Luxury Retail’s Evolving Landscape• Cognizant 20-20 InsightsExecutive SummaryThe luxury goods market may appear to many as arecession-resistant industry that generates over $1trillion in revenue, but a closer look at the figuressuggests otherwise. Luxury retailers, which weregrowing 9% annually a year before the recession,saw sales drop on average by more than 13 per-centage points from 2007 to 2009. Meanwhile,luxury manufacturers saw their revenues declineby an average of 21 percentage points.1The major industry brands have since overcometheir tepid performances and reported strongrevenue gains, defying all signs of a turbulentmarket in 2011. But the recession seems to be thegame changer for a range of consumer behaviorsthat could be magnified in the coming days. Andthese changes could potentially redefine thebusiness model of the successful luxury retailerover the near term.With the advent of social media, the rise ofemerging markets and a refined and informedgeneration of millennial consumers, the meaningof luxury is blurring. It is no longer sufficient fora product to exhibit rarity. Luxury products needsto exhibit uniqueness coupled with product supe-riority and originality, providing value for moneyin today’s frugality-minded reset economy.This paper focuses on how the movement of theindustry’s target segment from classes to massesis affecting the luxury market and the impera-tives for retailers that wish to maintain or gainmarket share.Spanning the GlobeConsensus opinion of economic experts suggeststhat Europe is slowly sliding back into recession.However, the revenues of retailers in this regionhave been fueled by tourists from Asia and Chinawho shop in Europe to purchase high-end brandsat lower prices. The U.S. appears to be recoveringa bit faster. In the luxury segment, productcategories such as shoes, apparel and leather arefast regaining momentum in the U.S. The marketfor luxury goods in Japan, meanwhile, has erodedsince 2007 (showing a 3% decline in revenue),mainly due to a demographic shift.2The reason:luxury consumers from the ‘90s are eitherretiring or becoming more conservative (due toa two-decade-long recession), thus leading to areduction in luxury spending.One of the fallouts of the financial crisis is thefact that APAC is gaining significant relevanceas a result of the rising incomes of affluenthouseholds. China has emerged as the clearwinner in terms of growth for luxury items, mainlydue to a rising middle class that has exhibited ademand for “aspirational” products. A big allurefor luxury retailers has been the wealth accumula-tion in China. In fact, wealth has slowly percolatedfrom China’s large coastal cities to smaller citiesin the north and west. The luxury market inthese regions is concentrated in menswear andbusiness gifts.The idea of luxury arose from product attributessuch as rarity, craftsmanship and exclusivity tothe individual. Most clothing, jewelry and acces-cognizant 20-20 insights | april 2012
sories brands like Hermes, Louis Vuitton, Chaneland Moët-Hennessy started as small familybusinesses in Europe centered around creativedesigners.Major European business magnates then beganmerging their businesses under various differentumbrellas. The influx of investment bankingcapital led to brand marketing and an aura aroundproduct heritage and craftsmanship. Graduallythe saturation of retailers’ home markets inEurope and the U.S. and the emergence ofdeveloping nations like China, Russia, Hong Kong,etc. pushed retailers to enter foreign marketsand diversify their product lines. Major luxurygoods companies evolved from mono-brand tomulti-brand. Traditionally, brands have one coresegment, and additional one(s) for diversification(e.g., Armani, Bally, P.R. Lauren, Versace, E. Zegnaand Choppard).With the advent of social media, emergingmarkets and an evolved and informed generationof consumers, the meaning of luxury is blurring.It is no longer sufficient for a product to exhibitrarity. Uniqueness must be coupled with productsuperiority. Experiential luxury is beginning togain greater market share over materialisticluxury (see Figure 3).Traditional Luxury ConsumersThe Maslow needs hierarchy3would be a goodstarting point for segmenting luxury consumersfrom normal buyers of day-to-day products.Unlike ordinary purchases which are bought tosolve a problem or need, luxury products arepurchased for the experience, by consumersseeking self-esteem (self-actualization). It is notessential for survival but related to status, egoand psychogenic needs.The purchase of a luxury product provides theconsumer with greater joy and satisfactionthan the economic value of the product itself.This utility could be derived either through theselection process, the purchase experience, useof the product or the pride derived from owningthe product. Luxury products are timeless classicswhich generally don’t go out of style. They havehigh recall value and exclusivity.The New Luxury ConsumersThe new luxury consumers are younger, betterinformed, more exposed globally and hence moresophisticated. A large portion of these consumersare baby boomers4who want to define their ownrules. These consumers are less materialistic andmore experiential.A second set of consumers are generation X andY5who aspire to own these products. They save inorder to buy the best or take a short-cut (counter-feit products) to gain status. These sets of peoplebelieve luxury is for everyone but different foreveryone. These consumers are driven by theneed to buy and display. They believe luxury is ameans of expression of status.cognizant 20-20 insights 2The Evolving Luxury LandscapeDrivers for ConsumersTrigger PointsEra of ExclusivityEra of ConsolidationEra of DiversificationStrategy ofdiversification withfocus on select highquality products.Revitalization of luxurywith use of celebritiesto create an auraaround brands.European familybusinesses centeredaround craftsmanship.Increased consumption ofluxury in developingeconomies, financial crisisand perils of recessionlooming on consumermindset.Influx of capital,emergence ofcompanies like LVMH,Hermes and Prada.Wave of consumptionof luxury goods inEurope.Materialistic viewof exclusivity(1970 – 1985).Appeal to emotion,charm and betterlifestyle (1985 – 2000).Combination ofutilitarian andhedonist attributes(2000 onwards).Figure 1
cognizant 20-20 insights 3The consumer attitudes that influence the twosegments are, respectively:1. A personal experience that is customized toaccelerate the “feel-good” factor.2. Being part of the elite group for the aspira-tional class (e.g., products that transfer brandpersonality to the owner).A recent study contends that emotional factorsaccount for as much as 70% of the decision topurchase, with the balance based on rationalfactors such as category attributes.6Buildingbrand credibility is crucial to influencing perceivedvalue. Brand loyalty in luxury parlance is thecontract between the retailer and the consumer,bonded by emotions that are difficult to replace.Key TrendsTo address the needs of a diverse audience,luxury marketers cannot rely solely on their brandimage. They need to give consumers a reason tobelieve it is worth owning the product.Luxury markets are at a key inflection point.Post-recession, with the exception of a fewleading brands, most of the smaller brands facefinancial stagnation or decline. As illustratedin Figure 2, consumers arebecoming a bit more price-conscious, seeking higher exclu-sivity from the luxury brandsthey purchase. Consumers arebecoming aware and vocal abouttheir luxury brands’ sources oforigin, positioning and brandvalue. It therefore is becomingall the more important for luxuryretailers to provide best-in-classservice and create substantialbrand loyalty/affinity with theconsumer. For luxury brands itis extremely important to build aglobal footprint extending theirreach deep into growing marketssuch as China and Russia.The critical success factors forluxury retailers in the days tocome include:• Managing the portfolio willbe the key: Strategic focus onthe right category of products.• Ride the emerging markets wave: Countriessuch as China, India and Russia provide amplegrowth.• “Channel-ize” efforts to engage consumers:Engage customers through e-commerce,m-commerce and social networks.• Eliminate counterfeits: Roughly 7% (worth $6billion) of the entire world’s production is coun-terfeit. Educate customers on brand heritageand create awareness that products cannot besubstituted.• Technology-enabled creativity and advancedfunctionality: Use technology to providesuperior customer experience.Portfolio ManagementLuxury product players typically own a portfolioof various brands across different categories.The traditional categories include watches,jewelry, fashion, clothing, electronic gizmos andalcoholic beverages. According to a survey byBoston Consulting Group (BCG), these categoriesAfﬂuent consumer survey:shopping behaviors I’m doing more oftencompared to last year.Using coupons/direct offers.Waiting foritems I buyto go on sale.Buying lessexpensivebrands thanI usually do.I believe thatthe brands Iwear say alot aboutwho I am.I am willing to spendmore for designerbrands because theyare the most stylishand fashionable.FirstQuarter2011FirstQuarter200832% 39%31% 38%17%51%41%32%51%20%2010 2011Source: Harrison Group and American Express PublishingFigure 2Consumers arebecoming awareand vocal abouttheir luxurybrands’ sources oforigin, positioningand brand value.It therefore isbecoming all themore important forluxury retailers toprovide best-in-classservice and createsubstantial brandloyalty/affinity withthe consumer.The New Luxury
cognizant 20-20 insights 4(including travel, hotels, food, beverages andspas) represent a target market of $1.1 trillionUSD7(see Figure 3).Brands continue to be the backbone of luxurybusinesses worldwide. Post-recession, luxurygoods makers have two options: either strengthentheir business vertically across different productcategories or horizontallyacross price segments.Merchants, planners or buyersshould be on a constant lookoutfor new, emerging brands.Success will be determinedby balancing the right mix ofbrands within well-managedcosts. Top luxury retailers areeyeing emerging Asian brands.For example, a $650 millionprivate equity fund backed byLVMH Group is on the prowl forup-and-coming Asian brands inthe hope of transforming theminto global names. L Capital Asia fund has, so far,spent a total of $90 million on minority stakesin two Singaporean fashion companies and aHong Kong-listed watch and jewelry company.This suggests that large retailers are using theirknowledge to connect and experience buildingluxury brands, or make the brands aspirational, toaccelerate profitable growth.8Among the product categories, leather goods andready-to-wear goods have the greatest operatingmargins.9Cutting prices would not make much sense inlight of most luxury brand strategies, as priceelasticity for most retailers is extremely limitedand such cuts would hardly be rewarded withhigher demand (since luxury goods consumersare historically less price conscious than otherdemographics are). However, retailers can haveclearly demarcated product ranges addressingvarious consumer segments. Swatch is one of thefew companies that has successfully expandedvertically across different price segments ratherthan horizontally across different luxury productcategories. It sells watches ranging from thevery expensive (i.e., Omega) to the inexpensivenamesake Swatch brand.Emerging Luxury Markets: ChinaEconomies like China were least affected byrecession and are taking big strides to becomingthe next economic superpower. China is expectedto become the biggest luxury goods marketworldwide within the next four years, and it willconsume 44% of the luxury market by 2020.The greatest growth in the years ahead willoriginate from the upper-middle class, ratherthan wealthy consumers. According to a studyfrom McKinsey, this segment accounts forabout 12% of the market, and its numbers aregrowing rapidly. By 2015 there could be 76 millionhouseholds in the income range (10,000-20,000renminbi), accounting for 22% of luxury-goodspurchases.10Studies also indicate that the majorityof the luxury consumers in China are male and intheir 30s.These new generation shoppers are most likelyto splurge on experiential activities such asspas and travel rather than traditional productssuch as handbags, jewelry, fashion, etc. Twentypercent of Chinese consumers will spend moreon “experiences” (i.e., spas, massages and otherwellness activities) whereas only 13% will spendon products.11Luxury retailers in this market need to payattention to the following:• Most consumers would rather shop in regionslike Europe and Hong Kong rather thanon mainland China. Retailers must createsufficient brand visibility in major Chinesetourist hot spots.Luxury Market by CategoryTotal Luxury Market ~ 1.1 Trillion USDLeather Goodsand Accessories7%Fashion and Clothing7%Spas and Clubs3%Furniture6%Technology15%Cosmetics andFragrances4%Alcoholand Foods7%Travel Hotels36%Watches andJewelery15%Source: Boston Consulting GroupFigure 3Post-recession,luxury goods makershave two options:either strengthentheir businessvertically acrossdifferent productcategories orhorizontally acrossprice segments.
cognizant 20-20 insights 5• Brands have a low recall value which could be aboon to mid-tier luxury retailers but a bane toestablished top-tier luxury retailers that cannottake for granted that their brand image willcarry over. Luxury products is more of a pullthan a push industry; hence, large amounts ofmoney need to be invested in advertising andcreating brand awareness.• With more and more luxury retailers eyeing thislucrative market, the competition is cutthroat.To differentiate themselves, products sold byluxury retailers should exhibit Chinese heritageand be designed to specifically reflect Chineseculture.Channel OptimizationA recent survey indicated that four out of fiveaffluent luxury shoppers logged online in thepast three months from their desktop or laptopcomputer to make a purchase, shop for a giftor research a product or service.12Turnoverof high-end luxury brands via online shoppingmarket reached a record high 10.73 billion yuan(68% growth) or $1.59 billion in 2011.13Luxury Institute research on the wealthyconsumer use of mobile devices shows that 76%compare prices via mobile devices, while a rapidlygrowing 27% have bought via a mobile device. Inaddition, 21% report that they use mobile devicesto look up respective product information whileshopping in stores.14Many luxury companies have slowly begun toembrace online and mobile channels. However,online/mobile channels can never be a substitutefor the shopping experience delivered via theretail store, where physical-world ambience andaesthetics, as well as the tactile characteristics ofthe product, can help make the sale. The onlinechannel, however, can complement the physicalstore and influence “connected shoppers” tovisit the store. Retailers can use this channelto educate consumers on brand heritage andexclusivity.For a luxury retailer, brand integrity, exclusiv-ity and value, outstanding service, convenience,security, an appropriate degree of personaliza-tion and consistency are mandatory attributes ofeach and every channel.Among luxury retailers, Nordstrom has con-sistently excelled in engaging customers withits cross-channel strategy. It has consistentlylinked social media with innovative visuals andup-to-date search pages to create a “wow” factorAsia’s Growing Luxury MarketChina€9.2 billion SouthKorea€5.5 billionJapan€18 billionThailand€1.1 billionMacau€0.7 billionHong Kong€4.4 billionIndia€4.4 billionTaiwan€3.2 billionSingapore€2.8 billionNote: Estimated 2010 revenuesSource: Bain Luxury StudyFigure 4
cognizant 20-20 insights 6among its audience. Ralph Lauren has embraceddigital marketing using virtual fashion shows andinteractive store windows to engage customers.The following should be applied by luxury retailersto create a successful cross-channel presence:• Use strong video content to provide a moreexciting and engaging shopping experience.• Encourage customers to engage in productfeedback/ratings.• Provide detailed product description pageswith 360-degree views to facilitate the senseof “touch and feel.”• Integrate the Website with Facebook andTwitter pages.• Offer suitable smartphone apps; this issomething affluent consumers have a strongaffinity for.Countering CounterfeitsWorldwide, it is estimated that counterfeitingaccounts for 5% to 7% of world trade. Nearlyone-third of all counterfeit sales are now Internetbased. The global luxury industry loses $250billion annually to counterfeit goods..15China isresponsible for the production of approximately85% of counterfeit luxury items (most of whichare exported). When referring to counterfeits, it isgenerally assumed that copied products not onlyruin the special status aspect of the original butalso contribute to a severe loss in exclusivity anduniqueness due to the availability of lower-pricedfakes.Here are a few tips to luxury retailers that canbreak the vicious circle of counterfeits:• In most countries, consumers purchasing fakeproducts have found that filing complaintswith the vendors was not successful. Thereis no channel to authenticate the genuine-ness of products. Boutiques selling luxurygoods typically refuse to certify the authentic-ity of luxury goods. Government agencies canonly examine the quality and ingredients ofproducts, rather than their authenticity. Luxurycompanies must look to certify the authentic-ity of their products similar to expensive com-modities such as gold.• The French luxury sector has succeeded inlobbying for domestic legislation against notonly trading in counterfeits but also in usingand possessing them. If anyone is found witha fake luxury product, he/she risks going tojail for up to three years; the law doesn’t carehow the product was received. Other countriesmust try to follow suit.• Brands such as Kate Spade and Louis Vuittontypically hire private investigators to find wherecounterfeits of their brands are sold. They alsohave their lawyer send a threatening letter inthe hope that it will scare counterfeiters intoshutting down their operations. They also tryto convince authorities to take action againstthese counterfeiters.• LVMH Group has been battling fake productmakers for years using a buzz strategy createdthrough the combination of aspirationalads with famous attention-grabbing artists,corporate sponsorships (LVMH Young Artists’Award, LVMH Discovery and Education), VIPevents (Louis Vuitton Classic, Louis Vuitton Cup)and PR activities. The most attention-grabbingevent has been its highly priced and heavilypromoted seasonal limited-edition bags. Thesefashion bags truly create an aura of exclusiv-ity and pride to the owners, thus discouragingconsumers from purchasing fake products.Technology-Enabled CreativityTechnology is making luxury more accessibleand helping consumers who might be hesitant toenter a store experience luxury products in thecomfort of their homes. Luxury companies areusing technology to target Millennials16who enjoyusing gadgets and technology. Technology usageis all about increasing customer touch points andproviding a unique experience.The following technology innovations adopted byluxury companies are worth considering:• Augmented reality is enabling luxury brandsto introduce new product lines and promoteevents with nominal costs. For example,Tissot’s augmented reality campaign was moresuccessful than any other marketing initiativethe brand had conducted in the UK; sales in theTissot Selfridges boutique rose 83%.17• In-store iPad app to supplement the salesassociate. This app should offer interactiveservices to address the consumer’s needs,attributes and preferences. Clinique hasdeveloped the iPad Skin Diagnostic Tool to offerboutique customers comprehensive adviceand information regarding Clinique products.Clinique reported sales increases as a result ofits iPad app of up to 30%.18Equipping a salesassociate with an iPad enriches the brandexperience.
cognizant 20-20 insights 7• Predictive analytics can be used to identifypatterns and profiles of the most profitablecustomers, perform smart segmentations andexecute automated marketing campaigns toimprove sales.19The return on investment for luxury companieson these types of technologies can be incrediblyhigh, and helps in creating an aura that is unpar-alleled compared with traditional mainstreammarketing methods such as advertising and print-based collateral.ConclusionLuxury brands can adopt a strategy to addressthe elite niche segment or offer another rangeof products, priced to attract the aspiration-al masses. To sustain growth, it is becomingimperative for brands to diversify their portfolioor expand their target segment.The future of luxury retailers will be shaped by fiveimportant factors — brand heritage, exclusivity,customer relationship, diversifying business andexpanding into high-growth markets. Creativity,differentiation, social responsibility and customerrelationship are pivotal for retailers to succeed.Footnotes1 “Five Trends that Will Shape the Global Luxury Market,” By Yuval Atsmon, Demetra Pinsent and Lisa Sun,McKinsey Study, December 2010.2 “Global Luxury Goods Worldwide Market Study,” 9th Edition, Bain & Co., October 2010.3 Theory in psychology, proposed by Abraham Maslow in 1943.4 People born from 1946-1964.5 Generation X: people born from the mid-1960s to 1980; Generation Y: people born 1980-2000.6 A recent study by brand and customer loyalty research firm Brand Keys.7 “New World of Luxury,” BCG Analysis, Ipsos market research, based on sample of 7,496 respondents whoare in top half of luxury spenders in seven developed countries which constitute 75% of global marketfor luxury.8 http://archive.hurriyetdailynews.com/n.php?n=lvmh-backed-fund-hunts-for-emerging-asian-brands-2011-05-119 http://www.wikinvest.com/concept/Luxury_Consumption10 “Tapping China’s Luxury-Goods Market,” McKinsey Quarterly, April 2011.11 “Understanding China’s Growing Love for Luxury,” McKinsey Consumer & Shopper Insights, March 2011.12 Survey by Unity Marketing.13 http://au.ibtimes.com/articles/298139/20120214/china-hermes-gucci-louis-vuitton-luxury-items.htm14 http://blog.luxuryinstitute.com/?p=150515 http://www.luxe-mag.com/en-september2011-front-page-counterfeiting-no-thanks/16 People in the age range 18 to 28.17 http://www.luxurydaily.com/augmented-reality-generates-powerful-advantage-for-luxury-brands-expert/18 http://luxurysociety.com/articles/2011/03/how-the-luxury-industry-is-using-the-ipad19 http://www.cognizant.com/InsightsWhitepapers/How-Predictive-Analytics-Elevate-Airlines-Customer-Centricity-and-Competitive-Advantage.pdf