Luxury in and after recession – tragedy, triumph and change

As the storms of the recession battered the economy, ravaging fortunes and destroying balance sheets, an interesting debate broke out about the fortunes of the luxury sector during the downturn. On one side ran the argument that the luxury industry is recession proof. On the other side stood the naysayers who argued that luxury goods, by their very definition, would experience a drop in consumption. So which argument carried the day?

The doom and gloom brigade had plenty of facts to buttress their case. The global sales of luxury products fell by over 6% in 2008. Sales plateaued in Europe. Iconic brands like Christian Lacroix downed shutters, and marquee ones like Tiffany’s and Saks saw their stocks plunge during the crisis. Even the playgrounds of the rich, it seemed, had been overrun by the specter of the crisis.

But the sector had its champions too. Hermes, the cream of the sector, saw its profits surge by 14% during the worst of the recession. The sales of high end automobiles surged in 2009-2011, as strong growth in Asia propelled automakers like BMW and Mercedes. Private jet makers too saw Asian demand counteracting a softening U.S. market.

The apparent dichotomy in fortunes was explained by the fact that the rules of the luxury game have changed, and those that change with it thrive, while the rest are left by the wayside.

The first of these changes is the by now well worn story of the rise of the East. While Japan has always been a major market for luxury goods, the rise of China, and to a lesser extent India, has turbocharged sales in the region. The Asia-Pacific region now accounts for a third of global luxury sales, and contains more high net worth individuals than Europe. The number of newly minted rich in Asia saw a 9.7% increase in last year alone. All these factors ensured that the fundamentals for growth in the Asian luxury market remained strong during the recession, and the sector is likely to prosper as growth in the Orient rises once again from the moderate (4% in 2009) to stratospheric (up to 92% by 2015) levels. Moreover, the theory of conspicuous consumption is particularly salient to Asia, as legions of the newly minted wealthy flock to snap up the latest offering from marquee brands, jostling to establish, and maintain, their position in the social pecking order.

The luxury sector has also seen a fragmentation of its traditional market as the growing divide between the wealthy and the rest is also mirrored within the ranks of the rich. The line drawn between the truly rich, or ultra-high net worth individuals with assets more than $30 million, and the merely well off became particularly clear during the recession. Worried consumers in the latter group eschewed costlier purchases, which in turn affected the large number of companies catering to this so-called “aspirational” market.  However, companies that catered to the very top of the pyramid fared much better. Brands like Hermes, or the jeweler Cartier, for instance, emerged from the recession relatively unscathed.

Finally, to abuse a tired cliché one more time, necessity is the mother of invention, and the mechanisms the sector adopted to survive the recession are likely to persist well into the near future. The use of social media driven campaigns are only going to rise as we go forward, especially as luxury brands target the Asian millionaire, who is often younger than his European counterpart. In addition, even staid brands, like the nearly century old Faberge, are increasingly taking to the web to sell their wares. Expect a leaner, snobbier, and more digitally conscious luxury sector in the years ahead.

Growth strategies in the luxury industry: the case of LVMH

The author of this post is Erminia Monzo, an exchange student at IIM Ahmedabad. She hails from the University of Bocconi, Italy.

Growth is extremely difficult to manage in luxury companies, as they have to strike a balance between raking in the profits versus maintaining an exclusive aura around the brand and goods sold. Empirical research in literature shows that multi-brand companies dominate in the luxury industry from a dimensional point of view and all together retain a higher market share than mono-brand companies. Also, there seems to be no significant difference in terms of economic performance between mono- and multi-brand companies operating in different business segments of the luxury sectors. So, why is the general trend in the luxury goods industry towards the consolidation and the promotion of multi-brand conglomerates? The immediate answer lies in the importance of the intangible components of luxury goods: in order to maximize the company dimensions and allow it to achieve a dominant position in the market without destroying the brand equity, companies must accept the limits of brand extension and move to the next step, i.e. brand portfolio; therefore the intangible components strongly influence the decision to grow through the external acquisition of brands because of the need to find a balance between the firm’s necessity to grow and exclusivity, which creates high value for the final customer.

LVMH, known as the luxury industry best player, has managed to formulate and execute this strategy successfully. Headquartered in Paris, LVMH Moët Hennessy – Louis Vuitton is world leader in the luxury sector with a unique portfolio of over 60 prestigious brands. The sustainability of its strategy of growth through brand acquisition is mainly due to the following reasons:

• Ability to grasp the sector specificities of the brand;
• Creation of a balanced and attractive brand portfolio;
• Management of the brand portfolio not just with a logic of maximizing financial results in the short term but also with a logic of creating symbolic value for customers in the medium/long term;
• Ability to acquire the adequate managerial to tools to reach an appropriate balance between brand autonomy and integration, search for synergies and maintenance of the brand identity.

The resilience of the multi-brand strategy during the last financial crisis has shown its capability not solely confined to managing cyclical patterns of luxury goods during good times but also to be able to weather through extreme periods of down turn. LVMH as a group managed to recover from the crisis remarkably also because sales from a division or market could cross-subsidize losses made in another. The diversity of LVMH’s business allowed the possibility of LVMH to free resources to meet new challenges and also take on emerging opportunities whereas other competitors in the same industry were barely surviving. LVMH took advantage of this period to expand into the hotel industry, a move indirectly strengthening specific brands in its portfolio. Also, despite facing a complex market, LVMH has been able to discover the peculiarities of the Chinese consumer by leveraging on its existing brand capabilities and also developing new competences together with local Chinese managers. Up till date, LVMH has successfully managed the acquisition and positioning of the Chinese brand Wenjun, one of China’s top traditional spirits distilleries, because of the organization’s ability to adapt and learn. Accordingly, despite failed attempts at multi-channel marketing via the internet, LVMH shows no slowing down when it comes to e-shops and has recently launched separate e-stores for Kenzo and Loewe, two of the brands it owns. The point here is that, with an era of hyper-competition and rapid change, LVMH as large as it seems, is nimble when it comes to learning, adapting and reacting to contemporary challenges.

Overall, with LVMH’s fundamental values propelling it forward, and financial bottom lines restricting its parameters and overall direction, there is no doubt that LVMH has mastered the art of the multi-brand strategy. Although, this must be said with caution, that this strategy is not for the faint hearted or simply any aspiring conglomerate. Competitive advantages such as material scale advantage, a stellar brand portfolio, balanced categories of goods and a wide geographic exposure are built up over a long period of time, led by a strong leadership.