Each year Fauchon, one of France’s most celebrated luxury grocers, dresses up its best-selling éclairs to be launched in their haute couture collection of the season. The autumn 2008 collection features 34 individualized éclairs in an extravagant display of premium foods photographed in the style of the best high fashion catalogues. Meanwhile, Parisians, expats and tourists alike line up at the celebrity Paris bakery, Poilâne, to buy the famous miche, a loaf of bread that is still made by hand and whose recipe has not changed since the bakery was founded in 1932. 

Innovation is becoming a clear market trend as French luxury goods companies, long seen as the guardians of centuries-old tradition and quality, face the pressure to change. Today’s market realities — the maturation of the European marketplace, the consolidation of key industry players, and the increased focus on East Asia’s growing economies and newly affluent consumers — have forced these firms to reconsider their strategy and reinvent themselves. The dramatic global economic slowdown has added to increasing pressure on companies in the luxury space. With market leaders like LVMH losing as much as 40% of their value in less than a year, and a scarcity of financing for small and medium sized businesses, many analysts predict that 2009 will be one of the worst years on record for the luxury goods industry.

The battle for the luxury goods consumer has intensified, bringing the trade-off between innovation and tradition front and center. This article evaluates the approaches of two celebrated names in French luxury food: Fauchon, a luxury grocer, and Poilâne, a family-run bakery, with different historical approaches to the changing economic landscape. While Fauchon has continuously sought to reinvent itself as the paragon of French luxury food, Poilâne has gone to great lengths to keep its original concept unchanged. The historical success of these two approaches is explored, as are the benefits and risks from pursuing these strategies in a bid to stay relevant in the toughest luxury market in decades.

Estimated to be worth US$220 billion (€164 billion) the comprehensive luxury goods industry includes products and services ranging from haute couture fashion to perfumes, champagne and other consumer products. An important part of this industry is the luxury foods market, a sub-sector whose offerings include high-end gourmet restaurants, rare and exotic produce, and intriguing gastronomic creations such as Joconde éclairs that bear the eyes of the Mona Lisa. World Archaeology defines luxury foods as those “that are widely desired because they offer a refinement or qualitative improvement of a basic food…. [They are an] indulgence and a status indicator.” Consumers reach for these extravagant goods in pursuit of perceived high quality and contribution to a luxury lifestyle.

The French luxury industry accounts for an estimated US$14 billion of the US$500 billion in annual exports from French companies. Despite forming only 2.8% of the country’s exports, luxury foods are a symbolic industry within France. The future of the industry is widely discussed throughout the country, particularly in the context of recent economic reforms implemented by French president Nicolas Sarkozy, designed to increase the international competitiveness of the French economy among its neighbors. 

Such reforms, meant to deal with the market-shifting effects of European unification, are simply one contributor to the changing landscape of the French luxury foods industry. For many companies, the trouble had already begun at home. Recent studies of the luxury foods industry within France conclude that, domestically, French firms that have historically prospered in their home market are challenged by two recent trends. First, “pure-player” firms focusing on one luxury foods product are becoming increasingly present, eroding the market share of companies such as Fauchon that provide a diverse product range.

Second, traditionally mass-market retailers such as Monoprix and Carrefour are diversifying into the luxury foods market, thereby reducing foot traffic in retail stores owned by luxury foods companies. In the face of these encroachments on market share, many French luxury foods companies have decided to pursue a two-pronged strategy already common among their cousins in luxury fashion: brand innovation and increased presence in new international markets to take advantage of increased buying power overseas.

‘Fauchon on Your Lips’

Fauchon’s flagship store in Paris is a pilgrimage destination for luxury foods aficionados. Located in Place de la Madeleine, it is, according to some, a more popular tourist destination than the famous church that lends its name to the square. Founded in 1886 by pushcart grocer Auguste Fauchon, the house of Fauchon has achieved a fine balance of innovation and tradition for over a century. Thanks to an exclusive contract with Air France, it became the first French food company to regularly import luxury foreign produce to France. In the 1970s, it was also one of the first French luxury foods companies to explore international expansion through a joint venture with the Japanese department store Takashimaya, selling apple-flavored tea in Japan.

Fauchon has experienced both the ups and downs of being a hallmark of French luxury foods in a global arena, lessons pertinent to weathering the current recession. During the 1990s, in an attempt to boost profitability, Fauchon entered the mass-market retail space and began distributing to supermarket chains such as Carrefour. The result was lukewarm. As prices were slashed by as much as 20% and new product lines designed for the mass-market were rolled out, the company faced criticism over brand equity dilution. Ignoring claims that it was spreading itself too thin, Fauchon followed a tried-and-true approach by increasing its foreign presence, a move financed by a private equity consortium that acquired Fauchon in 1998. 

At the time, lead financier Laurent Adamowicz commented to French newspaper Le Monde that, “This is the best brand in the sector…. In the United States, everyone recognizes the [Fauchon] name, although its products aren’t sold in the market.” The acquisition proved less successful than expected. The revenues of three new New York stores were disappointing, and their start-up costs contributed significantly to Fauchon’s losses in 2003 and 2004. By 2004, Fauchon started reporting heavy losses, with sales of €70 million generating an operating loss of €10.3 million.

Following these struggles in the 1990s, experts agreed that Fauchon needed a new wave of rejuvenation that would also preserve the company’s core competencies. When Michel Ducros, an icon in the luxury foods business in France, acquired a majority stake, reinvention became a priority. Ducros recruited a dynamic new chief executive, Isabelle Capron.  A veteran of the French public relations and advertising space, Capron’s mission focused on developing a two-part strategy — first, re-centering the brand on its traditional strengths and, second, using this new brand to consolidate market share in France while increasing market share in fast-growing international markets.

Fauchon’s successful brand reincarnation was a careful balance between venerated tradition and the avant garde. The new management wanted to establish Fauchon as a “luxury good reference” and to implement a comprehensive advertising and store redesign accordingly. Renovation of Fauchon’s two stores at Place de la Madeleine was completed in 2005, achieving an ultra-modern look that the newspaper Les Echos noted “transgresses the visual codes” of the 120-year-old brand. Borrowing from the aesthetic of its successful French cousins in haute couture, the Fauchon storefront look is more akin to Chanel or Dior than to the pastry-shop style of its next-door competitor Hediard. Its advertising campaign is highly eroticized, with widespread circulation in high-fashion magazines such as Vogue centered on the concept of “Fauchon on your lips.” In one stroke, Fauchon was able to distinguish itself from the competition.

The second part of the investment strategy focused on international expansion and differentiation. To reinforce Fauchon’s preeminence in France and export it to growing markets in Japan, China, Korea and the Middle East, Ducros made a simple press statement: “We have to move fast.” The new, ultra-chic store concept was exported to all of Fauchon’s international locations, comprising 36 countries with 451 points of sale.  At the top of this export strategy was China, where in 2007 Fauchon opened its largest retail space in Beijing. “Today, luxury is made in the West and sold in the East,” Isabelle Capron comments. “From now on, Asia is the principal source of growth.” Still, Capron is clear on what it is she is selling, telling Les Echos that “Our partners abroad ask us for France, France and France.”

Fauchon’s rebranding and internationalization campaign has borne fruit.  Sales for 2006 were €38 million, representing a 21% organic growth over the previous year. Its net loss shrank to only €5 million in 2006; and in 2007 Fauchon executives expected the company to return to profitability. Recently published figures indicate Fauchon currently draws 60% of its sales from outside of France, and expects this figure to reach 80%. The future, while uncertain, looks relatively bright. Fauchon’s focus and reinvention have come at the right time. Being the market leader in its category, Fauchon commands a formidable presence in markets that continue to grow. In countries like China, it will continue to attract an expanding aspirational consumer class. At home, Fauchon is re-polishing its customer focus by providing an ever-changing, innovative, unique customer experience. A range of price points allows Fauchon to capture an increasing share of a mature European market — from the student who buys a €4 éclair to the large-scale corporate accounts.

Amid a constantly shifting market both at home and abroad, Fauchon’s rebranding campaign has helped it remain relevant and return to profitability. Its recipe for success in the future is to remain ahead of its customers and continue to surprise them. In that sense, its new motto, “Fauchon takes you away,” is right on point.

FedExing One Million Loaves

Not all French luxury foods brands have undergone radical changes in order to remain competitive. In contrast to Fauchon, Poilâne, a Parisian high-end bakery, has not strayed far from its product, location, advertisement or management structure since its founding 76 years ago. Retaining its position of market leadership in a niche market has helped it successfully grow its presence and weather more than one economic downturn in the past. Its story provides a second successful approach to managing innovation and tradition.

Specializing in bread and simple pastries, Poilâne is most famous for a round, two-kilogram sourdough country bread referred to as a miche or pain Poilâne.  When Lionel Poilâne died in a helicopter accident and his Harvard-bound daughter Apollonia Poilâne took over, France appeared relieved that Poilâne would continue to be family-run. Celebrated in France, Poilâne continues to operate under the watchful eyes of its clients who value its small, family-owned identity. With its unassuming storefront, neutral product colors and lack of advertisement, Poilâne quietly embraces tradition. Within the context of companies that are considering internationalizing with a fresher brand image, Poilâne’s solid embrace of its traditional French food house identity and family roots is a different kind of innovation.

Perhaps due to its emphasis on tradition, Poilâne stands as a success story in French luxury foods today. According to Businessweek, sales have grown steadily in recent years from €11.6 million in 2001 to €15 million in 2007. Relying on word of mouth in lieu of advertising, Poilâne has also succeeded in growing its customer base both within and outside of France. Currently 20% of the company’s output is shipped abroad, including half a million loaves that are sent via FedEx to customers and resellers around the world.

Perhaps Poilâne is one of the lucky companies that, due to their well-established market niche, do not need to innovate to survive. In fact, any change to the Poilâne image may cause more damage than good. As Jacques-Henri Bourdois, managing director of the Association Syndicale des Moyennes Entreprises Patrimoniales (ASMEP), a lobbying group for medium-sized French companies, has suggested in Fortune magazine, “Poilâne has become a great brand name, but it remains a niche market. Apollonia can continue to grow within this niche. But is it reproducible, expandable, [and] franchisable on an industrial, international scale? That’s possible, but if so, it would lose the authenticity that has been its strongest attraction.”

Yet, like others in the luxury foods industry, Poilâne is facing competition, in particular from mass market retailers such as the Pain Paul bakery chain, whose rapid growth has had industry experts like Steven Kaplan commenting in the International Herald Tribune on its “tentacular reach.” In the face of this competition, Poilâne’s current strategy has been to remain focused on its traditional niche brand. As Apollonia Poilâne also stated in the Tribune, “I have no competitors.” It may turn out that Poilâne does not require the financing to fund a bold global expansion or entry into new markets. Moreover, its loyal customers are unlikely to change the purchasing habits they have followed for decades. But it remains to be seen whether this strategy will continue to garner success for the company.

The French luxury goods industry is at a crossroads. For years, it has enjoyed a market perception as a leader in quality, coupled with a growing consumer base both at home and abroad. However, the current economic crisis has brought sharply into focus the trade-off faced by luxury businesses: Falling consumer confidence, stagnant incomes in the West and ever-increasing competition have all added pressure to adapt and change, or succumb to failure. Our case studies of French luxury foods show that the most important strategy for luxury goods businesses is protecting competitive advantage at all costs — whether it is the excitement of continuous innovation, in the case of Fauchon, or Poilâne’s number-one position in a niche market. In addition, Asia as a consumer center has created new challenges but provides a much-needed lifeline and an expansion strategy that will no doubt be replicated in other emerging luxury goods markets.

This article was written by Katie Catillaz, Swita Charanasomboon, Munish Gupta, Deepti Tanuku, Alexandra Thomson, and Vasil Topuzov, members of the Lauder Class of 2010.