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How to be a successful luxury brand

Luxury goods are the quintessentially modern products, charting the spread of wealth and aspiration to the most unlikely places. Campden looks at five things that luxury brands have to do if they are to flourish.

The spread of luxury is the story of the early 21st century. Take this fact: Louis Vuitton, which started life as a trunk-making business in Paris in 1854, will soon open a swanky new store in Kazakhstan. This follows the opening of a massive new store in Shanghai, right at the heart of what was once a hardline Communist state. Luxury goods are the quintessentially modern products, charting the spread of wealth and aspiration to the most unlikely places. Campden looks at five things that luxury brands have to do if they are to flourish in this strange new world.

Human beings love stories, so brands that have good tales are wise to use them as much as possible. “Naturally, it is easier to sell your story if it starts with depuis 1833” says Anastasia Kourovskai of Millward Brown, a brand research agency. “Such brands as Chanel, Dior and Yves St Laurent have real stories behind the brand,” she says. Other newer ones, however, have created their brand stories.

Look at Tiffany’s, whose name is forever linked to Audrey Hepburn’s classic chic through the film Breakfast at Tiffany’s. Or Ralph Lauren, founded by a chap named Ralph Lifshitz from The Bronx, the son of immigrants from Belarus, but which has brilliantly used advertising and store design to link the brand with the WASPish pursuit of polo.

Mark Henderson, chairman of Savile Row tailor Gieves & Hawkes (founded in 1771) agrees that the stories matter. “I think that is why tradition and family heritage are such an important part of the brand,” he says. Family ownership, of course, is a strong scaffold onto which you can build a good story, and Henderson says that it appeals because this often gives the products a feeling of “something that is home-made.”

A luxury brand’s story is not a bolt-on, but is integral to the brand’s appeal. That’s because tradition and history are closely linked in customers’ minds with artisan production. Production quality and brand are mutually reinforcing. “It is important when you are designing products that you are close to where it is made,” says Henderson, “because only then can you really know what you are doing with the materials.” It is also vital that “the key products in any brand are made by the company itself.” Both Hermès and Louis Vuitton both make a large proportion of hat they sell. That retains “an element of craftsmanship” around the brand.

Indeed, some brands are so closely connected to a place that outsourcing offends people’s vision of the product and its story. Take, for example, the outcry when Ralph Lauren outsourced the production of the American Olympic team outfits to China (a particularly unpopular move during a recession, and the company was accused of giving American jobs to the Chinese.)

Other brands, however, manage to outsource without losing kudos. Burberry, which plays on the image of Englishness, has outsourced almost all of its production to Asia. Kourovskai says that some brands “have a permission from the consumer to update themselves. Burberry is one of the best examples of becoming more contemporary without losing the core values of the brand. Their innovative use of internet and social media preserved the feel of luxury and exclusivity while bringing the brand to the 21st century.”

Scott Galloway, a professor of marketing at NYU Stern University and founder of luxury think-tank L2 says: “An accessible product like Burberry can outsource, at the end of the day people want a great product, a nice brand at an affordable price, and the consumers are comfortable buying products that were made in China.

“When you get into the more craftsman or artisan product at a very high price point – a Cartier, say – that needs to stay close to the towns of the origins and the artisans who originally built them. When it comes to Burberry, they might occasionally pull out a Union Jack and start waving it about, but they don’t really care. The press does, but the consumers don’t.”

If you had walked into Burberry’s flagship London store last December you would have seen products floating around the place, attached to golden helium-filled balloons. Even when it’s not Christmas, the Regent Street shop is a pretty special store. Full-length screens can be turned into mirrors. Some items have chips attached that, when you place them near a screen, trigger them to play a film of information about the product, including catwalk footage. There are no tills, just good-looking staff wandering about with iPads. This being London, and Burberry being famous for trench coats, from time to time you even get a “digital rain shower”.

The growth of on-line shopping has, perversely, meant that luxury brands are working harder to get people into their stores. The opening of Vuitton’s new Shanghai store – the largest shop in China – was a global event, with the brand taking out front-page ads in the China Daily and Shanghai Daily and the New York Times. Stores are springing up all over China. British fashion retailer Karen Millen opened its first Chinese store in Beijing last month, the first of 60 that it plans to open in the next five years, while American sportswear brand Michael Kors is opening 15 stores this year, taking its number to 20. Vuitton has 41, Hermes 20 and Gucci 39. And they haven’t even started looking at the so-called second-tier cities yet. Prada opened 65 stores in the year to April 2012, and plans to open 80 more a year for the next three years.

“Luxury positioning is not enough to capture new generations of shoppers,” explains Claudia D’Arpizio, a partner with consultancy firm Bain & Company in Milan. “They have to enhance the customer experience, because luxury is evolving from ‘product’ to ‘product plus experience’.” Brands use modern art, screens and anything that raises a “wow” to get customers into the shop. Buying a product is about sharing in this glamour.

But you’ve got to balance the bricks (the physical stores) with the clicks (the on-line experience.) “We are going to see a tectonic shift from bricks and mortar retail to on-line retail,” says Galloway. “It’s low-touch luxury. Luxury has been about a bunch of suited people in funny hats opening doors taking you around and putting an umbrella in your hand when you leave the hotel, putting a watch on your wrist and telling you it looks wonderful.”

But, thinks Professor Galloway, “the younger generation is more introverted, and more at home with screens than with people.” He gives the example of the Mandarin Oriental in Tokyo. If you call reception and say you’ve left your phone-charger at home, they come and put it in a trap-door. “You don’t have to sit there awkwardly wondering whether you are meant to give a five dollar tip.” Sixty per cent of people say that they are put off by sales staff in luxury shops, Galloway says, and the number is higher in emerging markets. All those glamorous stores are all very well, but increasingly brands will also use Tumblr, Pinterest or Facebook to build communities of people who care about the brand.

In 1995, China accounted for 1% of the global luxury market. Now that figure is an astonishing 25%, according to recent research by managment consultant Bain. One in four luxury consumers is now Chinese, and Greater China – including the mainland, Hong Kong and Macau – has overtaken Japan as the world’s second biggest luxury market, after America. A whopping €27 billion was spent on luxury goods in China last year, a rise of 19% from the previous year.

China now accounts for a third of Prada and Gucci’s sales. Premier cru Bordeaux producer Chateau Lafite courted Chinese drinkers by prominently placing the symbol for the number eight, considered lucky in China, on its 2008 vintage. Prices rocketed. Success in these markets depends on understanding what the customers want. As Mark Henderson of Gieves & Hawkes says, “You get a lot more delicate fabrics in these countries, because the wealthy people there tend to be driven about much more and so their clothes get less wear.” Materials such as crocodile skin, which might alarm Westerners, are still sought-after in other markets. And when Estée Lauder announced that it is to launch a new skincare brand for China, called Osiao, it revealed it will use traditional Asian ingredients like ginseng.

But has Chinese demand peaked? Both Burberry’s and Vuitton’s growth there has slowed. Earlier this year Johann Rupert, the CEO of luxury group Richemont (owner of menswear brand Dunhill, IWC watches and fashion house Chloé among others) said: “I feel like I’m having a black tie dinner on top of a volcano, okay? That volcano is China… we are now a China play.”

Lucky for luxury brands, then, that other developing countries’ demand for luxury is growing. Bain expects the Indian and South African markets to grow by 20-30% every year for the next five years, and the Brazilian and south-east Asian markets by 15-25% per year. But how do you possibly expand into all these countries?

Increasingly, brands feel that they have to come under the umbrella of one of the big luxury groups, PPR, LVMH or Richemont. Twenty-five years ago 70% of luxury brands were family owned, says Bain. Now just 30% are.

“As PPR has shown with Gucci and Bottega Veneta, they can provide the wallet and the expertise to expand the acquired brand globally,” says Kourovskai. “Nine months after the acquisition of Brioni, they have opened in a rapid succession a store in Riyadh in Saudi Arabia, another store in Dubai in Mall of the Emirates and are eyeing Kuwait.” It’s not all over for minnows, though. “Having a strong brand makes it much easier to raise funds on the stock market to enable the management team to implement the expansion,” she says. But, says Galloway, “if you’re not growing in double-digits every year as a smaller brand, you are in no-man’s land and you should sell”.

Remember cyber-squatting? Where people would buy the domain name for a famous brand and then watch while they squirmed and then paid out fortunes to get the URL back? Well, cybersquatting’s little cousin – called “trademark squatting” – is alive and well and living in China. Hermès recently lost a court case to use its name after a Chinese manufacturer bought it to use on neck-ties.

It’s not only luxury brands that have fallen foul of this phenomenon – the trademarks Kardashian, J. Crew, Justin Bieber and Angry Birds have also been registered. Somebody in Liaoning province owns the trademark to sell clothes under the Oprah Winfrey brand. Basketball player Michael Jordan is trying to stop a Chinese sports brand from using his name. Amazingly, Apple paid $60 million to buy back the right to use the iPad brand. Perhaps oddest, somebody owns the trademark to make Facebook-branded condoms.

“You go to register your trademark in China and you find that someone has registered it before you, and you’ve got a battle on your hands to get it back,” explains Jason Rawkins, head of the fashion and luxury brands group at international law firm Taylor Wessing. “People are searching for businesses that are doing well and as soon as they have any sort of presence in the market, not even in the Far East, only in Europe, there seem to be people in China sitting at computers who just pick them up, and register the name.”

As the Hermes case proved, the courts can’t be relied on to decide in favour of western businesses. For luxury brands, whose name is fundamental to their business, it’s a nightmare that – if left too late – can only be resolved by paying money. Lobbying to change the system in on-going, Rawkins says, but the functionaries of the Communist Party of China do not always show the greatest respect to western companies who want to sell silk pochettes. “The only way to avoid the problem is to think about China really early on. That might seem counterintuitive to a firm that’s just starting out, but it’s necessary,” Rawkins says.

Counterfeiting is a problem, of course, although one which is taken seriously by most countries in the world (although China, where the copycat culture is strong, is still troublesome and the market is awash with fakes). Wealthy people from emerging markets prefer to come to Europe to buy their goods, to ensure that they are the genuine article.

Another difficulty is preventing your goods from turning up in the sorts of places you might not want it to be sold. Laws covering so-called selective distribution exist in most countries, meaning that a store has to meet certain standards to sell your goods. “That is generally speaking something luxury brands can set up. As long as they are objective criteria, you have legal grounds for saying that someone can’t sell your brand,” Rawkins says.

Many brands these days include bar-codes or other marks on their goods that tell them which batch they came from, so that they track a particular item, giving them a good idea where a supply chain leak occurred. It’s all bad for brands. But good for lawyers.

Hermes has only 328 stores worldwide. This exclusivity has certainly not hindered its growth. In Millward Brown’s 2012 BrandZ top 100 report, it ranked as the second most valuable luxury brand, with a value of $19,000 million. It was also the second fastest growing brand, having grown in value 61% in the previous year. It was outpaced only by Facebook.

Of course, it’s the difficulty of actually getting hold of some Hermès products increases its value to devotees. It is able to sell its most iconic product, the Birkin bag, for $8,000. A crocodile skin version reportedly sold online last year for $56,000. In other words, exclusivity works. Other brands also work hard to stay exclusive. In the 1970s Chanel famously cut the number of outlets that could sell its perfumes from 18,000 to 12,000 and the brand still works hard to stay exclusive.

As a strategy, that certainly makes sense: the ultra-wealthy are recession-proof. And according to a report by research firm Wealth-X there are 187,000 people with a wealth of $30m, a figure which is expected to grow by 4% a year globally, and in double digits in Latin America and Asia. “Nearly 90% of these people are self-made,” says Millward Brown’s Kourovskai. “They have not been born to luxury and now that they have earned their wealth they are ready for brands to tell them their stories, to entice them, to embrace the unique luxury experiences.” If you can break into this market, it’s a good place to be.

But on the other hand, the only luxury brand more valuable than Hermès is Louis Vuitton, which is fast becoming ubiquitous, especially in China, by targeting the mass affluent. “Many luxury brands are pursuing what is called a ‘masstige’ strategy,” says Kourovskai. This is otherwise known as “downward brand extension”, ie, appealing to less well-off customers.

This creates problems for a brand, however. By definition it loses exclusivity once it becomes more accessible. The mass affluent is a broad church, and those at the top end probably don’t want to own the same brands as those at the bottom. There are solutions. “The brands that are successful in the pursuit of this strategy have a clearly defined product portfolio that leads aspirational customers up the ladder,” says Kourovskai. But its not a perfect strategy.

“In China, where Louis Vuitton and Gucci have become nearly ubiquitous, this has an off-putting effect on the core customers and as a result a negative impact on the sales,” she adds. The risk is that familiarity breeds contempt, as evidenced by a recent (tongue-in-cheek?) letter to the Financial Times about the luxury industry that ended: “When even my maid has a Louis Vuitton handbag, the cachet of exclusivity is clearly lost.” 

Illustrations by Melissa Baily

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