The purpose of this study is to take an in-depth look in to the luxury fashion industry to understand the management strategies which were in place to overcome the difficulties and struggles during the recession. The study will take a closer look at how the five forces were having an impact on the companies and its sales figures while discussing how each company interpret their options differently.

1. A Study to understand the management strategy of luxury brands during the recession 1
A Study to Understand the Management Strategy of Luxury Brands During the Recession in
2008
Charm Rammandala
California Intercontinental University

2. A Study to understand the management strategy of luxury brands during the recession 2
Abstract
The purpose of this study is to take an in-depth look in to the luxury fashion industry to
understand the management strategies which were in place to overcome the difficulties and
struggles during the recession. The study will take a closer look at how the five forces were
having an impact on the companies and its sales figures while discussing how each company
interpret their options differently.

3. A Study to understand the management strategy of luxury brands during the recession 3
A Detailed Study to Understand the Management Strategy of Luxury Brands During the
Recession in 2008
Luxury goods industry is highly specialized in providing superior quality products which
cater for customer’s emotional needs and social status. Typically, luxury goods are bought by
desire rather than the need. For most consumers, luxury mean rarity, exclusivity, quality,
symbolism and refinement. It gives certain level of confidence and emotional strength to the
buyer which makes most buyers essentially a loyal customer (Edwin 2012)
Financial crisis in 2008 and the period soon after it was a period which tested the industry
resilient as well as the customer loyalty to the fullest extent. While the recession had adverse
effect on most of the industries and sectors, luxury goods market was somewhat unaffected
throughout the recession. The sales of luxury goods driven by the image created by various
brands on their products and its ability to evoke a dream factor as well as a way of investing on a
rare product (Solakiri 2015)
Luxury goods market was hit by the recession just as the rest of the industries in most of the
world. Remarkably, as graph 1 shows, within a year it was managed to resurface posting high
sales numbers. In 2011 again industry faced challenges due to European sovereign debt crisis but
yet again proved financial meltdowns in a country, region or even in the world would not be able

4. A Study to understand the management strategy of luxury brands during the recession 4
to keep loyal customers away. The luxury goods market grown by 20% since 2008 financial
crisis and expected to grow 35% by 2018 (Edwin 2012)
Graph 1(Spectrum Group)
Competition faced by luxury goods market
In order to discuss the intensity and the level of competition faced by luxury goods market,
Porter’s five forces is an important tool.
Chart 1 (Gallup)

5. A Study to understand the management strategy of luxury brands during the recession 5
As chart 2 demonstrate porter’s 5 forces consist with 5 elements in the market place which
threatens the existence of a firm. Those 5 forces are,
 Threat of new entrance
 Bargaining power of customer
 Threat of substitute products
 Bargaining power of suppliers
 Rivalry among existing firms
When we look at the threat of new products to luxury goods market, we are looking at
several different factors. Brand loyalty is one of the main obstacle to new entrance. Vigorous
brand loyalty programs, existing companies constantly trying to keep the loyal customer
followings for their products and service. Craftsmanship, innovation, heritage are not easy for
new entrance to follow. However, new entrance always looking to attract new generation with
extravagance styling and advertising (Chapman 2015)
Scale of economy is another major factor to consider when discussing threat of new entrance.
In order to build a reputation and image as a luxury brand, it is essential to have a visibility in
most exclusive parts of the major cities. This naturally come with a high cost. As well as the best
location, best layouts, fittings are a must. High management cost, high salaries are part of the
expenses. Essentially the amount of money needed in marketing and branding is astronomical.

6. A Study to understand the management strategy of luxury brands during the recession 6
These attributes make it difficult for the new entrance to successfully enter to the market and
challenge the existing brands (Solakiri 2015)
Buyers bargaining power is a formidable force brands have to be aware. It is utmost
important brands have a clear vision regarding the type of customers their catering for and how
the changing environment affect the buying patterns. While European and US customers struggle
with the effects of financial meltdown, China was taking over the market (Edwin 2012). Also it
is noted that over the last decade number of middleclass families significantly reduced in US and
portion of it moved to rich category and rest to the poor category. Luxury industry predominantly
cater to the wealthy individuals and when the population increase in that sector, it is a positive
sign for the industry. Graph 2 demonstrate the number of millionaires in the world in 2015
Graph 2 (Credit Suisse)
Threat of substitute is another element within the 5 forces. Understandably during a financial
meltdown, customers tend to be cautious about the money spent and how its spent. Segment of

7. A Study to understand the management strategy of luxury brands during the recession 7
the customers would scale down the amount spent on certain luxury brands and moved down to
high street brands. It is noted during the last 5 years, high street brand got extremely good at
replicating the look and the quality of high fashion brands. This may result in customers
switching to high street brands but inevitably at a cost as the exclusivity and the uniqueness of
luxury brand is not present in a high street brands (Peng 2012)
Bargaining power of customers and how it’s shifted during recession
Suppliers bargaining power is an another aspect of the porter’s 5 forces. When discussing
bargaining power, some of the areas to look at are, number of suppliers relative to buyer, level of
dependence on a supplier, effective substitutes and switching cost of suppliers are important. It is
well noted that number of craftsmen available in the industry is steady decreasing and new
entrance to become skilled workers are painfully slow. This is having an adverse effect on the
buyers. In 1920 there were over 10,000 skilled couture level embroiders were in France and
today that number has reduced to just 200. Most of the suppliers are specializing in catering to
buyers and switching cost would be extremely high (Chapman 2015)
When studying patterns of buying behavior during a time of recession or financial meltdown,
it becomes clear that consumers thinking and reasoning patterns are clearly on display. Segment
of customers tend to scale down on the buying frequency and the amount of money spent on the
products. However, portion of customers actually increase the amount spent on luxury items.

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This behavior is fueled by the notion that over time luxury goods vintage value tend to appreciate
as well as instead of buying many low cost items, spending money on few luxury goods is a
better deal (Peng 2012)
Impact of competition and how discounting used as a tool
Rivalry among the existing competitors another element of the 5 forces. While discussing
the competition, we need to look at the competitive structure, demand conditions and exit
barriers. Luxury goods market is dominated by 3 conglomerates. Those are, LVMH, Gucci group
& Burberry. Rivalry among the 3 companies are relatively low as they each have their own
identity. However, to capture the new customers who are coming in to the market, all companies
working hard. Immerging markets such as China, Hong Kong, Middle east, Korea are important
for the growth of the individual company hence competition is intense (Solakiri 2015)
It is well documented that firms in luxury product category do not engage in price wars. This
is by default as if a company start to discount an item in order to accelerate the sales, this would
inevitably result in negative growth in medium to long term. Luxury goods market cater for
customer’s emotional needs and they have a reputation to uphold. At any time, the items they use
end up being on sales, this would affect the customer confidence and brand loyalty. Hence it is
paramount that any cost firms have to refrain from discounting the items once sold for a certain
price range (Bill 2012)

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Summery
Luxury goods market remains one of the best performing market segments in the world. It is
not immune to global financial events yet it has a remarkable ability to bounce back in relatively
short period of time. This is mainly due to the fact that customers who are buying the products
coming from the wealthy backgrounds and products and services are catering to customers’
emotional needs more than the practical use of the items. The companies engaged in the sector
understand the buyers buying behaviors and the reasons to buy hence they continue to come up
with products which are high in value and found in most exclusive part of the cities. As a
cardinal rule most of the firm in the sector do not engage in discounting methods as this would
destroy the brand image over time.

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Reference
Alfino, M (2014). Critical essays on consumer culture. New York, Pearson
Bill, G. (2012). Storm Warning: How Global Recessions and Terrorism affect the Trade
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Bazerman, H (2012). Judgement in managerial decision making. New York, Pearson
Chapman, C (2015). R for marketing research and analytics, Pearson, NY
Edwin, R. (2012). The bling dynasty: Why the reign of Chinese luxury shoppers has just only
begun. New York, McMillan
Malhotra, N. (2010). Marketing Research: An applied orientation. San Francisco, Pearson
Peng, M. (2012). Global Strategy. New York, South-Western
Solakari, H (2015) Effect of recession on luxury goods market. Irwin, McGraw-Hill