"Luxu-re" - what drives luxury price premium // China, India

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Luxury used to mean something that was expensive because it was highly desirable but also scarce. Today ubiquity seems to be the driving force of luxury not scarcity. The definition of luxury has changed with time, and with the emergence of new markets of luxury such as India & China, it is important to understand the drivers of price premium.

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"Luxu-re" - what drives luxury price premium // China, India

  1. 1. Luxu-Re Back to the Roots The definition of luxury changes with time, and with the emergence of new markets of luxury such as India & China, it is important to understand the two drivers of price premium: the social esteem achieved and the possessor’s own experience of the product or service. DEVANGSHU DUTTA © 2012 Third Eyesight All Rights Reserved © 2012 All Rights Reserved
  2. 2. Luxu-re: Back to the Roots (This article appeared in a special issue of the Strategist on March 26, 2012.) L uxury is dichotomous, conflicted and conflict-creating by its very nature. “Luxuria” is Latin for “Lust”, the first in the list of the Seven Deadly Sins. The British poet Edith Sitwell is quoted as saying, “Good taste is the worst vice ever invented.” Luxuries are not a basic fundamental need to start with, yet to seek them out is innate in our nature. For the most part, the term luxury has been and continues to be applied to tangible goods whether found naturally, hunted or manufactured, rather than to intangible services. Yet, it is the intangible that differentiates what is ‘It is the intangible that luxurious from what is not. differentiates what is luxurious from what is not’ Certainly, the definition of luxury changes with time. There was a time, in today’s advanced markets, when hot water baths were a luxury and available frequently to only a few people. Indian pepper was once more expensive than gold. In fact, a significant part of European exploration of the world during the last millennium was driven by the craze for spices from “the Indies” before morphing into empire-building. Today, most modern Europeans would call neither a hot bath nor spices as a luxury, and many would gladly delegate to someone else their share of global travel. Understanding Luxury If we want to understand the shifts in the luxury market and how the emerging markets of luxury such as India and China might evolve in future, we must understand the two most fundamental drivers of price premium: the social esteem achieved and the possessor’s own experience of the product or service. When viewed together in the Experience-Esteem Price Premium Model (see graphic), we see the relationship of price premium and these two factors zigzagging in an N-shape for immature or rapidly evolving markets (“New”), whereas in more mature markets the premium would follow more of an S-curve (“Stable”). The term “market” here refers to not just geography but consumer segments, including segments defined by need/use rather than by demographics such as income or age. © 2012 All Rights Reserved 1
  3. 3. Luxu-re: Back to the Roots In rapidly evolving markets there is a significant premium available on products and services that are conspicuously expensive, whose price (or at least the apparent price level) is known in the buyer’s social circle. It’s a positive feedback loop: high social recognition keeps the price up, which in turn improves the social esteem of the buyer. Expensive cars and gadgets, designer brand apparel and accessories, holidays that would be the envy of others, Big Fat Indian Weddings (for and by Indians) all fit into this category. Beyond social recognition, however, the buyer’s own experience and satisfaction also plays a role in driving the price premium: the better the buyer’s own experience is for a given amount of social recognition, the higher the price premium is likely to be. This gives rise to the familiar pyramid for the luxury market, where the highest price is available for products and services that deliver both high social status and a superlative personal experience. In “New” or evolving markets, more of the premium is attributable to social status; the buyer’s thought process is: “if you’ve spent a million Rupees or Yuan on something and no one knows about it, it’s not that valuable”. In more evolved or “Stable” markets, on the other hand, where tastes have had longer to evolve, © 2012 All Rights Reserved 2
  4. 4. Luxu-re: Back to the Roots personal experience becomes important in driving premium for at least some products: for example, high-fidelity unbranded speakers bought by music aficionados or a vacation in an unknown destination fit the bill. The satisfaction, and the premium, is driven more from the personal high-quality experience, not from receiving recognition or respect from someone else. Developing taste needs time both at the personal level and for the society. On the other hand, status difference is a factor in all societies, at any given time. The pull between conspicuous and inconspicuous consumption at the higher price end plays out between indulgence and luxury versus opulence. Opulence may or may not enhance the buyer’s experience, but its main function is to make a statusstatement, including instances such as millions being spent on “public” spaces to enhance a political leader’s own standing. The thing with status is this: If others see you as worse off than them it is their problem; if you think you’re worse off than others, it is yours. By and large, the luxury industry, as it has evolved over the last 30-40 years, feeds ‘By and large, the luxury on this status insecurity that is multiplied and amplified by media. industry, as it has evolved Luxury used to mean something that was expensive because it was over the last 30-40 years, feeds on this status insecurity highly desirable but also scarce. Today ubiquity seems to be the driving force of luxury not scarcity. As economic growth has that is multiplied and created nouveau riche worldwide, brands (especially logo-bearing amplified by media’ ones) have emerged to deliver instant gratification and legitimacy. Distinct, recognisably expensive brands are the accepted currency in the world of cachet. In the final price, the share of marketing spend is often higher than the cost of the core product. In a consumer society that is more conscious of the status that the product offers rather than its utility, it is the recognition and identification that matters most. This has led to the trickle-down effect with luxury brands becoming increasingly more accessible, not just in terms of physical availability but also in terms of price units through bridge, diffusion and prêt lines, and licensing. A particular consumer may not be able to buy a Chanel dress or Dior gown, but she can surely scrounge enough to buy a perfume that promises at least a whiff of celebrity status! The vintage of the product or service is an important component of the status or recognition premium, especially when the buyer has newly come into money. This © 2012 All Rights Reserved 3
  5. 5. Luxu-re: Back to the Roots is why the market is dominated by European luxury brands that can claim ancestry of at least a few decades, if not centuries, while there are barely any brands of note from other geographies. This is not conclusive evidence of European tastes being better or more acceptable, just the economic cycles through which societies around the world have been. India & Luxury So where does India stand for luxury marketers? The Indian operations of most brands that have been launched in the last few years are bleeding, and seem unsustainable. And yet, it is tempting to compare the emerging golden bird of India to the golden dragon of China. ‘The Indian operations of most In our work with brands and marketers from brands that have been launched around the world, we have to constantly remind in the last few years are bleeding, people that not all emerging markets are the and seem unsustainable’ same. The explosion of luxury and premium brands in China during the last decade or so has been aided by sudden economic growth that came after a long cultural and economic vacuum. When the new money wanted links with the old and when uniform grey-blue suits needed to give way to something more expressive, well-established western premium and luxury brands provided the most convenient bridge. As China evolves further and consumer become more discerning, I believe we will see the emergence of Chinese and smaller new international brands that differentiate themselves on the core product, rather than relying on a long foreign history. India’s case is slightly different. Discernment may be a new experience to some Indians who have come into money recently, for whom brands can be a valuable guide and “secure” purchase. Globally well-known premium and luxury brands or products that are endorsed by “people in the know” (including works of art) are the first to benefit from this spending. However, discernment and taste are not new to India and, more importantly, differentiation and self-expression never disappeared even during the darkest years of “socialistic” economics. Therefore, India will see a layered approach to the luxury market and grow in a more fragmented manner, with slower expansion of individual brands. There would be multiple tiers of growth for international as well as Indian luxury products. For international brands customisation and Indianisation © 2012 All Rights Reserved 4
  6. 6. Luxu-re: Back to the Roots will be important, as is already visible in bespoke products by Louis Vuitton and Indian products by brands such as Canali (jackets) and Lladro. And there is a real prospect of luxury Indian brands emerging to respectable size, if they can stay the course and travel the distance. As the market matures spending by Indian consumers on indulgences will also grow, driven by the need to satisfy themselves rather than for the status they could gain. In fact, another market to watch out for is India itself is a source of indulgences for foreigners – luxurious Indian experiences in which price is not the object but the experience – Big Fat Indian Weddings, ayurvedic treatments and meditation holidays for non-Indians are a case in point. While on indulgences, in closing, I refer back to the ExEs Price Premium Model. For a limited number of people the price premium curve follows a clockwise-D, starting from Indulgences. For them invisible or inconspicuous products whose only function is to enhance the owner’s or buyer’s own ‘In a world of hyperexperience are the most prized. In many cases, the fewer information, self-promotion people that know about it, the better and more premium it and instant celebrity, would be. invisibility may be the In fact, perhaps invisibility itself could be the greatest greatest indulgence of all.’ indulgence of all in a world of hyper-information, selfpromotion and instant celebrity. Increasingly we will find that anonymity and invisibility will be treated as luxuries, and service providers will charge a huge premium for taking you down below the radar, making you invisible. Actually, we don’t really need to wait to see that emerge. That world of luxurious anonymity is already here, and its most valuable service providers are banks in offshore tax havens! About Third Eyesight: Founded in 2003, Third Eyesight is a specialist management consulting firm that works with market leaders with annual sales of ranging to over US$80 billion. These include retailers, brands, manufacturers, service and technology companies, investors, trade and government organisations. Third Eyesight helps with research and assessing market opportunities, developing business strategy, business launch, sourcing and supply chain, product strategy and other areas. © 2012 All Rights Reserved Contact Information: Third Eyesight F-1/3, Hauz Khas Enclave New Delhi – 110016, INDIA Tel: +91 (124) 4293478 Email: services@thirdeyesight.in Website: www.thirdeyesight.in Follow Us: On Our Blog: http://thirdeyesight.in/blog On Facebook: http://facebook.com/thirdeyesight On Twitter: http://twitter.com/thirdeyesight 5

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