The recent crisis hit the luxury industry hard, of course. But how they all came out of it strongly is another story...
By: Ashok Som, Professor of Global Strategy, Management Department, ESSEC Business School
Posted on: May 13, 2015
Although many believed the luxury industry would be immune to the crisis, the 2008-2009 recession eventually produced a change in the behavior of luxury consumers. First and foremost, these consumers became choosier: where before the crisis they would have bought ten products, after the crisis they would choose just one or two, after careful deliberation. Second, they showed a renewed interest in inconspicuous consumption: many avoided purchasing products that were too obviously expensive or flashy. With the changes in the consumption behavior, luxury brands had to reposition themselves during this period of transition.
But the different response to the crisis witnessed new difficulties. Changes in the external environment, such as exchange rate fluctuation, created a distinctive phenomenon. The dollar became stronger and American consumers started consuming. On the other hand, Chinese consumers preferred shopping in France rather than in China as the price differential is almost 51% higher in China compared to that in USA, and 72% higher in China compared to that in France. With this arbitrage there rose a group of middle-men called “Daigou” who were successfully buying the brands in bulk overseas, more so in France, and selling it at a discount in China. This phenomenon involuntary creates a market where the goods cannibalize their own sales in the Chinese market, as the goods in the luxury stores find themselves trying to compete price-wise with the grey markets. As a knee jerk response, Chanel cut its price in China by 22% and increased prices in Europe by 20%. The interesting question to understand is two-fold. First, will the whole industry follow the example of Chanel? And, will it facilitate growth back in China and restrict cannibalization? The response has been varied once again. Prada decided to cut prices in China, but stopped short of increasing prices in Europe, thereby protecting the local European market. On the other hand, LVMH and Hermes did not unify price points across markets. Surprisingly, however, as seen from the above observation, many of the strongest brands chose starkly opposing strategies, revealing that the luxury industry was heterogeneous and constantly evolving.
Some luxury brands had the same knee-jerk reaction: reduce expenses, reign in spending, and reduce expansion. Strategies included hiring freezes, reducing the number and the size of the collections, rationalizing media spending, and reducing head-counts. Dolce & Gabbana slashed prices. Stella McCartney closed its boutique in Moscow just 18 months after opening. Burberry ended its Thomas Burberry collection. Prada shifted its manufacturing base to China for certain products.
Other brands, however, saw the crisis as opportunity to expand geographically and touch new potential customer bases. Prada, for example, undertook the most aggressive investment plan it had ever undertaken in 2008-2009 in an effort to expand its distribution network. Similarly, Hermes opened stores in Manchester, Las Vegas and Wuxi in China – and resisted the crisis quite gracefully.
Expansions were also undertaken horizontally into different traditional luxury categories. For example, Louis Vuitton expanded into high fashion, high jewelry and watches. Coach explored lower price options for the consumer, providing them with a larger range of accessible products. Other luxury brands explored new ways of reaching customers: through mobile advertising, or online sales, for example.
4. Holding true
But what’s most striking about the luxury industry is the capacity of some brands to resist the crisis by simply not changing at all, and staying true to their luxury heritage. Bottega Veneta, for example, continued to manufacture its products in Italy and invested in its artisans to ensure that they gave traditional quality output. This cool-headed reaction ensured that the brand was two steps ahead of its panic-struck competitors.
Some of the biggest post-crisis success stories come from those brands that chose to reinforce their luxury status. As Bernard Arnault pointed out in the 2015 shareholder meeting that “capacity to bring newness remained the group’s most vital fuel, trumpeting the importance of creativity that’s pragmatic.” Both Louis Vuitton and Christian Dior, for example, exited its logo and accessory product business as it pursued an up-scaling drive, in the hope that the cream among the super rich would not be affected by the crisis. François-Henri Pinault, CEO of Kering, was of the opinion, “There’s a new perception of luxury, a more discrete sophisticated luxury where notions of heritage and craft play a big role.”
What does the diversity of reactions say about the luxury industry as a whole? Growth depends on each brand’s ability to understand the scope of potential customers, fixing a strategy based on a specific language. There was no universal response, nor any universal language. Chanel speaks Chanel, Hermes speaks Hermes - each brand faces an individual challenge on how to keep the dream alive for their consumers.
Ashok Som is Professor of Management Department at ESSEC Business School. Professor Som's expertise is in global strategy and re-designing organizations within diverse contexts. He is author of the books The Road to Luxury: The Evolution, Markets and Strategies of Luxury Brand Management (Wiley, 2015), International Management: Managing the Global Corporation (McGrawHill, 2009) and Organization Re-design and Innovative HRM (Oxford University Press, 2008). His current research is on creative industries focusing on luxury, movie and art industry. He is a regular speaker in international conferences and consults with European and Indian multi-nationals. Follow him at @AshokSom