September - November 2004

KeepingKeeping TheThe SStrategictrategic BalanceBalance IInn TThehe NNewew LuxuryLuxury MarketMarket By Gabriela Alvarez, Victoria Kemanian and Professor Thomas Malnight

An expanded new luxury space has proved irresistible to traditional luxury groups, mass- market conglomerates and hundreds of small ‘boutique’ companies. Winning in this space requires a delicate balancing act of stretching the brand without breaking it, expanding the product portfolio without diluting the profitability of core brands, and extending company capabilities without losing sources of advantage in increasingly competitive luxury markets.

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luxury. Leading this growth is a ‘Global Elite’, a sector estimated to represent 56 million households Traditional worldwide with annual earnings over $100,000. Luxury Traditional luxury expand This sector has grown 40% in size in the last five and ‘democratise’ years and is expected to reach 77 million 1 Affordable luxury households by 2007. Additionally, a recent U.S. Luxury opinion poll found that 19% of American taxpayers believed themselves to be in the top 1% of earners, New luxury boutiques enter space

Markets with a further 20% expecting to end up there in their lifetime.2 Thus a large population either Mass belongs to this luxury segment or behaves as if it does. Consumer brands expand searching profitable spaces On the other side, luxury has become more affordable through lower-priced items, still with a significant premium over other products in their

etc category. Affordable luxury products are within the

Fashion reach of a consumer willing to ‘splurge’ in a Watches Jewellery Perfumes Cosmetics category. Even if a Chanel suit is still beyond the Accessories

Leather Goods Leather reach of many, Chanel makeup offers a sense of luxury at an affordable price. Consumers today are choosing to spend in Products different ways, prioritising ‘feeling good’ and well- Fig 1. The Luxury Triangle being over ‘owning’ as a status symbol. Consumers also exhibit a bipolar tendency in their predisposition to pay. On one hand, they spend more when there is a strong value proposition, but he luxury market space has—by tradition— they can be demanding price buyers flocking to been a select market where only the most discount outlets for standard products. Texclusive brands compete, enjoyed by only Competition in luxury markets has also the wealthiest individuals. Nowadays, a new undergone transformation. Entrepreneurs have expanded ‘luxury’ market spans a wide range of targeted consumers with concept-and-experience prices and product categories, effectively redefining based luxury, creating charismatic and stylish the notion of luxury to include a limited edition personality brands. At the same time, the growth of crocodile handbag, a line of spa bath products and the ‘affordable luxury’ market has attracted large even a cup of speciality espresso coffee. consumer brand companies suffering from slowing As luxury markets expanded, their premiums growth rates, private label competition, and increasing attracted companies from across the spectrum. But threats from concentration in distribution channels. It success in this attractive space has not been is not surprising that many companies looked to homogeneously ‘luxurious’. For every success story luxury markets as one way to stimulate growth. there have been tales of overstretched brands, Thus traditional luxury markets evolved from a expanding luxury groups remaining heavily narrow band of products and brands serving a dependent on a few core brands for profitability, select group of consumers to a ‘luxury triangle,’ and companies entering and then exiting the luxury spanning traditional and new luxury products and markets. consumer groups. The emergence of this luxury In this highly competitive space a new set of triangle (Figure 1) has subsequently changed the ‘luxury survival rules’ is emerging, requiring rules of competition and requirements for success. successful players to maintain a delicate balance: stretching brands without losing exclusivity, CHALLENGES TO WINNING IN THE expanding brand portfolios without diluting LUXURY TRIANGLE profitability, and extending capabilities without Success in the luxury triangle requires addressing three losing unique sources of advantage. fundamental challenges and involves deciding how far to stretch brands, portfolios, and capabilities. THE ‘LUXURY TRIANGLE’: THE NEW Issue 1: How far can a company stretch luxury LUXURY LANDSCAPE brands, without eroding their exclusive image? Rising disposable income and demographic A stroll in the new ‘Spazio Armani’ in Milan offers changes have allowed more people to ‘afford’ the opportunity to indulge in a pair of Armani Jeans

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or a Giorgio Armani suit. But you can also find group, Gucci, remains dependent on the Gucci Armani homeware, sunglasses, perfumes and even brand for 60% of revenues - and all of its profits. chocolates. The Italian firm has spread its aura of Table 1 outlines lead brand contribution to fashion to a wide variety of product categories. revenues and profits at several luxury groups, However, as Pierre Cardin discovered in the highlighting the challenges of a luxury portfolio 1980s, a brand cannot be extended indefinitely—if strategy. Can success in one luxury brand be it becomes too common it is devalued. Stamping replicated in another? What real synergies can be the brand name indiscriminately on T-shirts, key transferred from one luxury brand to another? chains and even paint can effectively destroy a brand. Gucci was following a similar path, as Issue 3: How far can a company stretch its internal family disputes resulted in a largely capabilities, before eroding its advantage in uncontrolled multiplication of licences. Domenico luxury markets? De Sole, head of Gucci from 1994 to 2004, Alongside luxury firms, consumer brand giants like retransformed the company by buying back Unilever ventured into affordable luxury markets. licences and, with designer Tom Ford, revived the These markets were created as firms offered brand’s value. However, no sooner had they products that, while at a premium over traditional achieved this than they embarked again on products in their category, were accessible to a extending Gucci’s presence into ready-to-wear, growing number of consumers. One successful accessories, sunglasses, shoes, fragrances and example was Unilever’s transformation of its Dove watches. This expansion was tightly controlled, yet soap brand into a global franchise with 2003 sales its future success is far from certain. Gucci’s current totaling more than $2.5 billion, making it the world's financial performance may again signal the largest cleansing brand. limitations of aggressive expansion. The impetus to stretch the Dove brand came as As Gucci, Armani and other luxury brands have part of a strategy of moving from being product-to demonstrated, brand equity can be successfully brand-driven. For Dove, this involved leveraging the leveraged into new product categories, lower-ticket brand’s luxurious moisturising image into an entire items and product extensions. But they constantly line of affordable luxury products. The strategy risk becoming devalued in the eye of the consumer. resulted in building a brand franchise growing at a What strategies do successful companies employ 30% annual rate, while the brand’s traditional bar to maintain the aura of glamour and exclusivity soap market declined at 2% per year. while embarking on expansive brand strategies? For Dove, Unilever leveraged its marketing expertise, consumer intimacy, technical expertise, Issue 2: How far can companies expand their and global customer relationships. However, the luxury portfolio in markets where creativity company has not been always been successful, as and exclusivity limit synergies? suggested by a series of setbacks and Bernard Arnault, head of LVMH, challenged the restructurings of its ‘prestige’ fragrance brands. In view that luxury companies have to focus on a these areas, Unilever lacks a unique brand single brand. By ‘managing creativity for the sake of franchise and, more importantly, it had weaker profit and growth…’ Arnault built an empire consumer intimacy and customer relations to build controlling over 50 luxury brands, acquiring brands brands in increasingly competitive markets. where the common denominator was the luxury The challenge of stretching firm capabilities appeal to consumers. However, LVMH still relies on involves understanding a company’s unique its Louis Vuitton brand for 20% of revenues and, combination of skills and know-how applicable to more importantly, for 60% of profits. Another luxury luxury markets. What is the mix of firm capabilities that enables success in luxury markets against TABLE 1: LEAD BRAND CONTRIBUTION TO strong competition? FINANCIAL RESULTS (2002) THE SURVIVAL RULES IN THE LUXURY TRIANGLE Company Lead Brand % of total revenues % of total profits Stretching the brand…while maintaining exclusivity LVMH Louis Vuitton 22% 62% Stretching successful brands is tempting. Besides Gucci Gucci 61% 126% the opportunity it affords for increased revenue, Richemont Cartier 60% 66% lending the ‘magic touch’ to related products helps Tod’s Tod’s 60% na leverage the investments required to support a global brand. Stretching can involve extending a Source: Company Data

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STAMPING THE BRAND NAME INDISCRIMINATELY ON T-SHIRTS, KEY CHAINS AND EVEN PAINT CAN EFFECTIVELY DESTROY A BRAND

brand into ‘affordable,’ ‘affinity’ or ‘diffusion’ Keep a tight control on quality, product lines. distribution and production: Successful Expansion into ‘affordable’ categories involves companies managing the tension between offering products that offer a ‘taste of luxury’ to a brand extension and exclusivity have kept broader market. Although at significant premium to tight control on quality in all aspects of its standard products, lower unit prices make the relationship with consumers. Brands like products within the reach of a wider population. Gucci, Yves Saint Laurent and Burberry Common categories for ‘affordable’ expansion were rescued by the aggressive buying include handbags and leather accessories, back of poorly managed licences. Control sunglasses, perfumes, cosmetics and other of market ‘touch points’ allows brand accessory products. At Gucci, accessories today image to be synchronised along the entire make up 70% of total sales. Even Chloé, consumer experience. But complete vertical traditionally focused on clothes, launched a line of integration is not the only way to achieve bags and eyewear in 2001 and in just two years this. Licences are necessary and can be accessories represent 25% of sales. beneficial, for example, in manufacturing Expansion into ‘affinity’ categories has been specialised products where the brand popular for luxury brands. Watchmakers Bulgari owner has little experience (e.g. Louis and Chopard found natural extension of watch Vuitton sunglasses, Calvin Klein watches). brands in jewellery. While Bulgari traditionally had a Licences are also beneficial for access to jewellery line complementing its watch offerings, a distinct geographic markets, as Burberry series of line introductions helped the jewellery and Paul Smith found in Japan. But these division grow faster than the original watch licences are tightly controlled. According to business. Bulgari further extended to perfumes in British designer Paul Smith, “The key thing 1993, a line of accessories in 1997, eyewear in is the control of all aspects. I have been to 1998 and more recently even ventured into product Japan 48 times since 1984.” categories such as ‘design hotels’. Maintain the aspirational value of the ‘Diffusion’ offerings involve building a family of brand: Legendary brands maintain, above brands with different propositions in the same all, their exclusive aura. The perception of product category, but benefit from the halo effect of exclusivity can be created in many ways, the parent brand. Armani has done this in the including limited distribution or production, fashion industry with five distinct brands ranging brand communication and high price tags. from the high-end Giorgio Armani to the informal Actively restricting access can also create a everyday wear of Armani Exchange and Armani sense of uniqueness. For example, the Jeans. Each brand is aimed at a different customer Hermes Birkin bag, named after British segment and has its own positioning, distribution actress Jane Birkin, has an opening price of network and retail strategy. $6,000 and a top of the line price of $85,000 - if you fancy crocodile leather and Regardless of the approach, three principles can closures adorned with diamonds. But help a company profit from the expansion without it is also impossible for a customer to walk diluting its most valuable asset, the value of the into a Hermes boutique—the sole retailers brand: of the bag—and buy one. The waiting list

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reached two and a half years when the value of synergies is often included in company closed it, and a waiting list for the acquisition prices. This is dangerous for waiting list opened. Prada also offers luxury acquisitions, where the value of limited edition items, and Dior has synergies has yet to be established and a developed a made-to-measure business. brand’s luxury image can demand Even with high margins, these products premiums. The danger of overpaying for represent a tiny fraction of turnover, but luxury brands should be carefully they raise the ‘aspirational bar’ of the entire considered. Competing in luxury markets is brand. less likely to benefit from traditional Avoid overexposure: Brand extension in synergies and rather synergies must be luxury markets is more limited than other identified in true value-creating activities. markets. Even if companies control the Putting two medium-sized troubled firms entire value chain and selectively create together does not produce a winner; it exclusive items, the pressure to grow can often just produces a large troubled firm. ultimately lead to the brand losing its allure Revitalising brands can be cheaper: through overexposure to the point of Luxury conglomerates and consumer customer disappointment. companies have been more successful reviving brands than creating them. Procter Expanding the brand portfolio… without & Gamble converted its traditional beauty diluting profitability brand ‘Oil of Olay’ into the new ‘Olay’, an With limits to expansion of individual brands, many affordable luxury brand that joined its ‘billion companies inevitably contemplate adding brands to dollar brands’ list in 2003. However, making their portfolio. In luxury markets while general a new luxury brand commercially successful portfolio economics may apply, a few portfolio rules has proven difficult. LVMH has invested are particularly important: time and resources in establishing the Don’t overestimate synergies: Success designs of Christian Lacroix, a designer that cannot be easily replicated from one luxury attracted media attention for its ‘avant- brand to another. Maintaining the garde’ designs in the 90s. But, after more individuality and creativity of brands and than 10 years, the brand has yet to imposing operative procedures and produce a profit. financial targets has proven challenging in Kill the tail: Companies must actively the personality-driven luxury sector. manage brand portfolios, building core Combining ‘creative’ and ‘commercial’ brands with their best talent, while processes have proven difficult. The harvesting lower performing brands before advantages of a brand portfolio must they drain resources. Luxury brands take compensate for spreading management time to develop the allure and require

CREATIVITY, CONSUMER INTIMACY, A COMMITMENT TO IMAGE AND EXPERIENCE, AND ATTRACTIVE AND POWERFUL BRANDS ARE SOME OF THE REQUIREMENTS FOR SUCCESS

attention across relatively independent significant investment in advertising, public businesses. In luxury groups, shared relations and designer costs. The return on activities have largely focused on back- the investment may take years to be office operations, real estate and realised. ‘Hockey stick’ financial projections advertising. These synergies have not can result in wasted financial and significantly contributed to the bottom line. management resources, when such Don’t overpay for synergies that likely resources are often the keys to building the don’t exist: It is well known that most successful brands. acquisitions create value for the Extending capabilities… without losing unique shareholders of the acquired firm, sources of luxury advantage destroying value for the acquiring firm. The For companies with luxurious ambitions, one final infamous ‘winner’s curse’ suggests that the challenge is undertaking a realistic assessment of

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what combination of capabilities offer the greatest Swatch owns over 15 watch brands, opportunity for success in luxury markets. Creativity, including luxury brands such as Omega and consumer intimacy, a commitment to image and affordable luxury ones such as Swatch, CK experience, and attractive and powerful brands are and Balmain. But beyond its expansion into some of the requirements for success. manufactured watches, Swatch also owns Understanding a company’s source of success, ETA, Frédéric Piquet and Nouvelle Lémania, particularly in the true value-adding activities, is a three companies that satisfy 90% of the challenge to consider before—as opposed to market demand for watch movements. after—expansion. Swatch’s strategy leverages its unique power in the mechanical watch category. Choices about where to expand are particularly critical for entering luxury markets. Successful The business of selling ‘indulgences’ at premium companies tend to prioritise moves around their prices has proved to be very attractive for players core, moving to neighbouring spaces that leverage that have successfully managed their growth. But strong capabilities unique to the company. In luxury these markets are changing and so are consumers, and affordable luxury markets. Four primary with boundaries continually being reset according capabilities can be leveraged: to what is luxury and what is mainstream, what Channel dominance: An effective merits a premium and what does not. The same distribution network consistent with the characteristics that can make a brand successful brand’s desired position is key when entering can ultimately bring about its fall. new markets. Having it already in place accelerates customer reach and enables Companies willing to compete in this space need to associated cost-efficiencies. Diageo, an develop growth strategies that simultaneously: alcoholic beverage giant with premium – Stretch successful brands—while brands including , Johnny Walker maintaining their perceived exclusivity; and Bailey’s, ventured into premium wines – Expand portfolios—by identifying and leveraging its global distribution structure. In leveraging synergies in value-adding addition to the channel advantage, they activities; and were able to imprint their branding capability – Extend capabilities—by developing on its premium wines. strategies that build opportunities in Consumer intimacy: Targeting a consumer neighbouring market spaces without segment requires deep understanding of sacrificing sources of distinct advantage. consumer behaviour to drive product planning and development. From the Clearly recognising and addressing these three consumer perspective, a company’s simultaneous challenges defines the drivers of credibility and reputation, matched with a growth in the luxury triangle. Collectively they positive brand experience, lead to openness represent the challenge and opportunity for to adopt new offers. Utilising both its brand generating the expected results in this highly building expertise and consumer intimacy, attractive and competitive market space. Unilever expanded its Dove range from soap to a broad bath and body line, leveraging References: key elements of the brand’s traditional 1 Boston Consulting Group: Trading Up: The New Luxury identity. and Why we need it, 2002 Operational excellence: Taking expertise 2 CDX IXIS: Sector Report February 2003 garnered with star brands into new segments offers the opportunity to use Gabriela Alvarez and Victoria Kemanian are partners in existing skills to capture new audiences. Latitude, a strategy consulting firm located in Lausanne L’Oréal successfully positioned Plénitude as . They can be reached at a higher quality mass-market brand, [email protected] and leveraging its R&D expertise in ‘anti-aging’ [email protected] technology developed for Lancôme. Through sophisticated packaging and a slightly higher Thomas Malnight is a professor at IMD, located in price point, while using mass distribution Lausanne Switzerland. He can be reached at channels, L’Oréal was able to target a [email protected] broader consumer segment. Input control: Swiss watch manufacturer mCriticalEYE Publications Ltd. 2004

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