I hope you will check out my new column for Colloquy, the leading source of publications, education and research for the loyalty industry. I am proud to serve as their luxury industry contributing editor.
If you are in retail, the last 15 years or so have brought enormous change. Let me call out a few profound shifts:
- Winning business model bifurcation: Price and dominant assortments at one end (Wal-mart, Amazon); remarkable experience and assortment curation/product differentiation on the other (Nordstrom, Louis Vuitton). The result is death in the middle.
- Digital retail: What started as an electronic catalog is now not only a high growth channel approaching 10% of many categories’ sales–and much higher if the product can be delivered digitally–but an increasingly important medium for promotion, interaction, customer reviews, price checking, etc.
- The constantly connected–and inter-connected–consumer. As more and more consumers are armed with powerful mobile devices the notion of anytime, anywhere, anyway retail has become a reality–and expectation. Social networking, product review sites and pricing apps are creating greater and greater information transparency. The brand is no longer in charge. The consumer is.
- The omni-channel blur. Most of your customers will engage with multiple touch points in their decision journeys. As mobile commerce grows–and it becomes easier for consumers to seamlessly move between various applications to gather product information, check prices, confirm inventory availability, get product reviews and the like–the notion of distinct channels breaks down. It’s a frictionless, compelling experience that matters, not making each of your channels better. New ways of consumer engagement, new ways of organizing your business, new ways of measuring and incentivizing become mandatory. Silos belong on farms.
While it is true that remarkable new business models sometimes emerge quickly and unexpectedly, most winning concepts that have gobbled up market share from industry incumbents did not come out of nowhere.
Amazon launched in 1995. The off-the mall and specialty formats that have made life difficult for the Sears’ and JC Penney’s of the world have been important competitors since the late 1990′s. Anybody paying any attention to customer data during the last 10 years has known that the so-called “multi-channel” customer outspends a single channel customer by a factor of 3-4 times.
With the benefit of 20/20 hindsight it’s clear that many Boards and many retail executives were asleep at the wheel. They failed to gain sufficient awareness of the competition and seek truly actionable customer insight. They failed to accept what was happening. And of course they failed to act. And now it’s too late.
So here’s the new reality. While many of the companies I mentioned–and countless more I’m sure you can offer up–had some 15 years to see what was happening and make the necessary changes, chances are you will have less time. A lot less time.
So I guess the question is: what are you going to do to make sure the next 5 years don’t happen to you?
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?
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
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.
Being remarkable wins.