The world of luxury goods is changing. Today, more than ever, companies are redefining their values in search of a retail model that is more respectful of the environment. Tiffany & Co., the American jewelry company, has eliminated its line-up of coral products because it is not possible to cultivate coral in a sustainable way. Cartier, the French maker of watches and jewelry, only invests in those gold mines where it is not necessary to use mercury to extract that metal. Fashion producers Loro Piana and Ermenegildo Zegna are promoting the repopulation of the vicuna in the Peruvian Andes, which also helps develop that region’s local communities. This trend also extends to less exclusive fashion chains such as Inditex of Spain, which is aiming to make all of its shops more eco-friendly before 2020. Meanwhile, on Twitter, retailer H&M is advertising suits made from recycled polyester. On the whole, trends that are established by the exclusive luxury brands are later followed by the rest of the market.
Within three years, sales in the luxury sector could reach 221 billion euros, according to consulting firm Bain & Co. Asian countries will be the luxury market's big stars in the future. Firms such as Prada, Jimmy Choo and Coach have not overlooked the opportunity to go to the Hong Kong Stock Exchange to reach the Asian investing public. Corporate deal making is also the order of the day. Louis Vuitton Moet Hennessy (LVMH), the French luxury firm, has purchased Bulgari, which specializes in luxury jewelry and other items, for 3.7 billion euros, and LVMH also owns 20% of Hermes, the fashion firm. Meanwhile, Hermes has just sold Jean Paul Gaultier (the perfume and cosmetics company) to Spain’s Puig (which also sells perfumes and cosmetics), and Pierre Cardin has hung out its “for sale” sign.
To explain how things work inside the most exclusive, high-end consumer market, Universia Knowledge at Wharton interviewed Maria Eugenia Girón, a professor at the IE Business School and author ofThe Secrets of Luxury. Girón also manages the investment firm Megam Capital, which specializes in the high-end sector, and provides companies with advice about strategic planning and brand-building.
Universia Knowledge at Wharton: What is eco-luxury, and what impact does it have on the development of a sustainable high-end market?
Girón:Eco-luxury is the favorite term for describing the initiatives that luxury brands are taking in order to integrate the value of sustainability into their business strategies. This term includes many different kinds of initiatives. Tiffany & Co. has eliminated coral from its line-up of products because it cannot be harvested in a sustainable way. Zegna and Loro Piana have repopulated the vicunas of the [Peruvian] Andes, which were on their way to extinction. They have contributed to the prosperity of the local communities while also improving the production of wool.
Recent research shows that the meaning of “better product” in the minds of consumers is now tied to the impact that its development, manufacturing and sales have on the planet and on people. The traceability of the products that we consume is one of the concerns of the younger generation, who want to know not only where the products they buy are coming from, but also the impact that the manufacturing and sales of those products are having on the world.
The luxury brands are concerned about responding to their customers regarding these issues in a fresh way.
UKnowledge at Wharton: Is there a place for luxury goods following this period of crisis? If so, why is that?
Girón:After 2009, when the luxury industry declined for the first time, the sector grew by 10% in 2010, and expectations for 2011 are similar.
We have also seen a phenomenon that we call the polarization of luxury. There are some extremely luxurious brands – those that are perceived as having secure value – and they are the ones that have gotten through the crisis the best. Some of the leading brands, such as Hermes and LVMH, had the best [financial] results in their history in 2010, both in terms of sales growth and profitability.
We are living at a time when values are being reassessed — not during a period of crisis. The financial and economic crisis, which materialized in September 2008 with the fall of Lehman Brothers, precipitated this change, and it had an impact on the way luxury products are chosen and purchased. We observed a return to the traditional values of craftsmanship and authenticity. More than ever, luxury consumers are looking for products that “are forever.” Faced with handbags that last for just one season – which [fashion writer] Suzy Menkes calls "McLuxury" products – consumers today want a handbag that mothers can pass on to their daughters.
UKnowledge at Wharton: Has there been a change in the way that luxury items are sold and positioned from before the crisis?
Girón:The financial crisis has been the catalyst for some changes that are quite important. The following are the most outstanding changes:
a) The development of “e-luxury”
Until recently, the luxury sector survived on the shoulders of technology and the Internet. Almost the only initiative that occupied the pages of the newspapers was the battle over the sale of counterfeit products on eBay. As a result of some successes [of online businesses] such as Net a Porter and Gilt in the U.S., the industry has begun to take the initiative to integrate technology into their strategy. Collaboration with bloggers, the emergence of such web sites as “The Art of the Trench” of Burberry [with uses images taken on the street of people dressed in its famous gabardine], and the use of “augmented reality” by Boucheron [which enables customers to try on jewels and watches in a virtual way] are some examples of this approach.
b) Growth in China
The growth in the number of high-income individuals in China, along with the need for symbols to establish and provide visibility to the new social order [in that country], have stimulated the consumption of luxury products there, making that market the engine of growth in the industry. It is worth remembering that the potential buyer of these products in China is, on average, 15 years younger than the [average] luxury customer in Europe and the U.S. This characteristic of the consumer in the market that is growing the fastest, is forcing the industry to rejuvenate its supply of products and to develop new channels for interacting with these younger consumers.
We can also see how many European brands’ recent collections of fashions and accessories have been inspired by Chinese esthetics and traditions — for example, the latest Marc Jacobs fashion show for LVHM. A notable example of China’s emerging luxury brands is Xang Xia, a project led by Hermes.
c) New values: sustainability and traceability
Today’s consumers are interested in knowing where the products they consume are coming from, and understanding the impact of their design, production and development on the environment and on people. For reasons of health, as in the case of foods or cosmetics, or because of [greater] sensitivity to the problem of environmental deterioration, consumers today identify the “best” products as those integrate those values.
Luxury consumers, who are demanding and well-informed, are even more sensitive to these dimensions. This reality has inspired numerous initiatives in the luxury industry.
UKnowledge at Wharton: How is a luxury brand created? What are the keys?
Girón:The primary material of a luxury brand is creativity. The challenge is learning how to transform creativity into profitability. For that to occur, it is critical to:
a) Develop emblematic products that become symbols of the brand.
These sorts of products, which are a characteristic of mythical brands, are the ones that come to mind whenever we evoke the name of that brand. Some examples are the Kelly handbag of Hermes, the Chanel jacket, and Tod’s moccasins.
b) Rely on the backing of opinion leaders.
In the history of mythical brands, there are always leading customers who discover the brand’s products and make them their own. These people transfer their own personal attributes and values to the products. For example, when Grace Kelly was photographed carrying a Hermes handbag, that product acquired her name, as well as the image of refinement and distinction represented by the American actress who had become a European princess. When Marilyn Monroe declared that she sprinkled drops of Chanel Number Five on herself before going to sleep, she transferred her seductive image to the product.
Loewe [a Spanish brand of luxury products, especially leather goods] pioneered the use of imitation lambskin for making handbags. This innovation made its product lighter and gave it an unbeatable touch. In addition, Loewe used a skin that had no lining in their "Ante-Oro" collection. The Amazona model in that collection became the symbol of its brand, bringing together the attributes of discretion, elegance and quality that are its characteristics. In addition, this model, which the brand is continually updating, continues to be chosen by leading people in Spain and around the world.
UKnowledge at Wharton: Whatis a trend leader, and what importance does he or she have for a luxury company?
Girón: A trend leader is a person who, because of his or her qualities, good taste and access to information, sets the standard for customers and potential consumers of a brand. An opinion leader must be capable of representing both the tangible and intangible values of the brand. In some cases, such as Hermes and its Kelly handbag, the product takes on the name of the person who uses [or wears] it and who transmits all of its attributes.
UKnowledge at Wharton: As the head of an investment firm in the luxury sector, tell us, please, which sorts of companies are most interested in international investments? Why are so many deals taking place in this sector in recent months?
Girón: This industry is growing, and forecasts call for it to continue to do so. Share prices on the [Madrid] stock exchange have been steady, and the differential with other industries is greater than ever. These are good conditions for buying.
The most attractive brands are those that have their own style of products, and have demonstrated their success in key international markets — the U.S., Asia and Europe. One of the keys to building a leading brand in this sector is that your products reflect your own characteristic style. Their style must also be identifiable and attractive.
When we look at the origins of each of these leading brands, we perceive a history of innovation. For example, Louis Vuitton developed a trunk with a flat lid and waterproof fabric at the beginning of the 20th century, which was more appropriate for the trans-Atlantic voyages of that era. And the jacket suit re-invented by [Giorgio] Armani in the 1970s solved the needs of women who had moved into the corporate world. A brand must also be able to continuously update its products by contributing [additional] innovation. When creativity is right for the market, it becomes innovation.
Stories about innovation and creativity are the origins of success, and they put new brands on the map. The combination of creative skill and a good team manager who knows how to transform creativity into profitability — that is another variable in the equation. Combining both [of those factors] enables you to construct a successful, valuable brand.
UKnowledge at Wharton: As for geography, can you say which countries or continents make different purchasing decisions about specific types of luxury items?
Girón:Luxury brands are global, and their products and images are essentially the same all around the world. However, there are nuances and small adaptations of the product that reflect the tastes of the market and even the physiognomy of its customers. For example, more of the smaller handbags and jewelry are sold in Japan than in the U.S. or Russia.
As for product categories, there is a remarkably high interest in accessories in [East] Asia, and [a similarly level of interest] in jewelry in India. In other words, jewelry sales as a percentage of all luxury sales are the highest in the world [in India]. It is also worth pointing out that the highest-quality diamonds sell well in Japan, while in China the most popular items are limited editions [of diamonds].
UKnowledge at Wharton: What role do the various emerging markets play in the luxury market?
Girón:The so-called emerging markets — China, India, Brazil, Russia, etc. — are already essential in the luxury market. When it comes to the size of the sector, according to data from Bain & Company, there were some 170 billion euros of sales in 2010, including all luxury products [fashion, accessories, jewelry, watches, perfumes and cosmetics]. This included 40 billion euros in the U.S.; 18 billion in Japan; 19 billion in China; 4.5 billion in Russia, and 4 billion in the Middle East.
So [the emerging markets] are enormously important for the luxury sector. Japan during the 1980s was the market that sparked the transformation of a group of fundamentally European family-owned companies into a prosperous [global] industrial sector. Today, China is the market that has become the engine of the industry. The Chinese market has overtaken the Japanese market in size, and is already the second most important.
The impact of China and Japan on the [overall] size of the sector reflects not only the sales of products in those countries’ markets, but also the sales generated by Japanese and Chinese tourists during their trips to Europe and the U.S.
Angela Ahrendts, chief executive of Burberry, told the Financial Times last October that her company’s sales to Chinese tourists in London already amounted to 30% of its total sales.
Total sales in the industry grew by 10% in 2010, and the fastest-growing geographical area was China, which grew by about 20%. Meanwhile, sales in Japan declined, and growth levels in Europe and the U.S. have recovered to their pre-2009 levels.
In Latin America, the most important market today is Brazil, where [annual] sales are 1.5 billion euros, and growth rates in coming years are projected to be between 15% and 20%.