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Presented by: Stephanie So, Evan Lui, Vanessa Yau, Richard Kan & Trevor Li
The Luxury Goods Industry 2013
What is luxury?
Luxury goods have more than the
necessary and ordinary
characteristics compared to other
products of their category
The Luxury Goods Industry 2013
characteristics of
luxury products
“The  Concept  of  Luxury  Brands”,  2012  
INDUSTRY
BACKGROUND
The Luxury Goods Industry 2013
Global Market size
Bain    Company,  2012  
The Luxury Goods Industry 2013
growth by geographic
markets
Pwc,  2012  
The Luxury Goods Industry 2013
Growth by product category
Pwc,  2012  
The Luxury Goods Industry 2013
recent trends
•  Globalization – over 40% of sales is from “luxury tourism” 
Bain    Company,  2012  
The Luxury Goods Industry 2013
recent trends
•  Globalization – plenty of untapped potential in emerging
markets
Bain    Company,  2011  
The Luxury Goods Industry 2013
recent trends
•  Consolidation – individual brands are bought up by large
luxury groups
Bain    Company,  2011  
The Luxury Goods Industry 2013
recent trends
•  Consolidation – large companies experience much higher
margins
  Brand recognition (esp. emerging markets)
  Economies of scale (eg. advertising)
  Optimal brand portfolio management
Pwc,  2012  
The Luxury Goods Industry 2013
recent trends
•  Diversification – apparel brands branch out to other
luxury product categories, eg. jewelry, cosmetics, perfume,
even restaurants
McKinsey,  2012  
INDUSTRY
COMPETITIVE
ANALYSIS
The Luxury Goods Industry 2013
The five forces model
Porter’s
Five Forces
Model
The Threat
of New
Entrants
Rivalry
among
Existing
Competitors
Suppliers’
Bargaining
Power
Buyers’
Bargaining
Power
The Threat
of
Substitutes
The Luxury Goods Industry 2013
Threat of new entrants
Brand Loyalty
 Scale Economies
Capital
Requirement
Exclusive Access to
Suppliers 
Distribution
Potential Retaliation
from Existing
Companies
The Luxury Goods Industry 2013
brand loyalty
❧ Brand image and CRM programs
build high brand loyalty
The Luxury Goods Industry 2013
brand loyalty
❧  Decreasing brand loyalty as a result of
different needs in emerging markets
Emerging TraditionalEmerging
•  Extravagance
•  Status
•  Obvious brand
logo
Traditional
•  Craftsmanship
•  Exclusivity
•  Innovation
•  Service
•  CRM
•  Heritage
 easily switch to
other brands of
similar status
Pwc,  2012  
The Luxury Goods Industry 2013
Scale economies
❧ Consolidation of luxury brands
achieve high economies of scale
– e.g. LVMH, PPR (Gucci), Prada
Group, Richemont
– Minimize risk through
diversification in the company
brand portfolio
– More financing options e.g. IPO
– Operating synergies e.g.
advertising
The Luxury Goods Industry 2013
capital requirement
❧  A very high break-even point 
❧  “…In the luxury sector, even the smaller brands
have to pretend they are powerful and rich, and by
doing so they end up with a very high break-even.”
❧  “..For example, every brand must be present
everywhere in the world.”
❧  “…If the Japanese tourist cannot find his Givenchy
or Aquascutum store when he visits Milan or New
York, he may well conclude that these brands are
weak and he might decide to stop buying them in
Japan.” (Abstract from “Luxury Brand Management:
A world of Privilege”)
The Luxury Goods Industry 2013
capital requirement
❧ High marketing  management costs
–  Distribution Fees:
•  High rent to develop monobrand boutiques in
prestigious shopping areas 
•  e.g. South Korea’s Apgujeong; HK’s Tsim Sha Tsui
Canton Road
•  To develop global presence, 400 stores are needed to
cover the world!
–  High salaries for craftsmen
–  High investment for promotional activities
•  e.g. Chanel’s elaborate runway shows during Paris
Fashion Week; Louis Vuitton’s microfilm
The Luxury Goods Industry 2013
Exclusive Access to
Suppliers  Distribution
❧ Many brands have acquired
suppliers to protect competitive
advantage and insulate against
future rising supply costs
❧ E.g. LVMH acquired two watch
dial manufacturers – Léman
Cadran and ArteCad SA, French
artisan shoemaker Delos Bottier 
Cie and haute couture
manufacturer Arnys.
The Luxury Goods Industry 2013
Exclusive Access to
Suppliers  Distribution
❧ More and more distribution
access points are available to
brands
❧ Contemporary areas like The
Bund in Shanghai brings a multi-
sensory experience to luxury
Value  Partners,  2007  
The Luxury Goods Industry 2013
Potential retaliation from
the existing companies
❧ Small luxury brands do not
have high barriers of
distribution
– Pressure from powerful groups to
prevent them from having access
to multi-brand retailers
The Luxury Goods Industry 2013
The five forces model
Porter’s
Five Forces
Model
The Threat
of New
Entrants
Rivalry
among
Existing
Competitors
Suppliers’
Bargaining
Power
Buyers’
Bargaining
Power
The Threat
of
Substitutes
High
The Luxury Goods Industry 2013
threat of substitutes
Price of
Substitutes
Quality of
Substitutes
Switching
Costs to
Customers
The Luxury Goods Industry 2013
price of substitutes
❧  Rising popularity of middle price (“high
street”) brands
❧  Consumers tend to “trade down” during
economic crises
❧  Worldwide shipping of counterfeit goods
from China
The Luxury Goods Industry 2013
quality of substitutes
❧  Increased Internet accessibility of top
luxury brand designs allow fast fashion
brands to respond and copy trends within
weeks after fashion shows
❧  e.g. Zara, Steve Madden
The Luxury Goods Industry 2013
switching cost to customers
❧ No monetary switching costs
❧ Loss of prestige if switch to
high street or fast fashion
brands
The Luxury Goods Industry 2013
The five forces model
Porter’s
Five Forces
Model
The Threat
of New
Entrants
Rivalry
among
Existing
Competitors
Suppliers’
Bargaining
Power
Buyers’
Bargaining
Power
The Threat
of
Substitutes
High
Moderate
The Luxury Goods Industry 2013
buyers’ bargaining power
Number of
Buyers relative
to Suppliers
Level of
Dependence on
a Buyer
Switching
Costs
Possibility of
Buyer’s Vertical
Integration
The Luxury Goods Industry 2013
number of buyers
❧ Decreasing buyer concentration
–  Increasing number of buyers relative to
suppliers
–  Example: China’s emerging middle-
class buyers
•  Concept of “affordable luxuries” spreading in
second-tier cities  satellite towns
–  Increasing number of wealthy
households
•  Of the 1.6 million wealthy households, about 50
percent were not rich four years ago
The Luxury Goods Industry 2013
number of buyers
The Luxury Goods Industry 2013
level of dependence on a
buyer
❧ Luxury industry depends heavily
on top-tier customers
•  Average spending by luxury consumers
rose by 30% in 2009
•  MOST driven by small groups of super-
affluent top-tier consumers
❧ Top-tier customers eg. celebrities
are usually early adopters and can
drive consumption
❧ But not one single buyer can
determine prices
The Luxury Goods Industry 2013
switching costs
❧  Buyers who develop an emotional attachment
to the brand may have emotional switching
costs
❧  Increasing switching costs with the
introduction of customer loyalty programs
–  E.g. LV’s VIP clients receive free gifts
The Luxury Goods Industry 2013
Possibility of backward
integration
❧ Extremely low possibility
❧ Customers purchase luxury
products for direct consumption
–  No business reason for backward
integration
❧ Size of luxury companies usually
way out of a buyer’s purchasing
power
The Luxury Goods Industry 2013
The five forces model
Porter’s
Five Forces
Model
The Threat
of New
Entrants
Rivalry
among
Existing
Competitors
Suppliers’
Bargaining
Power
Buyers’
Bargaining
Power
The Threat
of
Substitutes
High
Moderate
Low
The Luxury Goods Industry 2013
suppliers’ bargaining power
Number of
Suppliers
relative to Buyers
Level of
Dependence on
a Supplier
Effective
Substitutes
Switching Costs
(Switch
suppliers)
Possibility of
Supplier’s
Vertical
Integration
The Luxury Goods Industry 2013
number of suppliers
❧ Limited high skilled workers
❧ Skills shortage – retiring
craftsmen, not many youngsters
willing to learn
❧ Couture-level embroiderers in
France: ~10,000 in 1920,
dropped to ~200 now
The Luxury Goods Industry 2013
level of dependence on a
supplier
❧ Some key components and
materials are outsourced 
– e.g. LV outsources its
monogrammed leather
– Chanel ordered a large bunch of
leathers from one supplier at one
time in case they wouldn’t find a
better one
The Luxury Goods Industry 2013
effective substitutes
❧ Highly specialized “atelier
d’arts” with a narrow scope of
expertise
– E.g. Feather-maker Maison
Lemarié, Costume jewellery and
button-maker Desrues
– Very hard to replace
The Luxury Goods Industry 2013
switching costs
❧ Cannot easily switch to another
suppliers
– Past cooperating experience is
important
– Risk a lower quality of products
after switching to new suppliers
The Luxury Goods Industry 2013
possibility of forward
integration
❧ Extremely low possibility
❧ Luxury companies, especially
large groups, are much more
powerful and wealthier than
their manufacturers
The Luxury Goods Industry 2013
The five forces model
Porter’s
Five Forces
Model
The Threat
of New
Entrants
Rivalry
among
Existing
Competitors
Suppliers’
Bargaining
Power
Buyers’
Bargaining
Power
The Threat
of
Substitutes
High
Moderate
ModerateLow
The Luxury Goods Industry 2013
rivalry among existing
competitors
Competitive
Structure
Demand
Condition  
Exit
Barriers
The Luxury Goods Industry 2013
market structure
❧ Oligopoly
– A few large luxury groups
dominate
– Large number of small
independent brands
– “Big Three”
•  LVMH
•  Richemont
•  PPR Gucci
The Luxury Goods Industry 2013
Top 10 Industry players
*Size  of  bubble=  Revenue  
Bloomberg,  2012  
The Luxury Goods Industry 2013
demand condition
Country
 Growth in €
(2011/12)
China
 20%
Hong Kong
 18%
The US
 13%
Korea
 13%
Middle East
 10%
The UK
 9%
Japan
 8%
Russia
 7%
Country Personal Luxury Goods Market Growth
•  Demand will grow at a relatively high rate in the near
future 
Bain    Company,  2012  
The Luxury Goods Industry 2013
exit barriers
❧ Emotional Barriers
– Some brands may not break even
but continue operating due to a
small number of extremely loyal
customers and critical acclaim
– E.g. Christian Lacroix
•  Never made a profit for the 22 years
in operation
The Luxury Goods Industry 2013
exit barriers
❧ Specialized Assets
– May be difficult to sell the highly
specialized supply chain
components
– E.g. Chanel has 6 atelier d’arts
under it
•  Specialized machines  no
alternative purpose
The Luxury Goods Industry 2013
The five forces model
Porter’s
Five Forces
Model
The Threat
of New
Entrants
Rivalry
among
Existing
Competitors
Suppliers’
Bargaining
Power
Buyers’
Bargaining
Power
The Threat
of
Substitutes
High
Moderate
ModerateLow
High
The Luxury Goods Industry 2013
conclusion
❧ Luxury remains one of the best-
performing, highest-growth sectors
Pwc,  2012  
The End

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Luxury Goods Industry Analysis 2013

  • 1. Presented by: Stephanie So, Evan Lui, Vanessa Yau, Richard Kan & Trevor Li
  • 2. The Luxury Goods Industry 2013 What is luxury? Luxury goods have more than the necessary and ordinary characteristics compared to other products of their category
  • 3. The Luxury Goods Industry 2013 characteristics of luxury products “The  Concept  of  Luxury  Brands”,  2012  
  • 5. The Luxury Goods Industry 2013 Global Market size Bain    Company,  2012  
  • 6. The Luxury Goods Industry 2013 growth by geographic markets Pwc,  2012  
  • 7. The Luxury Goods Industry 2013 Growth by product category Pwc,  2012  
  • 8. The Luxury Goods Industry 2013 recent trends •  Globalization – over 40% of sales is from “luxury tourism” Bain    Company,  2012  
  • 9. The Luxury Goods Industry 2013 recent trends •  Globalization – plenty of untapped potential in emerging markets Bain    Company,  2011  
  • 10. The Luxury Goods Industry 2013 recent trends •  Consolidation – individual brands are bought up by large luxury groups Bain    Company,  2011  
  • 11. The Luxury Goods Industry 2013 recent trends •  Consolidation – large companies experience much higher margins   Brand recognition (esp. emerging markets)   Economies of scale (eg. advertising)   Optimal brand portfolio management Pwc,  2012  
  • 12. The Luxury Goods Industry 2013 recent trends •  Diversification – apparel brands branch out to other luxury product categories, eg. jewelry, cosmetics, perfume, even restaurants McKinsey,  2012  
  • 14. The Luxury Goods Industry 2013 The five forces model Porter’s Five Forces Model The Threat of New Entrants Rivalry among Existing Competitors Suppliers’ Bargaining Power Buyers’ Bargaining Power The Threat of Substitutes
  • 15. The Luxury Goods Industry 2013 Threat of new entrants Brand Loyalty Scale Economies Capital Requirement Exclusive Access to Suppliers Distribution Potential Retaliation from Existing Companies
  • 16. The Luxury Goods Industry 2013 brand loyalty ❧ Brand image and CRM programs build high brand loyalty
  • 17. The Luxury Goods Industry 2013 brand loyalty ❧  Decreasing brand loyalty as a result of different needs in emerging markets Emerging TraditionalEmerging •  Extravagance •  Status •  Obvious brand logo Traditional •  Craftsmanship •  Exclusivity •  Innovation •  Service •  CRM •  Heritage  easily switch to other brands of similar status Pwc,  2012  
  • 18. The Luxury Goods Industry 2013 Scale economies ❧ Consolidation of luxury brands achieve high economies of scale – e.g. LVMH, PPR (Gucci), Prada Group, Richemont – Minimize risk through diversification in the company brand portfolio – More financing options e.g. IPO – Operating synergies e.g. advertising
  • 19. The Luxury Goods Industry 2013 capital requirement ❧  A very high break-even point ❧  “…In the luxury sector, even the smaller brands have to pretend they are powerful and rich, and by doing so they end up with a very high break-even.” ❧  “..For example, every brand must be present everywhere in the world.” ❧  “…If the Japanese tourist cannot find his Givenchy or Aquascutum store when he visits Milan or New York, he may well conclude that these brands are weak and he might decide to stop buying them in Japan.” (Abstract from “Luxury Brand Management: A world of Privilege”)
  • 20. The Luxury Goods Industry 2013 capital requirement ❧ High marketing management costs –  Distribution Fees: •  High rent to develop monobrand boutiques in prestigious shopping areas •  e.g. South Korea’s Apgujeong; HK’s Tsim Sha Tsui Canton Road •  To develop global presence, 400 stores are needed to cover the world! –  High salaries for craftsmen –  High investment for promotional activities •  e.g. Chanel’s elaborate runway shows during Paris Fashion Week; Louis Vuitton’s microfilm
  • 21. The Luxury Goods Industry 2013 Exclusive Access to Suppliers Distribution ❧ Many brands have acquired suppliers to protect competitive advantage and insulate against future rising supply costs ❧ E.g. LVMH acquired two watch dial manufacturers – Léman Cadran and ArteCad SA, French artisan shoemaker Delos Bottier Cie and haute couture manufacturer Arnys.
  • 22. The Luxury Goods Industry 2013 Exclusive Access to Suppliers Distribution ❧ More and more distribution access points are available to brands ❧ Contemporary areas like The Bund in Shanghai brings a multi- sensory experience to luxury Value  Partners,  2007  
  • 23. The Luxury Goods Industry 2013 Potential retaliation from the existing companies ❧ Small luxury brands do not have high barriers of distribution – Pressure from powerful groups to prevent them from having access to multi-brand retailers
  • 24. The Luxury Goods Industry 2013 The five forces model Porter’s Five Forces Model The Threat of New Entrants Rivalry among Existing Competitors Suppliers’ Bargaining Power Buyers’ Bargaining Power The Threat of Substitutes High
  • 25. The Luxury Goods Industry 2013 threat of substitutes Price of Substitutes Quality of Substitutes Switching Costs to Customers
  • 26. The Luxury Goods Industry 2013 price of substitutes ❧  Rising popularity of middle price (“high street”) brands ❧  Consumers tend to “trade down” during economic crises ❧  Worldwide shipping of counterfeit goods from China
  • 27. The Luxury Goods Industry 2013 quality of substitutes ❧  Increased Internet accessibility of top luxury brand designs allow fast fashion brands to respond and copy trends within weeks after fashion shows ❧  e.g. Zara, Steve Madden
  • 28. The Luxury Goods Industry 2013 switching cost to customers ❧ No monetary switching costs ❧ Loss of prestige if switch to high street or fast fashion brands
  • 29. The Luxury Goods Industry 2013 The five forces model Porter’s Five Forces Model The Threat of New Entrants Rivalry among Existing Competitors Suppliers’ Bargaining Power Buyers’ Bargaining Power The Threat of Substitutes High Moderate
  • 30. The Luxury Goods Industry 2013 buyers’ bargaining power Number of Buyers relative to Suppliers Level of Dependence on a Buyer Switching Costs Possibility of Buyer’s Vertical Integration
  • 31. The Luxury Goods Industry 2013 number of buyers ❧ Decreasing buyer concentration –  Increasing number of buyers relative to suppliers –  Example: China’s emerging middle- class buyers •  Concept of “affordable luxuries” spreading in second-tier cities satellite towns –  Increasing number of wealthy households •  Of the 1.6 million wealthy households, about 50 percent were not rich four years ago
  • 32. The Luxury Goods Industry 2013 number of buyers
  • 33. The Luxury Goods Industry 2013 level of dependence on a buyer ❧ Luxury industry depends heavily on top-tier customers •  Average spending by luxury consumers rose by 30% in 2009 •  MOST driven by small groups of super- affluent top-tier consumers ❧ Top-tier customers eg. celebrities are usually early adopters and can drive consumption ❧ But not one single buyer can determine prices
  • 34. The Luxury Goods Industry 2013 switching costs ❧  Buyers who develop an emotional attachment to the brand may have emotional switching costs ❧  Increasing switching costs with the introduction of customer loyalty programs –  E.g. LV’s VIP clients receive free gifts
  • 35. The Luxury Goods Industry 2013 Possibility of backward integration ❧ Extremely low possibility ❧ Customers purchase luxury products for direct consumption –  No business reason for backward integration ❧ Size of luxury companies usually way out of a buyer’s purchasing power
  • 36. The Luxury Goods Industry 2013 The five forces model Porter’s Five Forces Model The Threat of New Entrants Rivalry among Existing Competitors Suppliers’ Bargaining Power Buyers’ Bargaining Power The Threat of Substitutes High Moderate Low
  • 37. The Luxury Goods Industry 2013 suppliers’ bargaining power Number of Suppliers relative to Buyers Level of Dependence on a Supplier Effective Substitutes Switching Costs (Switch suppliers) Possibility of Supplier’s Vertical Integration
  • 38. The Luxury Goods Industry 2013 number of suppliers ❧ Limited high skilled workers ❧ Skills shortage – retiring craftsmen, not many youngsters willing to learn ❧ Couture-level embroiderers in France: ~10,000 in 1920, dropped to ~200 now
  • 39. The Luxury Goods Industry 2013 level of dependence on a supplier ❧ Some key components and materials are outsourced – e.g. LV outsources its monogrammed leather – Chanel ordered a large bunch of leathers from one supplier at one time in case they wouldn’t find a better one
  • 40. The Luxury Goods Industry 2013 effective substitutes ❧ Highly specialized “atelier d’arts” with a narrow scope of expertise – E.g. Feather-maker Maison Lemarié, Costume jewellery and button-maker Desrues – Very hard to replace
  • 41. The Luxury Goods Industry 2013 switching costs ❧ Cannot easily switch to another suppliers – Past cooperating experience is important – Risk a lower quality of products after switching to new suppliers
  • 42. The Luxury Goods Industry 2013 possibility of forward integration ❧ Extremely low possibility ❧ Luxury companies, especially large groups, are much more powerful and wealthier than their manufacturers
  • 43. The Luxury Goods Industry 2013 The five forces model Porter’s Five Forces Model The Threat of New Entrants Rivalry among Existing Competitors Suppliers’ Bargaining Power Buyers’ Bargaining Power The Threat of Substitutes High Moderate ModerateLow
  • 44. The Luxury Goods Industry 2013 rivalry among existing competitors Competitive Structure Demand Condition   Exit Barriers
  • 45. The Luxury Goods Industry 2013 market structure ❧ Oligopoly – A few large luxury groups dominate – Large number of small independent brands – “Big Three” •  LVMH •  Richemont •  PPR Gucci
  • 46. The Luxury Goods Industry 2013 Top 10 Industry players *Size  of  bubble=  Revenue   Bloomberg,  2012  
  • 47. The Luxury Goods Industry 2013 demand condition Country Growth in € (2011/12) China 20% Hong Kong 18% The US 13% Korea 13% Middle East 10% The UK 9% Japan 8% Russia 7% Country Personal Luxury Goods Market Growth •  Demand will grow at a relatively high rate in the near future Bain    Company,  2012  
  • 48. The Luxury Goods Industry 2013 exit barriers ❧ Emotional Barriers – Some brands may not break even but continue operating due to a small number of extremely loyal customers and critical acclaim – E.g. Christian Lacroix •  Never made a profit for the 22 years in operation
  • 49. The Luxury Goods Industry 2013 exit barriers ❧ Specialized Assets – May be difficult to sell the highly specialized supply chain components – E.g. Chanel has 6 atelier d’arts under it •  Specialized machines  no alternative purpose
  • 50. The Luxury Goods Industry 2013 The five forces model Porter’s Five Forces Model The Threat of New Entrants Rivalry among Existing Competitors Suppliers’ Bargaining Power Buyers’ Bargaining Power The Threat of Substitutes High Moderate ModerateLow High
  • 51. The Luxury Goods Industry 2013 conclusion ❧ Luxury remains one of the best- performing, highest-growth sectors Pwc,  2012  

Editor's Notes

  1. third year in a row of double digit growth for personal luxury goods market