Luxury’s Flight to Quality

Hermes. Bulgari. Louis Vuitton. PPR (owner of Gucci and Bottega Veneta). Richemont.  All have recently reported strong profits.

Clearly, these firms have benefitted from their growing presence in the booming Asian luxury markets. But something else is going on. I believe this dazzling performance during a worldwide recession is about more than their global footprint.

All of these brands represent a powerful legacy of craftsmanship, of superior materials, of timelessness.  Unquestionably these products are expensive, yet time and time again, consumers choose them over much less costly options or similarly priced more trendy alternatives.

Because the affluent consumer’s capacity and willingness to spend remains constrained, brands must work even harder to capture a disproportionate share of the available wallet.  These heritage luxury brands are getting more than their fair share in a flight to quality.  They have taken a purchase which could be seen as a splurge and made it a seemingly sensible choice.

Of course, regardless of the price point, any brand wins because the consumer sees a strong price/value relationship.  And let’s face it, it’s easy to run a sale, offer extra loyalty points or give away a gift with purchase to drive short-term revenue.

Spending the money, making the hard choices, having the patience to build an investment quality to your brand–well that takes something extra.  It takes leadership, vision and courage to build something truly remarkable and enduring.

What’s your choice?

 

Luxury Market Research Smackdown

A number of media outlets have picked up on the debate between Pam Danziger of Unity Marketing and Ron Kurtz of the American Affluence Research Center (AARC) concerning the future of the luxury market.  Let me boil it down for you.

In a recent AARC report Kurtz recommends that: “Luxury brands and luxury marketers should be focused on the wealthiest one percent because they are the least likely to be cutting back and are the most knowledgeable about the price points and brands that are true high-end luxury.”

Danziger fired back “This is just plain dumb advice for luxury marketers.” She goes on to suggest that “the top one percent of the market (about 1.2 million households with average incomes of $500,000 and above) simply can’t carry the entire weight of the luxury industry.” Instead, she recommends that the luxury industry cast a much wider net, aggressively going after the so-called HENRY’s (High Earners Not Yet Rich) to energize significant future growth.

So who’s right?  Well, neither one, exactly.

Kurtz is right that the most elite segment has the greatest capacity and willingness to spend on luxury. But for virtually all but the most rarefied luxury brands, it would be an unmitigated disaster to focus only on the top 1%.  As the former head of strategy and marketing at Neiman Marcus, I can assure you that customers outside the top 1% contribute a very significant percentage of sales and profits.   And if you are Saks, Net-a-Porter, Gilt Group, Louis Vuitton or Gucci, I doubt it’s much different. Most luxury brands need the truly rich and the merely affluent.

So Danziger is right that most luxury marketers need to attract a wider demographic. But she goes too far.  First, while there are many more of the HENRY’s–and their aggregate spending is significant–as you move lower in income the number of potential customers goes up, but their spending on luxury drops dramatically.  Trust me on this: I’ve seen actual, recent spending data by percentile, and the difference between a 99% percentile and a 90th percentile customer’s luxury spending is vast.

The second issue is one of positioning.  The more a brand’s target customer group becomes diffused, the harder it is to be relevant, differentiated and compelling across each distinct consumer segment.  As brands aggressively court a wider demographic they risk alienating their historically strong elite core.

Like most things in life, the answer is not black and white.  It is rarely true that brands need to focus on only one segment.  A compelling customer growth strategy can be built on multiple customer groups.  The needs and value of each segment must be well understood and segment specific strategies designed and integrated to create a powerful blend.

But the starting point is a solid understanding of your customer base.  And apparently that starts with sifting through what the facts actually say.

I’m reminded of the lyrics from the Talking Heads song “Cross-eyed and Painless.”

Facts are simple and facts are straight
Facts are lazy and facts are late
Facts all come with points of view
Facts don’t do what I want them to

Surgical Shopping and the Hangover Market

Last holiday season I coined the term “surgical shopping” to describe the highly precise way many consumers were purchasing.  While the panic of late 2008 and early 2009 subsided, consumers were only gradually opening their wallets, focusing primarily on needs vs. wants and often trading down to brands that gave very clear bang for the buck.  By the time the numbers were in for the 4th quarter, it was clear that business was better, but not particularly good.

As an economic recovery struggles to gain traction, this “surgical shopping” behavior remains rampant, and in my opinion is not likely to change any time soon.

This behavior is evident on the lower end of the market, as private labels (or more accurately “private brands”) gain market share.  And it’s apparent on the higher end, as accessible luxury brands such as Coach, Nordstrom and J. Crew beat their more exclusive and expensive rivals.  Even at the absolute luxury tier, brands like Louis Vuitton, Gucci and Hermes outpace the competition as they emphasize their heritage of investment quality craftsmanship to win over flash in the pan, mostly pure image brands.

This is now the Hangover Market.  Waking from the intoxication of too much marketing and societal hooch, consumers are now shaking off the cobwebs and dry mouth of excessive, superficial spending.   And while it’s always difficult to predict future consumer behavior, many consumers are not going back to their old reckless spending habits.  For some, this will be out of economic necessity.  For others, this will be values based, as they become more discerning about the quantity of what they buy and the price they pay for certain items.

So what does this mean for business leaders and brand stewards?

Tangible, obvious value wins.

Craftsmanship wins.

Authentic wins.

Experience wins.

Connectedness wins.

Being remarkable wins.

The Private Flash Sales Sites Jump the Shark

On April 19 I posted about my belief that the luxury off-price market was about to hit the wall, largely owing to a squeeze between a growing customer base seeking out great deals, and a diminishing supply of first quality branded merchandise.   I suggested that the various players in the space were going to have to evolve their winning formulas substantially to sustain their growth.

Well this seems to be playing out with the various high-end flash-sales sites (Gilt Groupe, RueLaLa, HauteLook, Ideeli and BeyondTheRack and the myriad wanna-bees).   In fact, what made these new concepts so great–and allowed them to gobble up market share–is rapidly being watered down.  Whether you call this “jumping the shark” or “nuking the fridge”, it’s a cause for concern.

All these companies have grown rapidly, attracting both legions of members and significant investment capital.  Their original value proposition was simple: offer well-known, high end brands at unbelievably low prices, and make them available in limited quantities during a short sale period.   This was an innovative re-imagining and up-scaling of QVC–or a blatant ripoff of Europe’s Vente Privee–depending on where you sit on the cynicism scale.  Regardless, during late 2008 and well into 2009, customers signed up in droves and feasted on high demand fashion brands at steep discounts.  Of course the rocket fuel during this time was the substantial amount of surplus inventory that both manufacturers and retailers were desperate to turn into cash.

A review of the flash-sale sites’ offerings today reveals quite a different story than even six months ago.

The first obvious thing is the paucity of true high demand luxury brands.  Tomorrow’s sale on RueLaLa features one true luxury brand (Pratesi), but also Andrew Marc, L. Spaace, Tailor Vintage and Cuddlestone.   BeyondTheRack has some Gucci, Prada and Robert Cavalli–though it’s sunglasses and wallets–not ready-to-wear or handbags.  The rest of their offering is Jonathan Marche, Ninety, SpyZone Exchange, CC Skye and Italgen.   Not exactly household names.  A check of Ideeli and Hautelook reveals the same smattering of brands you have heard of, while the rest is decidedly second tier or no-name.  Gilt Groupe, on the other hand, does seem to consistently have a much broader offering of true high end and fashion brands.

The second item of note is that the discounting is not nearly as extreme as last year.  And this is not surprising.  Last year, when manufacturers were stuck with mountains of unsold inventory, they were often willing to sell first quality product below their production cost.  Today, more and more product is not distressed, but rather made specifically to be sold in these channels; and that means the manufacturer needs a mark-up.  If your product acquisition cost goes up, the retail price goes up (i.e. the lower % discount to the consumer).

The other noteworthy change is the growing mix of product that is not fashion merchandise.  All these sites are starting to feature travel, wine and even bicycles.  On the one hand, this is a smart growth strategy: find more things to offer to your existing clientele.  For others, it smacks of desperation.

All this adds up to a model that, despite being barely two years old, is rapidly evolving and will likely look quite different by this time next year.  My guess is that by then several of these sites will be gone, bought out or struggling mightily, while a short list will leverage deep customer insight and new capabilities reinvent themselves and thrive.  Given that the big guys–Neiman Marcus, Saks and Nordstrom–have yet to do anything meaningful in this arena (and really why is it taking them so long?) we can only expect the competitive environment to become even more intense.

Any guesses on who will be standing tall versus who will become chum?