marketing is of greater importance than in earlier years, as the customer has much greater access to information from a variety of sources, primarily from outside the company. Nobody can spin him or her a tale that is not feasible. This strengthens the power of the customer over the brand and puts trust at the centre of the customer’s relationship with it.

Distribution The expansion of distribution in global growth phases presents the luxury goods company with considerable challenges. It provides great opportunities that have to be exploited to avoid losing market share to aggressive competitors, but the risks should not be overlooked. This starts with capital requirements. Are there sufficient financial resources to keep up with the necessary growth rate? Are these resources well invested in the available sites? Are there sufficient, suitable resources on the ground (trained employees, logistics, services, etc) to run the sites professionally? Are the management systems (reporting, KPIs, CRM, etc) in place to handle distribution efficiently? The advantage of having one’s own distribution channels is optim ization of the brand presence through to the end customer, as well as

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greater proximity to the market and so being in a position to experience changes in customer behaviour as quickly as possible. Today the value of a brand is not only measured by its products, but also by the retail sites in which it is represented globally with its own stores. Are these the locations with very high or strongly growing purchasing power? The brand can and must be presented in these stores as a whole – the store as the ambassador of the brand. The one-brand store is perhaps the most important communication instrument, as it offers the customer an interactive and multisensory experience. Here the complete product range can be presented without competitor products alongside, to its full aesthetic extent. The store as a whole should ex- press the values from which the brand derives its legitimacy. For this purpose, all factors are used and optimized – the location, the building, COPYRIGHT MATERIAL the architecture, the interior furnishings and their design, the background music, theNOT colours, FOR theREPRODUCTION smells, the decoration, the illumination, the presentation of the goods, the process flows and, not least, the ap- propriately trained staff and their interactions with the customers. In the store it has to be possible to distinguish the product as an object of art, created in collaboration between artists, designers, craftsmen, etc. Individual brand points of sale are smaller and also less kitted out for exclusivity than flagship stores and are also more affordable. For many brands, the major luxury department stores are an important distribution channel, even though the retail margin is shared with the wholesaler. Either a special sales area is allocated to them in the department store or they can offer the customer their own brand experience in a shop-within-a-shop concept, but then they usually have to take over the logistics, the staff costs and the management of their shop themselves. Here the brands profit from the department store’s customers and expertise. The rise of online sales has posed a special challenge for luxury goods companies. In 2011 an estimated 3.2 per cent (€6.2. billion) of personal luxury goods were sold this way and this is an upward trend. Ten to eleven per cent of the purchases were generated directly by an online experience and 20 per cent were at least influenced online.14 In other words, even if someone would rather make their purchase in the store, their purchasing decision is often reached online if not actually made there. The website of a brand, its functionality and its

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presentation in the social media moulds the perception of the brand and the attitudes to it among customers. The number of people who follow brands on Twitter and Facebook has risen enormously.

The group level: corporate strategy and governance Diversified luxury goods companies are controlled and integrated at group level. Often this is at the corporate headquarters/centre where the company is based. This group level generates costs, of course. So that the company does not destroy value through its diversification, it is important that the group level generates greater value than it costs (corporate surplus). Three organizational areas are available for this:

1 the normative frameworkCOPYRIGHT through MATERIAL which the development of the group is channelled and orientated; NOT FOR REPRODUCTION 2 the elaboration of a corporate strategy through which the compo- sition and advancement of the portfolio of the group companies and their synergetic interaction is defined; 3 the adaptation of the leadership organization to promote the implementation of strategy in the form of strategy-focused organizational structures and management systems.15

Specification of the normative framework The more differentiated a company is in regions, brands, functional areas, etc, the greater the demand for an integrating concept. In terms of content, this happens bottom-up from the momentum of the individual operative areas, as well as from the ideals of top management and the owners concerning where and how the company would like to be seen in its next development stage. The merger of both factors is rendered explicit in a company’s normative framework, which is relayed to the operative units by top management. This is aimed at ensuring a concerted approach by the company overall without re- stricting the entrepreneurial freedom of the individual operative units too much. The normative framework has to fulfil two functions: to orientate and to channel the company’s development. Orientation is achieved

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through the company’s vision and via its strategic goals. Metaphorically speaking, the vision ambitiously sets the bar with regard to a stakeholder group considered to be especially important, over which one would like to jump in the future. According to its vision statement, Kering: ‘Aims to become leader in the luxury and sport & lifestyle markets with a portfolio of highly recognized quality international brands focusing on apparel and accessories.’ The vision of LVMH in contrast does not seem particularly orientating, as it reflects the current situation: ‘The LVMH Group (LVMH) aims to be the undisputed leader of the luxury goods sector.’ The mission statement defines the company’s value propositions for its most important stakeholder groups. What purpose and objective is to be fulfilled? LVMH states: COPYRIGHT MATERIAL The mission of the LVMH group is to represent the most refined NOT FOR REPRODUCTION qualities of Western ‘Art de Vivre’ around the world. LVMH must continue to be synonymous with both elegance and creativity. Our products, and the cultural values they embody, blend tradition and innovation, and kindle dream and fantasy.

By prescribing shared values, the company wants to set and encour- age important behavioural norms for the company’s employees. At Richemont these include: ‘Creativity/Innovation, Craftmanship, Customer Service, Learning Culture, Entrepreneurship.’ The challenge with the normative framework is usually to give it relevance for daily activity in the company. But if there really is a desire to do this, there are, in turn, a number of supporting instruments, such as measurement and setting incentives. But frequently these instruments are just ‘tokenism’ and are not professionally implemented so they cannot achieve their full effect.

Corporate strategy: portfolio configuration and synergy management Luxury goods companies have to regularly address the question of which business areas they wish to operate in and how they want to use their portfolio overall as a group to the advantage of the subsidiaries. Guided by its vision and mission, a company should have a strategic concept/rationale that describes and drives how the group as a whole

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wishes to develop, and what that would mean for the business model of the overall company. The consequences for the future configuration of the company group business can then be derived from the strategic development concept. Which new business areas do we wish to enter? Which business areas should be fostered with what weighting? Which business areas do we want to leave or disinvest from? This calls for active portfolio management. Expansion of the portfolio usually entails growth and risk aspects. Entering new business areas opens up new sources of income, but also diversifies the risk of the existing lines of business over more areas. The following diversification options have special significance: sector diversification, in which a company becomes active in a product area not previously dealt with; regional diversification, in which a company opens up COPYRIGHT MATERIAL a geographically defined and new market; and vertical diversification, which concerns NOTentry intoFOR upstream REPRODUCTION or downstream value creation stages. The more a company is diversified, the more the question of its integration arises. This is not only a matter of management in the sense of coordination of a social system that has become highly complex, but also of making the most of synergies – advantages that can arise from the structure of the group for the respective operative units and reinforcing them in their competition.16 However, to begin with, the basic question is the extent to which the company wants to integrate its business areas at all. There is a dilemma: the individual subsidiaries are usually very traditional enterprises and brands, which should be given the maximum possible autonomy so that their brands are not watered down in favour of short-term cost synergies. However, the company group may be faced with competing groups that take advantage of the available synergies (eg central purchasing of raw materials) and are therefore able to as- sist their maisons to compete in the market. A dilemma of this nature cannot be easily resolved, but in the light of competing short- and long-term goals of the respective stakeholder groups, awareness should be continually heightened.

Adaptation of the leadership organization To ensure that corporate strategy does not remain wishful thinking, the leadership organization must be structured so that it supports

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and promotes its implementation. This particularly encompasses looking at styles of interaction such as those between the corporate level and the operative units and stakeholder groups, and then adapt- ing structures and systems as necessary.17 The type of interaction between the corporate level and the brands is very much shaped by the high degree of autonomy that one wishes to give to the brands. This is why companies have to date largely confined themselves to specifying a few financial benchmarks to be incorporated in the plans that the brands have presented. But with increasing pressure to ensure certain standards (compliance) and to exploit the potential of synergies, this extremely decentralized management style has had to make way for a somewhat more centralized approach, which is also expressed in the increasing influence of corporate functions. COPYRIGHT MATERIAL If a luxury goods manufacturer is diversified in countries, brands and/or industries/sectors,NOT FOR REPRODUCTIONthis is reflected in a multidimensional organizational structure in which there are clear responsibilities in the individual operative units. The first question that arises is that of setting up divisions. Should the brands from the same sector be as- similated with their own sector divisions as far as leadership is concerned? The advantages of this are that the management team is unburdened and there is a sector-specific focus regarding knowledge management, synergies, etc. The downside is the additional management level, which can lead to greater bureaucracy. In view of the differentiation across the operative units, their integration in the sense of overall management is necessary. This especially applies to support functions usually carried out by specialized departments in the corporate headquarters. Their task is to provide the operative units with supporting services. Typically, corporate functions include market research/branding, logistics/supply chain management, research and development (R&D), legal/intellectual property (IP), personnel (HR), real estate, information technology (IT), communications/public relations/corporate affairs, investor relations, corporate development/strategy and finance. These corporate functions can act as partners of the businesses, but also as suppliers of standardized central services, often through outsourced shared services centres. If the manufacturer is strongly globally diversified, then there are often additional regional company headquarters that are

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aimed at supporting the brands nationally. This integration via corporate functions should lead to standardizations and synergies. From the perspective of the systems which support the leadership and implementation of strategy, in luxury goods management special thought has to be given to providing a normative framework and strategies for staff development, customer relationship management and reporting and controlling. With regard to the development of strategies, the fact that luxury goods are socially sensitive products has to be taken into account. The important stakeholder groups should be involved in strategy development so that any diversity of expectations is clear. Regular stakeholder dialogue should be set up to build more transparency, trust and understanding, and to utilize the existing knowledge for COPYRIGHT MATERIAL internal development. To achieve standardizationNOT FOR REPRODUCTION and synergies, an Enterprise Resource Planning (ERP) system will be useful to prevent attempts to achieve integration from becoming solely exercises in power and arbitrari- ness. There is also a need, in this exclusive customer segment, that as much as possible is known about the profile and history of customers of the company’s own brands to be able to ‘pursue’ them, for example with micro-marketing. This not only applies to their purchases, but also their preferences, activities in the social media, etc. A comprehensive Customer Relations Management (CRM) system that ex- tends beyond all language barriers and national borders has its own specific limitations and challenges, of course. The quality of employees is of crucial importance in such a brand- related business, as they are direct ambassadors for the brand and its values. There are many points at which this value creation chain, from development of the product range to sale in the boutique or via the online shop, may be disrupted by unqualified employees. Beyond the brands themselves, the luxury goods manufacturer needs all kinds of specialists: IP lawyers in the event of brand rights violations, e-commerce experts, and branding experts to name a few. Here corporate HR and the HR departments in the operative units have to ensure that all these competences are available at the right time and in adequate supply. In addition to handling remuneration systems, management by objectives, international mobility, talent management and succession planning, the

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HR functions need to concentrate on management development. Against a backdrop of short supply, there is a need to attract and retain qualified employees by organizing an internal labour market. Overall, it is also a matter of developing staff to reflect the developments in the markets at all levels. For instance, this means really developing global management teams at all levels and allowing them to gather truly international experience.18

Implications for management What conclusions can be reached from market developments for the management of companies in the luxury goods segment? The requirements for successful management of luxury goods enterprises have changed radicallyCOPYRIGHT over the decades. MATERIAL While at the outset it was a matter of managing local manufactory with various forms of craftsmanship expertise,NOT with FOR the REPRODUCTION massification of luxury goods, branding was added as an important new competence through which a brand became a global ambassador for the company’s products. But over recent years the dynamics of this business are such that management competence has once again had to expand significantly if one was to compete successfully. Seven challenges that are especially pivotal for the management of luxury goods companies are discussed below.

1 Develop a future-oriented ownership structure Even though the luxury goods segment remains highly fragmented, there has been a degree of consolidation through the formation of ever larger company groups. There have been many changes in ownership structures in recent years. Those who wanted to profit from strong growth in emerging countries achieved this with high investments in distribution, in new mono-brand stores and in e-commerce platforms. Such investments, however, were so high that they often strained independent families’ capital capacity and ability to accept risk. And this situation has not changed. If they do not keep up, they lose market share in a growing business and there is a danger of being driven out of the market. If they bring in new shareholders, they lose part of their independence. Other options include a pure (silent) backer, an active investor who also introduces management capacity and expertise, a private equity company, listing on the stock market or

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even selling to an expanding luxury goods company group. Each of these has its advantages and disadvantages that have to be carefully weighed up in good time and also in accordance with the succession issues in family companies. Over recent years it has become apparent that the profitability of the biggest luxury goods company groups correlates positively with the development of their sales volumes, and they tended to weather the financial and economic crisis better and faster than the smaller companies. But despite this, there will be room in the future for innovative and independent niche providers; small companies that manufacture luxury in the traditional sense. In times of the massification of big brands, they could again have special opportunities. This is particularly the case where very wealthy customers wish to distin- COPYRIGHT MATERIAL guish themselves from mass luxury with ‘hyper luxury’. NOT FOR REPRODUCTION 2 Keep track of the altered understanding and needs of luxury Over the last two decades in particular, luxury and luxury goods have experienced profound changes. What was once an extremely limited offering for a very elite target group has become a mass product in the high-end sector. And the question can be asked whether something so widespread and accessible can still be called ‘luxury’ in the classic sense. Pure luxury probably no longer exists in relation to the big, global brands. The new communication technologies have contributed to globalization and democratization of many luxury goods, and they are no longer a purely elitist product. There is also a new generation of customers in the offing. Gener ation Y, who will enter the market around 2020, is well educated and characterized by a tech-savvy lifestyle. A distinctively hedonistic behaviour is to be expected (ego society) whereby people primarily strive for fun, pleasure and sensual desire. This generation is almost restlessly searching for new trends and is happy to orientate itself on celebrities. It defines itself less by what it possesses than by what it has experienced (luxury experience). This all indicates that besides the old traditional brands, a whole series of new, fresh brands is likely to come into existence. A future luxury brand will not have to have a long tradition and will not have to have originated in the classic European manufacturing countries.

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3 Counter cycles with diversification Even though we could almost forget, in view of the rapid upward trend in luxury goods since 2010, the luxury goods business – with the exception of around a dozen ‘star brands’ – is cyclical. This means that one’s own business should be diversified to counter this cyclic risk. This can be achieved by regional diversification, assuming that the entire world economy will only rarely be hit by a crisis; by diversifying into other luxury goods sectors; or by spreading the risk over several brands. Obviously every diversification carries a risk of failure, especially if the new business is not close enough to the business it comes from. There are plenty of negative examples of this. Diversification therefore represents its own field of competence, which should be paid sufficient attention. COPYRIGHT MATERIAL

4 Think businessNOT globally FOR Luxury REPRODUCTION goods has become a global business – irrespective of the size of the company. It is negligent to draft a corporate strategy from a purely national perspective, even though you may only wish to concentrate on the domestic market. If the globalization of business is to be taken seriously, this has to be addressed in all aspects of the company. The following are typical questions to be answered:

●● How should investors find out about our company? Should the company be listed on an Asian stock exchange, for example? Should an active investor be included to realize the growth potential?

●● Which nationalities should be represented in the management of the company, especially at the corporate headquarters? Usually managers from the country where the company is located pre- dominate, but shouldn’t more managers be appointed from the strongly growing regions? Global standards are being introduced, especially in globally active companies. But they should be implemented with precise awareness of local conditions and needs, otherwise they only lead to bureaucracy and destruction of value.

●● How is the relationship between the parent company and regional units to be structured? What influence should the countries have on the sector management teams and the corporate centre?

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●● To what extent should the products be adapted to the specific needs of the individual regions? For example, should the women’s fashion collection be adapted for women in the Middle East?

●● How does the way of dealing with the local customer base have to be tailored? As an example: are CRM systems capable of recording Mandarin letters? Can customers be registered internationally, ie globally?

●● How does the after-sales service at the customers’ place of resi- dence have to be structured? Can repairs or adaptations be per- formed within a short time on-site (even if the products were purchased abroad)? Despite globalization, there will still be big regional differences in COPYRIGHT MATERIAL what is connected with luxury. This needs to be considered more in the future, not NOTless. FOR REPRODUCTION 5 Advance vertical integration of the business To deliver the market promise of a luxury brand (quality, etc) as far as possible, many luxury goods manufacturers are taking aspects of their value creation process back under their own control. Also, to perfect sales in an even more brand-oriented fashion, intensive forward integration is taking place, whereby global growth potential is exploited by companies via their own stores instead of via wholesalers or licence holders. Generally, further growth of some distribution channels is anticipated, eg with parallel imports, grey market activities, vintage sales or second-hand sales points. To continue growing, it is now a matter of expanding distribution beyond the key cities in the emerging countries. Distribution should not be aimed at maximizing the selling points, but at making them scarce to the right degree. Conversely, intensified backward integration ensures the supply to internal production of the suitable primary products.

6 From offline and online to no-line The sale of luxury goods and e-commerce were long considered inimical, but we now know this is not the case. Offline and online marketing and distribution can be complementary; they should go seamlessly hand in hand (no-line). However, this presents companies with great challenges. The new digital business model requires completely new competences and relatively

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high investment. However, there is plenty of opportunity for creativity and for building new forms of relationships with customers. At Louis Vuitton, for example, as a manufacturer of travel accessories rich in tradition, there is an app with which people can share travel experiences. Whoever wishes to stand out from the crowd has to venture forth with new variants and gather new experience before others do. One has to differentiate oneself through unique product ranges, exciting contents, interactive community elements, etc. Here it is important to also optimize the mix of distribution channels.

7 Put sustainability at the centre of the business model Luxury and sustainable development are not easy to reconcile at first glance. In fact, many see a direct contradiction, as they do not really consider COPYRIGHT MATERIAL luxury goods to be necessary – they see them as wasteful. In addition, the luxury goodsNOT manufacturers FOR REPRODUCTION tend not to be those who have stood out as early adopters of corporate social responsibility, and if they were, it was often in the form of foundation activities so that the social commitment was separate from the business. But is it really so difficult to build a direct bridge between the business of luxury goods and sustainable development? Luxury goods are all about high quality, durability and a certain time- lessness, so we can clearly see a link to the concept of sustainability.19, 20 Luxury consumers also often tend to want to distance themselves from a materialistic culture and to appear sensitive towards the environment and social issues. For example, they want to know how the cacao farm- ers of their favourite luxury chocolate brand are treated (payment, working conditions, etc) and how pesticides are used on the hacienda. It may even be the case that consumption of luxury with ecological awareness confers on its purchaser a new dimension of status, which he or she just happens to be able to afford. Obviously this ecological awareness must not be purely window- dressing: it has to be incorporated throughout the entire company, in its strategies, its culture, its processes, its brands, etc. This begins with sustainable, more efficient resource management in a time of ever scarcer resources, and here the use of modern technology can take effect. All processes and resources deployed (materials, intermediate products, en- ergy, etc) have to be examined, and products and services must be viewed in terms of their entire lifecycle. The issue of sustainability must

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not be dealt with on the peripheries, but must shift to the centre of the business (green luxury). A more expansive sense of social awareness should be central for luxury goods manufacturers, given the high level of social imbalance prevailing in many of the strongest growing markets. If this is ignored, further state restrictions have to be anticipated, as have already been seen in China, for example. One should also consider whether, in a more or less post-materialistic world, where it is less a matter of possessing than of experiencing luxury, one should not present customers with radically different business models, more orientated to comprehensive service packages that take into account all the aspects of sustainability in their ecosystem.

Facing dynamics and organizing oneself COPYRIGHT MATERIAL In summary, it has to be assumed that in the long term – interrupted by cyclical downturnsNOT – theFOR business REPRODUCTION of luxury goods will continue to grow strongly, but will be subject to profound changes. Many basic assumptions – such as ‘luxury can only be sold offline’ or ‘luxury will never be green’ or ‘luxury enterprises must be managed highly autonomously, which is why no synergies can be achieved with different brands’ – have almost vanished. A constructive and open approach should be taken to the criticisms of luxury consumption, such as ‘luxury goods are wasteful’, ‘luxury goods show relatively little innovation’, ‘mass luxury is not real luxury’. Those who do not adapt in good time to these and other changes in the rules of the game endanger their existence. The business of luxury goods is once again set to become more complex, raising the demands placed on professional management of the companies involved. In view of the relatively high degree of fragmenta- tion of the sector, we can also anticipate more and more consolidation. Nonetheless, there will always be a place for small manufactories if they manage to create a well-protected niche with a unique product range.

Research in luxury

Just as difficult as defining the term or delineating the market, is giving a comprehensive account of the body of research dealing with luxury. Therefore we deemed a multifaceted approach the best com- promise for achieving a rough understanding of what research in luxury today resembles.

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A bird’s-eye view of luxury research Luxury has been a topic in the scientific literature for many decades, and a substantial body of thought on the subject has been created. To reach a general understanding on where luxury has been discussed, our report is based on a quantitative literature review that takes inventory of scientifically published literature (only peer-reviewed journal articles were included in this review, books were not) on luxury with at least some relevance to managerial science. It is apparent that luxury has not only been discussed for a long time, but also with increasing frequency in the past decade: half of the scientifically published and readily available contributions on luxury have been published since 2003; 70 per cent of the articles have been published since 1993. InvestigatingCOPYRIGHT the origins MATERIALof the field, we see that scientific journals in economics,NOT FOR sociology REPRODUCTION and psychology have been contribut- ing articles with relevance to the field for the longest time (since the turn of the 20th century) and with the greatest consistency. Journals in finance, management, organizational sciences as well as marketing picked up on research into luxury in the 1940s, 1950s and 1960s. Contributions in journals with an entrepreneurial, innovation or international business background have only discovered the topic recently. In the past 20 years, contributions have been made in publications generally dealing with marketing, economics and strategic management. The earliest published documents on luxury also dealt with admin- istrative, political, sociological and economic problems. Between 1930 and 1950, articles dealing with general business as well as finance considerations started to appear, and sector-specific research began to be published. The period from1950–1970 marked the appearance of documents dealing with region-specific topics, historical reviews, human resources issues, more general thoughts on marketing and more specific consumer behaviour. Only recently have documents dealing with sales and specific product groups started to appear. In the past 20 years, the dominant areas for publications with relevance to luxury have been the consumer, economic theory and marketing strategy. Increasing the focus on management research, we find the strongest topical focus lies with research on consumer behaviour and marketing. In contrast, literature on management topics was underrepresented and accounted

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for the same amount of contributions as environmental topics or more specific topics like market research. Investigating the dimensions of literature on luxury we can see that the topic of luxury has received substantial scientific attention for more than a century, from a multitude of perspectives and in conjunction with a mixture of other topics.

Modern roots of scientific thought on luxury In the more philosophical sense of science, theories of luxury have been published since the era of classical antiquity. Several contemporary scientists with an interest in historical developments of sociological phenomena COPYRIGHThave published MATERIAL on the actualization of luxury consumption though the ages.21–3 Typically, the central theme of these works has beenNOT reiterations FOR REPRODUCTION of the long and usually critical ethical evaluations by classical philosophers of the ever-popular and seem- ingly immortal consumer behaviour of conspicuous consumption. For modern science, however, the central figure of origin remains Thorstein Veblen, sociologist and economist of the late 19th and early 20th century. His observations and conclusions described in Theory of the Leisure Class24 are seminal to the development of modern scientific thought on luxury. While this document has overshadowed earlier and comparably important works in the field25, 26 as observed by Alcott,27 it presents a socio-economic perspective on the upper class and the ostentatious spending behaviour dubbed ‘conspicuous consumption’ of its members in a detailed and, following classical example, decidedly critical way. Veblen described what can be called the first central social motivation for luxury consumption: consumption of goods with conspicuous properties, particularly conspicuous price, with the aim of signalling social prestige. This observation re- sulted in the term ‘the Veblen effect’, indicating the possibility of upward-sloping price/demand curves for conspicuous products. After Veblen’s publication at the end of the 19th century, it took several decades until a rekindling of economic interest in the field of psychology in 1940s and 1950s led to the introduction of what Veblen had observed into economic thought.28 Essential contributors to this movement were, among many others, Leibenstein and Simon.29 Following in the footsteps

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of Veblen and, more recently, Morgenstern30 and Leibenstein31 picked up the concept of conspicuous consumption, assessing in his seminal work that there had been no satisfactory approaches to integrating the phenomenon of conspicuous consumer behaviour into economic theory. While Leibenstein agreed with the general sentiment of Morgenstern’s assessment that there can be situational ‘non-additivity’ in demand functions, he disagreed with Morgenstern in the ideal approach to amend traditional, mechanistic economic theory with this respect and proposed ‘the relaxation of one of the basic implicit assumptions of the current theory – namely, that the consumption behaviour of any individual is independent of the consumption of others.’ Thus, Leibenstein introduced the relevance of the social environment to the behaviour of the individual. This paved the way for two COPYRIGHT MATERIAL additional central social motivational strategies for luxury consumption: consumptionNOT of FOR goods REPRODUCTION with the aim of belonging to a specific in-group, commonly called the bandwagon effect; and consumption of goods with the aim of distancing from a specific out-group, coined the snob effect. While later scientific contributions increased understanding of the particular results of these motivations with regard to actual consumer behaviour, these insights constitute the core of luxury consumption’s impact on economic theory.

Central drivers of luxury consumption It is commonly accepted that luxury consumption is generally not driven by any particular single desire but rather a set of motivations that originate from intrinsic as well as extrinsic needs.32–4 Following a well-received review35 of prestige-seeking behaviour, it was stated that the attraction of luxury consumption rests on five motivational patterns, some driven by social needs and others by individual needs. The following introduction to the individual factors presents the three social effects first followed by the two individual effects.

Veblen effect The Veblen effect is based on social signalling between the individual and his or her social peers, a reference group. Reference group effects

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on behaviour have been of scientific interest for several decades, starting with the original coining of the term by Hyman36 in a purely psychological context but already pointing to the role of prestige as social scale. More recent37–9 and current40–42 empirical studies and modelled simulations have contributed greatly to the understanding of reference group effects with regard to individual conspicuous consumption. Integrating these findings with the initial notion of Veblen, it can be seen that the relevance of reference group approval to consumer behaviour is a central motivation for consumption in general and of prestigious goods in particular.

Snob effect 43 The snob effect buildsCOPYRIGHT on a consumer’s MATERIAL need for social distinction. This need can be satisfied by consuming products that are available to only a small NOTgroup FOR of people, REPRODUCTION which, in cooperation with a limited horizon of social reference, can allow the illusion of possessing a product that nobody else has. Luxury consumption supports the need-satisfaction of uniqueness since the diffusion of luxury products is limited by scarcity of materials and, symbiotically, high prices.44–6 According to the existing literature, the social need for uniqueness is an important driver of consumer behaviour in general and the consumption of luxury goods in particular.

Bandwagon effect Conversely to the snob effect, the bandwagon effect builds on a consumer’s need for social integration. While the concept is by no mean trivial, an established idiom describes the motivation perfectly. ‘Keeping up with the Joneses’, refers to the social desire not to fall behind on status symbols and cultural or materialistic consumption within your immediate social environment: the people living next door. With regard to consumer behaviour, purchasing a luxury pro duct can be perceived as attaching a symbol of group-participation and ascribe desirable group-properties to the symbol wearer.47–9 The social need for association with desirable groups is an important contribution to the consumer’s self-esteem and consumption of luxury goods appears to be a valid strategy to reach this goal.

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Hedonism Consumer hedonism describes the phenomenon that, beyond the functional and rational aspects of need-satisfaction by consumption, there is an additional, strong motivator of experiencing positive emotions.50–52 Hirschman and Holbrook51 developed a classical line of argument for the influence of hedonic mental constructs: emotional desires can dominate utilitarian motives in consumption.50, 53 Consumers tend to enrich the objective product with subjective meaning to the extent of influencing buying decisions by overriding inferior functional attributes with superior hedonic connotations.54 Hedonic consumption can shift consumer’s awareness from the known reality of products, their functions and their consumption to their desired idealization of 55, 56 reality. Furthermore,COPYRIGHT studies suggest MATERIAL that seeking hedonic stimulation and seeking cognitive stimulation are regulated by independent mechanisms withNOT different FOR REPRODUCTIONcombinations of desire for each person.57 Hirschman and Holbrook continue to argue that hedonic elements in consumer behaviour gather particular traction during usage or active consumption: Since using the product poses a trade-off of investment of mental capacities, consumers may choose the consumption of a product that requires some level of hedonic participation.58,59

Perfectionism Perfectionism is characterized by striving for flawlessness and setting excessively high standards for performance, accompanied by tendencies toward overly critical evaluations of one’s own behaviour.60, 61 Research in perfectionism has yielded duality in results, pointing to constructive and, particularly, destructive effects spurred by perfectionism. It has been argued62 that perfectionism is constructed of three major dimensions: self-oriented perfectionism, other-oriented perfectionism and socially prescribed perfectionism. It is likely that all three aspects are of some relevance to luxury consumers.

Sources of the contemporary luxury research stream

Having set out the dimensions of published luxury research, reviewed the modern roots of scientific thoughts on luxury and presented the

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central drivers for luxury consumption, we turn to contemporary luxury publications and ask: which literature do current authors in the field base their research on? What do you really need to read? We approach this question by creating and reviewing a custom- made citation ranking generated from 150 current publications on luxury. The base sample of 150 articles of the five years to 2013 presented us with 4,164 literature references which we coded and analysed for frequency. Below, you will find a carefully sorted directory of the 66 most frequently cited journal articles in current luxury research.

Methodology – roots of contemporary luxury researchresearch COPYRIGHT MATERIAL EBSCO Host was used on June 2013 to retrieve articles marked as published in peer-reviewed journals,NOT FORwith full REPRODUCTION text accessibility for Swiss universities, published within the past 10 years, and matching the search term ‘luxury’. The 622 results retrieved were reviewed for journal association. To focus the analysis and to arrive at a pragmatic scope, we discarded journals that provided less than four articles in the past decade, arriving at 151 articles in our review. These 151 articles provided us with 4,164 references which were extracted and analysed for frequency. Finally, we arrived at 66 articles that were mentioned by at least four articles in our sample.

Individual perceptions of the luxury offering

Hedonic indulgence Closely related to the concept of materialism is the notion of hedonic indulgence. In our sample, we found 15 citations on two articles with this topical focus. Classically and most prominently, Hirschman and Holbrook63 laid the foundations for hedonic experience in consumption in their contribution. The authors conceptually integrate the experiential aspects of consumption, pointing to consumer fantasies, feelings and fun and thus extend the prior notions of consumer behaviour as a function of rational choice or irrational needs. In turn, Kivetz and Simonson64 are commonly cited for experimentally investigating consumer self-licensing with regard to indulgences, contrasting the more conventional approach of commitment with avoiding a hedonic temptation. These two frequently referenced publications point to two central elements of luxury consumption: the motivating role of hedonic indulgence but also the immorality of indulgence and, thus, necessity of licence to indulge.

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Beyond the product: experience Related to the fundamental concept of indulgence, we found two articles pointing toward the essential element of consumer experience. Darden and Babin65 contributed an exploration of retail personality as an empirically supported (n = 125 and n = 192) concept for affective quality. The authors consider the impact of the retail experience on the stimulated affect and its role in constructing meaning in consumers’ semantic networks. Comparably and most recently, Tynan et al66 review and conceptually integrate the role of experience marketing in both practitioner and research communities. Thus, both contributions extend the previous pointers of the value of considering consumers’ indulgences to experiences by applying both phenomena to the prime location of consumer experience and indulgence – the retail setting in detail and COPYRIGHT MATERIAL beyond the customer lifecycle in general. NOT FOR REPRODUCTION Value and scarcity While luxury consumption is commonly driven, at least in part, by social considerations, the second and interrelated component is the performance of the product or service purchased. Thus, a fundamentally important assessment of both attributes of price and quality helps the consumer establish a perception of value of an offering. This concept is the core of the contributions of both Zeithaml67 and Rao and Monroe.68 Zeithaml is cited for her conceptual integration of consumer perceptions of price, quality and value and propositions about the relationships between the elements as well as the managerial implications. In their meta-analysis on the topic, Rao and Monroe extend this notion by also considering brand and store names and present evidence for the impact of both price and brand names on perceived quality, but no significant influence of the store name. Further extending the scope of value perceptions, authors in luxury frequently cite Michael Lynn’s contribution on scarcity effects on value.69 Lynn introduced commodity theory to the field of marketing by presenting a meta-analysis of studies on this theory. Commodity theory posits that ‘scarcity enhances the value of anything that can be possessed, is useful to its possessor, and is transferable from one person to another’. In a much more applied sense, Phau and Prendergast70 came back to this crucial role of the rarity of luxury goods and highlighted the relevance of what they presented as ‘the rarity principle’ – requiring a luxury brand to achieve

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high awareness while strictly limiting accessibility. Here, Phau and Prendergast present an interesting Asian perspective to the referenced contribution by Dubois and Paternault71 on ‘the dream formula’. While Dubois and Paternault found in their survey that purchasing luxury goods realizes the dream of luxury for western consumers and decreases the drive toward luxury, Phau and Prendergast found the opposite to be true for Asian consumers. Connecting to the general sentiment of Lynn, Kemp72 presented his research on perceiving luxury and necessity in a series of three experiments, finding that, first, the perception of luxury is strongly related to the estimated price elasticity; second, a good is regarded to be a luxury if it is an object of desire rather than an object to relieve a state of discomfort; and third, that it is more acceptable for a scarce good considered to be a COPYRIGHT MATERIAL luxury to be distributed via a market than by regulated distribution. NOT FOR REPRODUCTION Luxury consumers as social beings

Social reference and social status Luxury consumption is an individual’s behaviour that is, at least to some extent, aimed at positioning him or her in a social setting. Thus, this social setting becomes important with regard to the norms of reference groups. William O Bearden discussed the influence of reference groups on consumer behaviour in two frequently cited contributions: in a project with Etzel,73 both authors examined the behaviour of consumers with regard to reference group influence on product and brand decisions; and, in cooperation with Netemeyer and Teel,74 a scale for measuring consumer susceptibility to interpersonal influence was developed. In the latter, the construct of susceptibility to interpersonal influence is defined as:

the need to identify with or enhance one’s image in the opinion of significant others through the acquisition and use of products and brands, the willingness to conform to the expectations of others regarding purchase decisions, and/or the tendency to learn about products and services by observing others or seeking information from others.

Amaldoss and Jain75 are frequently cited for their study, which integrates the social value of exclusivity in a luxury good with the necessary social setting providing followers. The relevance of reference

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group influence on aligning consumption behaviour with an existing reference provides an important prerequisite for further exploration of luxury consumer behaviour. However, luxury consumption goes beyond aligning with the reference group and also includes choosing the socially desirable reference group to align to, to seek status. Corneo and Jeanne76 provided an economic model of endogenous growth in which:

a desire for social status leads individuals to care about their relative wealth. The growth rate of the economy is socially optimal if the status motive is sufficiently important, but the presence of status seeking may also lead to excessive growth.

This contribution highlighted the economic driving force behind the COPYRIGHT MATERIAL nature of status-seeking behaviour where status is correlated with wealth. In a moreNOT applied FOR setting, REPRODUCTION O’Cass and McEwen77 contributed empirical support (survey, n = 315, student sample) for the connection between status consumption and conspicuous consumption. Further aiding the distinction between status and conspicuousness, Truong et al 78 presented their findings in 2008. While both terms appear closely related, conspicuousness in a luxury brand is confined to motivating social action while status goods may be bought for social or individual reasons. The concepts differ significantly according to the situation in which they are measured. Making a connection between status and the impact of success, we find frequently quoted literature on how being confronted with success can increase the desire for status consumption: Mandel et al 79 investigated the impact of stories of success or failure on consumers’ desire for luxury brands and found that a narrative on a similar and successful person increases the desire for luxury consumption and that reading a story on a dissimilar and successful person decreases it.

Culture While the influence of reference groups is certainly important in luxury consumption, its social scope is rather limited to a local peer group. Extending the scope to a societal or cultural group, there are two contributions that introduce the notion of culture and thus shift the focus to a societal scale. Here, Markus and Kitayama80 review, conceptually integrate and discuss the impact of culture on the

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‘construals of the self, of others and of the interdependence of the two’. Following a purely psychological approach to the phenomenon, the authors investigate these construals and conclude consequences for cognition, emotion, and motivation. In a more applied sense, Dubois and Duquesne81 presented their findings of an exploratory questionnaire study on the topic of which metric was more appropriate in delineating the luxury consumer segment: income or culture? The authors found that while income is a viable approach to delineate the luxury segment, a more worthwhile approach may, indeed, be consumers’ perspective on cultural change. Dubois and Duquesne found that consumers with a more positive attitude towards cultural change also show increased consumption of luxury goods for their symbolic uses. COPYRIGHT MATERIAL Beyond the influence of culture on social conceptions and on consumer behaviour,NOT culture FOR also REPRODUCTION impacts the general concept of luxury and consumers’ attitude toward it. Dubois et al82 added one of the most frequently cited studies in the luxury field. Their study aggre- gates data from 20 countries to present differences in attitudes to luxury. They find three specific consumer segments: elitists who aim to differentiate themselves from the general consumer public; democratic consumers who believe that today’s luxury goods are a commodity and can be mass produced; and distanced consumers who do not feel attracted to or interested in luxury. The authors conclude by presenting their findings of the 20 countries in the three dimensions of elitist, democratic, and distant.

Materialism While the modern concept of luxury includes post- materialist perspectives, materialism still remains at the heart of luxury consumption. Contemporary publications in luxury commonly point to literature dealing with the central behavioural phenomenon of materialism. For luxury, materialism is particularly important with regard to consumers’ self-extension behaviour, expression of materialistic values, recognition of material symbols, attribution of these symbols to socio-economic strata, and the relation of spending to saving. Thus, it is no surprise that literature on materialism has 42 citations in our study. Centrally, Russell W Belk is cited with his fundamental and classic contribution on materialism with two survey studies83 as well

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as with his review and discussion of the role of possessions for the extended self,84 giving an excellent and comprehensive account of the previous literature. Richins and Dawson85 contributed and evaluated their scale on consumer materialism, adopting a consumer values perspective, giving acquisition centrality, acquisition as the pursuit of hap- piness, and possession-defined success at the centre of their study. The later review of studies, which employed the material values scale, ex- tends and improves on the original contribution.86 Wong87 contributed a survey-based (n = 200) investigation of the link between materialism and conspicuousness, finding significant support for a correlation. Taking on a more applied perspective, Grant McCracken presents a detailed account of the structure and movement of consumer goods’ cultural meaning in his seminal conceptual and review contribution88 COPYRIGHT MATERIAL and later in his book.89 McCracken integrates four central rituals (exchange, possession,NOT FOR grooming REPRODUCTION and divestment) in which goods transfer meaning, previously endowed by advertising and the production system, to the individual consumer. Three single-author contributions in the 1990s present the roles of material possessions as stereotypes for specific socio-economic groups in a quasi-experimental setting,90 the connection between special possessions and the expression of material values, and an economic modelling perspective on saving behaviour in relation to wealth.91 Park et al 92 present their framework of brand concept management for selecting, implementing and controlling a brand image, while Aaker93 integrates personality psychology with brand management and develops and evaluates her scale to measure brand personality dimensions. Finally, Chang and Arkin94 are frequently cited with their three studies on materialism as an attempt to cope with uncertainty.

Uniqueness Luxury consumption means dealing with the development and the positioning of the self in relation to what is the norm. More specifically, luxury consumption means making a calculated move to exceed the appropriate societal norm, to go beyond what is expected. Thus, it follows quite naturally that contemporary researchers point to findings with regard to this notion of individuality and uniqueness: Snyder and Fromkin95 are cited with their perspective and scale development on abnormality as a positive characteristic. The authors

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describe fundamental research on situational determinants of uniqueness and develop a measure of need for uniqueness. More recently and more applied in a sense of materialistic consumption, Tian et al 96 review consumers’ need for uniqueness and develop and evaluate their scale on the topic. They define consumers’ need for uniqueness as:

an individual’s pursuit of differentness relative to others that is achieved through the acquisition, utilization, and disposition of consumer goods for the purpose of developing and enhancing one’s personal and social identity.

The authors discuss the impact of this need to support a better understanding of consumer behaviour. In research on the desire for uniqueness we find a central prerequisite for consumer behaviour and thus COPYRIGHT MATERIAL implications for management. NOT FOR REPRODUCTION Resulting phenomena

Measuring, segmenting and globalizing As luxury research outgrew its infancy, the need for reliable measuring tools became more important. There are two frequently cited approaches to the problem. Chronologically first, Eastman et al 97 contributed an intricately evaluated scale development on status consumption in consumer behaviour. Christodoulides et al 98 investigated Vigneron and Johnson’s original Brand Luxury Index (BLI) scale and found support for the general applicability of the BLI, but also described a further need for investigation into the changing consumption patterns as well as inter- cultural differences. Vickers and Renand99 contributed their own exploration of three classic conceptual dimensions of the luxury brand – functionalism, symbolism and experientialism – and integrated those into their scale. Berthon et al100 contributed a substantial insight into the aspects of aesthetics and preservation of luxury brands, integrating a conceptu- alization of luxury brands and an exploration of values behind luxury consumption. They present a typology of brands and derive implications for management, chief of which is that not all luxury brands are alike. This represents another important stream that evolved with the maturing of the field: the continuing drive toward segmenting the

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luxury market as it became clearer that single insights seldom cover the whole luxury phenomenon. In one of several articles, Laurent and Dubois101 contributed a frequently cited scale development on ‘excur- sionists’ embarking on luxury shopping sprees only in certain situa- tions. Wiedmann et al102 based their specific scale of a value-based segmentation of luxury consumption behaviour on Vigneron and Johnson’s seminal work of 1999 and later extend their work.103 In the late 1990s, the trend of analysing luxury consumption cross- culturally appeared. This trend has, in the meantime, turned into a stream within the luxury research field, mainly driven by the strong demand in Asian markets for luxury goods and the cultural differences between the West and the East. Here, Wong and Ahuvia104 contributed a conceptual perspective on the cultural factors that support COPYRIGHT MATERIAL the Asian drive to luxury. In 2001, Dubois et al contributed their unpublished butNOT highly FOR regarded REPRODUCTION Consumer Rapport to Luxury,105 an early version of their cross-cultural research. The authors contributed an international segmentation of consumers on their attitudes to luxury: in a study carried out in 20 countries, the authors identified three attitude segments in a Western cultural context. Prendergast and Wong106 contributed another perspective on consumer behaviour specific to the Asian market by analysing parents’ luxury consumption behaviour when shopping for their children. Two additional contributions dealing with specifics of Asian consumer behaviour were made by Heaney et al, 107 focusing on status consumption’s relationship with materialism and social comparison orientation in a survey with Malaysian consumers; and by Park et al,108 surveying the luxury purchasing behaviour of young Korean consumers. In a unique perspective, Shukla109 contributed an article on the socio-psychological, brand and situational antecedents of status consumption using two surveys with consumers in Great Britain and India. This contribution remains one of the few perspectives that expand their model beyond the consumer behaviour side of the consumption paradigm to include factors that are controlled by brand management.

Branding and counterfeiting brands While consumption has always been a communicative activity, the role of signalling is particularly important to the luxury market’s main behavioural driver of business: conspicuous consumption. Here, communicating takes priority over

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merely satisfying a need. Thus, the role of the brand as the central element of communication in any market-oriented business assumes a more important position. The brand of a luxury organization advances from a mere tool of positioning and communication to the fundamental service offering: enabling consumers to behave conspicuously with the branded product. It is no surprise that the field of branding has benefited from the most attention with regard to managerially relevant research. In a particularly frequently quoted study, Dubois and 110 Paternault surveyed awareness, purchase and dream in their study of the US consumer market. They found that awareness of luxury brands increases the likelihood of considering buying a product if consumers may choose freely. But, as consumers purchase a product of the brand, this dream of owning a particular luxury brand becomes COPYRIGHT MATERIAL real and thus loses its appeal. This study was replicated in Asia by Wong and ZaichkowskyNOT FOR111 REPRODUCTION to find diametric differences in consumer behaviour, probably fuelled by cultural influences. The authors discovered that in Hong Kong, luxury consumption did not have the same negative effect on brand appeal. Even more fundamentally, O’Cass and Frost112 presented their survey study on the effects of non- product-related brand associations on status and conspicuous consumption. They found that:

the status-conscious market is more likely to be affected by the symbolic characteristics of a brand; feelings aroused by the brand; and by the degree of congruency between the brand-user’s self-image and the brand’s image itself. Results also indicate that the higher the symbolic characteristics, the stronger the positive feelings, and the greater the congruency between the consumer and brand image, the greater the likelihood of the brand being perceived as possessing high status elements.

The particular role of the brand in providing a functional service to consumers in the luxury market leads to heightened managerial interest in optimally steering the luxury brand. It is no surprise that luxury brand management commonly is not handled by the marketing department, but is rather a key task for top management. Given that the brand assumes a central role in the communicative efforts of consumers, it follows that a behaviour of conspicuous consumption is the imitation of brands. In the luxury market, consumers

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pay high prices for products with a combination of high functional and demonstrative performance. If conspicuous consumption is a consumer’s main aim, functional performance becomes less and less important as does the fact that a product has been manufactured to the highest standards to achieve that functional performance. Counterfeiting the symbolic meaning of the product – while illegal – becomes rational consumer behaviour for reaching demonstrative performance at a low price with a risk of losing some or most of the product’s qualitative performance. Research on counterfeiting has become one of the main streams in the luxury literature with the following contributions being among the most frequently cited by current authors. In chronological order, Grossmann and Shapiro113 lead with their modelled simulation of the COPYRIGHT MATERIAL phenomenon in a duality of high-quality, domestic products versus low-quality productsNOT FOR of foreign REPRODUCTION origin, considering both legitimate and illegal market competition. Bloch et al114 consider the consumer an accomplice in counterfeiting and build on the increasing demand for counterfeit products as presented in the results of their field ex- periment. Penz and Stöttinger115 contributed a well-received survey study on the drivers behind purchasing counterfeit products and provide a model integrating key motivators. Gentry et al116 are frequently cited for their investigation on brand and product counterfeiting from a consumer search perspective. Motivated by the increasing difficulty of identifying counterfeits as their quality improves, the authors carried out interviews with 102 consumers and found specific clues that consumers use to identify counterfeits as well as the role of face and taste in the decision to purchase luxury goods. Nia and Zaichkowsky117 contribute a unique and critical perspective supported by a survey study on whether counterfeiting is really as problematic as managers and fellow researchers like to depict. They ask whether counterfeits devalue the ownership of luxury brands and find that consumers of legitimate luxury goods believed that ‘counterfeits were inferior products and believed that ownership of original products was more prestigious. Conversely, those who owned more counterfeits had a positive image of them and did not believe these products were inferior’.

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Management of luxury The management of luxury is one of the newest chapters in luxury research. Here, only a few contributions have been recognized to a degree that our citation index indicated relevance. The earliest contribution in this sample was authored by Groth,118 who conceptually explored the potential of brand exclusivity on pricing, introducing the exclusive value principle. In a similar direction, Pantzalis119 positioned his frequently cited dissertation on the exclusivity strategies in pricing and brand extension. Exploring the other end of the exclusivity spectrum, Nueno and Quelch120 contributed a conceptual perspective on the mass marketing of luxury, which found substantial resonance. As the luxury market is filled with interesting cases, it is not sur- prising that case studies have been a frequent approach to better un- COPYRIGHT MATERIAL derstanding the industry. Two case studies have been particularly well received byNOT the communityFOR REPRODUCTION with regard to citations: Moore and Britwistle’s contribution on the business model of Burberry,121 and Phau and Teah’s case study on Prada and its particular plight with counterfeiting.122 Fionda and Moore123 contributed an integration of 12 case studies and arrived at nine interrelated key luxury fashion brand attributes. Finally, Kapferer and Bastien124 contributed their take on the management of luxury which, today, is considered a central resource on thought for luxury management. Here, the authors describe their concept of inverting most of the rules held dear by many marketing managers in other brands in order to be successful in the luxury market.

Thoughts on future perspectives of luxury research The luxury research field is currently very active – just as the worldwide sales of luxury goods are climbing higher and higher. But the fascination with luxury will hit the same downturns as any other sector. While the underlying drive towards luxury is unlikely to subside, it seems to be safe to say that it will not take much more than a recession in Asia for the luxury market to take a substantial blow. Most likely there will always be wealthy people able to afford true luxury goods, but the sector has built the bulk of its financial strength not on the top-tier customers, but on making luxury accessible to the masses.

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Those masses will not buy when discretionary income decreases. Furthermore, the move to frugality and less ostentatious behaviour in consumer culture during a recession decreases the drive toward luxury consumption even further. Thus, today’s success of the luxury sector points to at least two things: first, preparing for the inevitable and second, rediscovering the roots of the field. Research in luxury management will find substantial resonance with practitioners by orienting efforts toward engaging the central problems of companies in a luxury market in economic crises. Here, avoiding and handling the critical blows takes priority – how can luxury brands avoid being critically wounded in an economic downturn? Answers may involve diversification, cooperation and business alliances. Dealing with adverse conditions is important – how can luxury brands adjust COPYRIGHT MATERIAL their business in times of crises without damaging their image and jeop- ardizing commercialNOT potential FOR REPRODUCTION in the next upswing? Answers may point to brand architectures, acquisition or range management, and efficient processes and crucial initiatives to avoid a downturn. How can valuable brands be kept alive and intact? Answers may include the efficient management of strategic (downturn) initiatives, increasing flexibility and redundancy, scenario thinking, communication and brand-building techniques but also innovation management or endorser marketing. Research in luxury management will contribute substantially to the industry and will reap the rewards of this work if the community tackles these issues. Research in luxury management could find substantial resonance with the scientific community in more fundamental fields by rediscovering and reintegrating theoretical foundations into our research. A big share of current published research on luxury appears driven by impressions from the applied field, aggregated for the practitioner audience. Articles’ arguments usually start and end in applied perspectives, rarely incorporating more fundamental, previously established theoretical research. There are many specific phenomena that call for an underlying theoretical explication. While a stronger resonance with the scientific community may seem like an exercise in vanity, this resonance decides whether luxury research is recognized as a field in which academic careers can be made. Given the value of seniority in a scientific community and the increasingly high hurdles for attaining tenure,

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recognition of luxury as a scientifically researchable phenomenon with interesting implications for every business that aims to generate a premium value will be necessary to establish the field further. In addition the field can take advantage of a more integrated and holistic view of the luxury phenomena. Most luxury goods managers only see their own industry segment. But we can profit from deriving more generic knowledge that can be applied across most luxury businesses. Also, interdisciplinary work can help move the field forward and gain a better understanding of the luxury phenomena. Luxury research has its bridgeheads in both fundamental scientific theory and the practitioners in the sector. The strength of the community is likely to determine whether this position will be an uneasy sitting-between-the-chairs or whether this topic will offer the ideal COPYRIGHT MATERIAL distance to both arenas to illuminate the practical topic with theoretical light andNOT methodological FOR REPRODUCTION rigour

Notes

1 D’Arpizio, C, Levato, F, Zito, D, Kamel, M-A, and Montgolfier, J de (2017) Luxury goods worldwide market study, Fall-Winter 2016, Bain & Company. Most statistical data on the market for luxury goods are based on two sources: the first is Bain and Company which, since 2000, together with the Altagamma Foundation (the leading Italian association of luxury goods manufacturers) has examined the market and financial position of 230 worldwide leading luxury goods manufacturers and markets by means of surveys and publishes the results in Luxury Goods Worldwide Market Observatory. The Altagamma Foundation is headed by Claudia D’Arpizio, partner at Bain/Milan. The data used in this chapter are mainly based on this source. They give a rough indication of the market structures and developments. The second source is the Boston Consulting Group: BCG together with Ipsos and the International Luxury Business Association surveys 1,000 wealthy individuals in eight industrial countries (France, Germany, Italy, Japan, South Korea, Spain, the United Kingdom and the United States) as well as in the BRIC countries. 2 Within this personal luxury segment, the segment of ‘absolute luxury’ (high-end luxury), which is little affected by economic cycles, is distinguished with a share of around 20 per cent (€43 billion) in 2012; the expanding target group is ‘High/Ultra Net Worth Individuals’.

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3 Müller-Stewens, G and Menz, M (2013) Akris: Competition in the high-end fashion industry, Case study, University St. Gallen, St.Gallen, or www.thecasecentre.org 4 ECCIA (accessed 1 November 2013) European Cultural and Creative Industries Alliance – ECCIA (online) http://www.eccia.eu/index. php?id=5#page_21 5 Frontier Economics (accessed 1 November 2013) The value of the cultural and creative industries to the European economy (online) http://www.eccia.eu/uploads/media/The_Study_01.pdf 6 D’Arpizio, C, Levato, F, Zito, D, Kamel, M-A, and Montgolfier, J de (2017) Luxury goods worldwide market study, Fall-Winter 2016, Bain & Company, p. 6. 7 Achille, A, Bellaiche, J and Lui, V (accessed 1 November 2013) Luxury Ecosystems: ControllingCOPYRIGHT your brand MATERIAL while letting it go (online) https:// www.bcgperspectives.com/content/articles/consumer_products_retail_ luxury_ecosystems_controlling_your_brand_while_letting_go/NOT FOR REPRODUCTION 8 Coste-Maniere, I, Panchout, K and Molas, J (2012) The evolution of the luxury market: stairway to heaven? in (eds) J Hoffmann and I Coste-Maniere, Luxury Strategy in Action, pp 5–21, Palgrave MacMillan, London 9 The term ‘manufactory’ is still used today if the high level and quality of the individual craft component is to be emphasized. The Porcelain Manufactory of Meissen still exists, and celebrated its 300th anniversary in 2011. But there are also newly formed companies that prefer to position themselves as manufactories, such as the small eyewear manufactory Pascal Nüesch, which manufactures customized eyewear from Indian buffalo horn under the Noosh-Optix label. 10 D’Arpizio, C (accessed 1 November 2013) Worldwide Luxury Markets Monitor Spring 2013 Update (online) http://www.fccihk.com/ files/dpt_image/5_committees/library/Library%20Luxury/2013%20 Bain%20Luxury%20Study%20Spring%20Update.pdf 11 Birindelli, F (2012) Luxury business: multinational organizations and global specializations, in (eds) J Hoffmann and I Coste-Maniere, Luxury Strategy in Action, pp 22–36, Palgrave MacMillan, London 12 Koehn, N (2001) Brand New: How entrepreneurs earned customers’ trust from Wedgwood to Dell, Harvard Business Review Press, Boston, MA 13 Kapferer, J and Bastien, V (2012) The Luxury Strategy: Break the rules of marketing to build luxury brands, Kogan Page, London

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