COURSE SUMMARY LUXURY DISTRIBUTION M1 MANAGEMENT DU LUXE Marie-Véronique Contat 1 INTRODUCTION The new issues at stake for luxury distribution 1/ Historical evolution of the luxury sector 2/ Recent evolution of the luxury market . Breakdown by distribution channels . Evolution of the online and off-price segments . Polarization of the markets : luxury brands go global 3/ Luxury distribution structure today . Central dilemna of luxury distribution . Main distribution channels for luxury brands 4/ Global luxury markets in 2014 . Breakdown by geographical areas . Main luxury markets in 2014 Marie-Véronique Contat 2 I/ Historical evolution of the luxury sector Evolution of the luxury sector From 1970 to 2000 : structural change in the luxury industry Concentration in the Fashion and Luxury industry and creation of major luxury groups 1987 : Bernard Arnault created LVMH, Richemont and Kering/Gucci Group were created in the same years (respectively 1988 & 1994) From craftsmanship to industry Emergence of marketing and brand stretching New markets, new opportunities : international expansion of luxury brands Marie-Véronique Contat 3 I/ Historical evolution of the luxury sector Evolution of the luxury sector 2000-2010 From concentration to consolidation Vertical and horizontal integration Global luxury and new luxury models « Retailization » strategy 2010-2014 : back to operations New acquisitions Focus on the emerging markets Marie-Véronique Contat 4 2/ Recent evolution of the luxury market Marie-Véronique Contat 5 2/ Recent evolution of the luxury market Worldwide personal luxury goods market trend by channel 2013-2014 Marie-Véronique Contat 6 2/ Recent evolution of the luxury market Worldwide personal luxury goods market trend by channel 2013-2014 Marie-Véronique Contat 7 2/ Recent evolution of the luxury market Online personal luxury goods market trend 2003-2014 Marie-Véronique Contat 8 2/ Recent evolution of the luxury market Off-price personal luxury goods market 2010-2013 Marie-Véronique Contat 9 2/ Recent evolution of the luxury market Airport channel trend 2011-214 Marie-Véronique Contat 10 2/ Recent evolution of the luxury market Polarization of the Markets : Luxury Brands are Going Global Total Asia : 41% Total Asia : 36% LVHM Fashion & Leather Goods Kering Luxury division Turnover : 10 828 B€ Turnover : 6 838 B€ Marie-Véronique Contat 11 2/ Recent evolution of the luxury market Polarization of the Markets : Luxury Brands are Going Global Total Asia : 46% Total Asia : 46% HERMES turnover : 4 118 B€ Prada turnover : 3 551 B€ Marie-Véronique Contat 12 2/ Recent evolution of the luxury market Polarization of the Markets : Luxury Brands are Going Global Total Asia : 34% Total Asia : 12% Total US : 65% Total US : 67% Coach turnover : 4,8 B US$ Ralph Lauren turnover : 7,4 B US$ Marie-Véronique Contat 13 3/ Luxury distribution structure today DISTRIBUTION : A COMPETITIVE ADVANTAGE IN LUXURY The success and development of the luxury and fashion markets is mainly due these last 20 years to their distribution strategy. Brands such as Saint Laurent which weakely invested in distribution has stagned or decreased their sales. On the contrary, Louis Vuitton, Hermès or Coach have invested in their distribution network and have significantly increased their sales. Marie-Véronique Contat 14 3/ Luxury distribution structure today Marie-Véronique Contat 15 3/ Luxury distribution structure today In a period of tight economy more than ever, distribution is a key factor. Heavy and risky investments, brand image control, payment risks, retailers’sales, e- commerce development…. Are a few of the many challenges that need to be taken into account in a distribution strategy. How to combine brand management and increase of revenues? From an economic standpoint, luxury maisons currently face a strong paradox consisting in, on the one hand, maintaining and even enhancing their luxury image and, on the other hand, widening access to their products to an ever- increasing clientele. We always refer to 5 main paradoxes in luxury business:: demand, price, product, distribution, communication. In the luxury industry, we will always refer to companies as retailers or wholesalers or both. Some brands are retail exclusive, some brands are mainly wholesaler, and some combine both distribution. Marie-Véronique Contat 16 3/ Luxury distribution structure today MAIN DISTRIBUTIONS CHANNELS FOR LUXURY BRANDS RETAIL Subsidiaries, owned stores, franchise stores, concessions in dept stores, outlets shops, pop-up stores. WHOLESALE Distributors, agents, multibrand retailers, corners in department stores, concept stores INTERNET LICENSES, MASTER LICENSES and MASTER FRANCHISES DUTY FREE SHOPS Marie-Véronique Contat 17 3/ Luxury distribution structure today Marie-Véronique Contat 18 4/ Global luxury markets in 2014 Breakdown by geographical area in 2014 Marie-Véronique Contat 19 4/ Global luxury markets in 2014 Breakdown by geographical area in 2014 Marie-Véronique Contat 20 4/ Global luxury markets in 2014 MAIN LUXURY MARKETS IN 2014 1. U.S.A. 2. JAPAN 3. ITALY 4. FRANCE 5. CHINA 6. UNITED KINGDOM 7. GERMANY 8. SOUTH KOREA 9. HONG KONG 10. MIDDLE EAST 11. RUSSIA Marie-Véronique Contat 21 4/ Global luxury markets in 2014 Marie-Véronique Contat 22 4/ Global luxury markets in 2014 Marie-Véronique Contat 23 PART ONE ROUTES TO MARKETS - WHOLESALE Marie-Véronique Contat 24 ROUTES TO MARKET WHOLESALE Definition : sales through third party distributors. Traditional formats : department stores, multibrand boutiques. Emerging formats : outlet stores, e-boutiques. Brand moved away from wholesaling during the recession as retailers began implementing sharp discounts. The once-key department store channel suffered a decline so luxury fashion brands are wise to explore other options. Outlet stores, factory shops and online boutiques such as Net-a- Porter offer growth at both the lower and upper ends of the fashion market. Marie-Véronique Contat 25 ROUTES TO MARKET WHOLESALE Marie-Véronique Contat 26 WHOLESALE EXCLUSIVE SALES First brands present their collections at the international fairs or fashion trade shows in Paris, Milan or Frankfurt and sell them on the spot to individual stores or department stores in a given city or given country Here distributors from around the world come looking for new ideas or new products. In the luxury ready-to-wear sector, the different brands present their fashion shows in the same week and all major purchasers come to town with their purchasing budgets (or open to buy). Marie-Véronique Contat 27 WHOLESALE EXCLUSIVE SALES The fashion brands pay particular attention to purchasers from US or Japan department stores that can purchase large quantities of goods. At the end of the show, firm orders and cash down-payments are taken for the goods to be delivered later in the year. Before they come to Paris and Milan, department store purchasers will have prepared their « open to buy » budgets based on each individual brand’s performance over the previous couple of years. The selling must be done well in advance and if possible at the headquarters of the main national department stores in major countries Marie-Véronique Contat 28 WHOLESALE EXCLUSIVE DISTRIBUTION This model preserves the personal relationship to the brand provided that the distribution agreement specifies that sales can only take place in the specified location and by the specified personnel. The advantage in comparison of the exclusive own-brand store network is that this system is much more flexible and the break even-point of a store here is much lower without damaging the brand. Marie-Véronique Contat 29 WHOLESALE LOCAL DISTRIBUTORS Local distributors purchase with their own money, build local inventories and sell in their own country. This is a low investment approach for a luxury or fashion company looking to expand internationally. A local distributor is generally granted an exclusive right to distribute a product or a brand in a given territory. Distributors generally represent several brands in order to spread the cost of their sales force between them. Local distributors assume all financial risks on the brand locally. Marie-Véronique Contat 30 WHOLESALE LOCAL DISTRIBUTORS They generally know how to negotiate for the best location in a department store and how to arrange discounts on media advertising tariffs. They can generally handle a brand’s day-to-day activities very effectively. Local distributors are not always easy to control and may, in some cases, do their own marketing locally, rater necessarily following what the brand would like. Distributors are ideal for starting and developing a brand; but when sales reach Euros 10 – 15 million, it may make sense to start a subsidiary. Marie-Véronique Contat 31 But the differences do not stop here The principal is very interested in building brand awareness and its standing in a given market, so it tries to push for the largest part of this advertising budget to be spent in media investments. The distributors are more interested in the short term, so prefers immediate promotional activities. Developing the distribution system is obviously the number-one activity for those who want to build a worldwide business and cannot afford to invest drectly everywhere in the world. It is the responsability of top management to know directly their distribution « partners » Marie-Véronique Contat 32 16 KEY LUXURY FASHION DISTRIBUTORS Marie-Véronique Contat 33 LUXURY BRANDS DISTRIBUTORS Despite their