Luxury Institute News

October 12, 2010

How to Bring in Luxury Shoppers—And Keep Them Happy

The rules of engagement in the luxury sector are tougher than ever.

By Rob Bates
JCK Magazine
October 2010 Issue

For a while, it seemed the “new normal” for the luxury market would resemble the old one. Upscale retailers like Nordstrom, ­Tiffany & Co., and Saks Fifth Avenue logged impressive sales jumps in the first half of 2010, reflecting pent-up demand that came spilling out when affluent consumers finally opened their wallets after two years of uncustomary frugality. But then…something changed. 

In June, MasterCard’s SpendingPulse report, which estimates total U.S. retail sales, announced that luxury spending fell for the first time since November. By July, sales of fine jewelry were down 13 percent, according to the same metric. No one is sure why consumers put on the brakes again, but as with the overall economy, improvement in the high-end will likely occur in fits and starts.

“The luxury market bounced back, but I think we are going into a bit of a decline,” says Andrew Sacks, president of the Affluence Collaborative, which performs market research for upscale firms. “There is a general feeling that we averted [economic] catastrophe. But now that we are beyond that, there is also the feeling of, ‘Okay. We survived, but things still aren’t that good.’ ”

Milton Pedraza, CEO of the Luxury Institute, predicts that “we will not see the heady days we saw in 2007 until the unemployment rate is 7 percent.” However, he doesn’t expect to see that number for several years. (Unemployment is currently at 9.5 percent.)

One major hurdle: The “aspirational consumers” who occasionally splurged on big-ticket shoes or watches have fled the market, says Greg Furman, founder and chairman of the Luxury Marketing Council. The remaining shoppers are a smaller but wealthier group-and when they do spend, they are more demanding than ever.

JCK spoke to a group of market gurus about the post-recession luxury landscape. Here’s how they see things shaping up:

Consumers will seek justifications to buy things.

After two years of watching every expense, affluent consumers still frown upon frivolous consumption. Today, people want to spend smartly. “If you are going to buy jewelry that will be seen by others, you will get questions about it,” Sacks says. “You will need to tell a story about why you bought this ring at this time, or why the watch was a good value.”

Consumers are also quicker to question a product’s price, though Sacks complains that most jewelry companies don’t even try to make their case: “If you look at Town & Country, 80 percent of the ads have photographs, a logo, and no copy. They are expecting consumers to notice the difference between the brands. But they are not taking the opportunity to say why and how they are different and worth what they are charging.”

By contrast, Sacks singles out Patek Philippe’s ad campaign-”You never actually own a Patek Philippe. You merely look after it for the next generation”-as one that “hits on everything. There’s a rational justification, but there is a picture of a father and son, so it’s also emotional.”

Consumers expect more from brands.

Buyers today stay true to a brand “only to the extent that it’s doing backflips to keep them happy,” says Furman. “Time was when the brand was enough to close the sale. Now that just gets the consumer in the door.” Pedraza thinks we are moving from a time when “brands validate customers” to a period where “customers validate the brand.”

“Because of the transparency of the Internet and the ease of communication, customers can talk to each other a lot more on Twitter, on Facebook, on rating sites,” he continues. “Word of mouth is amplified. And these instant reactions are what make the brand.”

Luxury companies will engage more with their clientele.

Pedraza advises companies to screen comments about their company on blogs and websites, and to send every customer a post-sale e-mail requesting feedback. “That gives you information about your company on a regular basis,” he says. Interaction is particularly important on social networks, Sacks argues. “If a luxury brand is on a forum where they are actively asking for feedback, it’s part of the social contract of these networks to respond,” he says. “Otherwise, they will turn off more than they will attract.”

Devotees are building communities around their brands.

This is taking place online and off, says Thomas Bodenberg, director of consumer economics and research for Unity Marketing, who predicts the “Tupperware party will go upscale” as consumers gather to view and discuss new products.

Social issues count…to a point.

While luxury consumers consistently talk up their humanitarian commitments in surveys, Sacks doesn’t believe this translates to actual sales. “A small percentage of consumers is willing to pay more for a green product,” he notes. “But that can’t be the only strategy.”

Still, he thinks social issues and other ethical concerns serve as “a great tie-breaker. If someone is looking at two similar products and one has a really committed program, it will work in their favor.”

Luxury stores will listen more to their front-line staff.

“Companies are realizing that people on the line are their greatest source of intelligence,” Furman says. “If they are treated as strategic partners, and their opinions are genuinely solicited, that is a huge advantage.”

Affluent consumers are demanding more personalized service.

Experts cite Patek Philippe as a brand whose image resonates with generations of buyers.

Sacks’ best advice for brands is to “hire people who know how to talk to people. So many brands are engaged in these intricate customer relation management programs,” he says. “They send out e-mails, but they are totally impersonal. Affluent customers need to be dealt with more intimately. They are used to personalized service and really resent it when they don’t get it.”

Pedraza suggests companies not “just send e-mails saying, ‘These products are 70 percent off. ’ That comes across as spam. Tell them that the navy sports coat they bought would go great with this pair of pants. That kind of customization is easily done, but very few do it.”

Brands will forge longer-term relationships with their customers.

Pedraza frets that many luxury companies still train their salespeople like they are “ ’60s car dealers.”

“They teach their salespeople to overcome objections, as if they can hypnotize people into buying something,” he says. “The affluent are smart. If they don’t want to buy, they are not going to buy.” Instead, the wealthiest consumers desire knowledgeable sales­people who treat them as more than a dollar sign, Pedraza says. “That doesn’t require a lot of money,” he says. “Just a lot of humanity.”

July 2, 2009

Luxury-Goods Makers Brandish Green Credentials

Posted in Green,Luxury Market
To Court Younger Crowd, LVMH Buys Stake in Organic Clothing Maker, PPR Sponsors Film About Environment  -By RACHEL DODES and SAM SCHECHNER

The bad economy and a fundamental shift in the market for luxury goods are forcing an industry that reveres names like Chanel and Versace to embrace a different icon: Mother Nature.
Over the past year, many of the world’s best-known luxury labels have started to introduce ecofriendly products, snap up brands that tout their social responsibility and weave environmental themes into their advertising and marketing. In May, French luxury conglomerate LVMH Moët Hennessy Louis Vuitton took a stake in Edun, an organic-clothing company founded by the singer Bono and his wife.

French luxury goods maker PPR put EUR10 million into a high-end documentary about man’s impact on the environment, in an effort to show the company’s greener side — and pump up sales.

Other companies have begun to advertise steps they took years ago to promote resource conservation. This summer, the windows of Tiffany & Co.’s retail stores world-wide feature images of coral reefs, publicizing Tiffany’s commitment since 2002 not to use coral in its designs.

“We want to change the way we conceive our business, socially and environmentally speaking,” said François-Henri Pinault, chief executive of French retail giant PPR SA, which has sponsored a feature-length documentary film highlighting man’s abuse of the environment.

The film, which was released in 131 countries last month, was produced by French director Luc Besson but PPR’s hand in it is clear: In the film’s opening credits the company’s brand names — Gucci, Yves Saint Laurent, Bottega Veneta and others — swirl around and coalesce into the film’s title, “Home.”

The luxury industry’s adoption of a green message reflects the challenges facing some of the world’s most glamorous brands. Once able to win customers with the promise of fine design, craftsmanship and service, the luxury business is contending with an aging core clientele and the aftermath of a decade-long expansion that has rendered exclusive brands less so than they used to be.

Those factors have purveyors of high-end fashions scrambling to re-invent their brands, in part by catering to younger shoppers who more often consider their impact on the environment than do traditional luxury-goods buyers.

In a recent survey, the Luxury Institute, a New York research firm, found that younger and more-affluent consumers seek information about corporate social responsibility more actively than their older and less well-off counterparts. “Young consumers believe that caring about the environment is how you create a meaningful life,” said Milton Pedraza, the firm’s CEO.

[green products]

Some luxury companies jumped on the green bandwagon earlier than others. In 2004, PPR rival LVMH’s Louis Vuitton brand conducted a “carbon inventory,” to gauge its impact on greenhouse-gas emissions. Afterward, it cut back on corporate travel and air shipment of goods.

In 2007, PPR created a social and environmental responsibility department that reports directly to Mr. Pinault. PPR now ties part of executives’ bonuses to achieving targets in seven areas — from reducing carbon emissions to promoting diversity, Mr. Pinault said.

Later in 2007, a study by WWF, the wildlife conservation group, singled out the luxury-goods business as out of touch with eco-conscious trends. WWF ranked the top 10 luxury brands on their environmental and social track records; the highest “grade” was a C+, given to L’Oreal SA, Hermès and LVMH. (PPR got a “D.”)

“Initially [the companies] were quite defensive,” says Anthony Kleanthous, senior policy adviser for WWF and co-author of the study. But now they are pushing environmental and socially responsibility “as a positive driver of brand value,” he said.

Laurent Claquin, PPR’s senior vice president of corporate social responsibility, said the company’s plans to develop a separate social-responsibility division were in the works well before the WWF report came out.

Around the same time, LVMH’s Louis Vuitton leather-goods brand launched a “Core Values” ad campaign that has featured tennis player Andre Agassi, rocker Keith Richards and, most recently, astronaut Buzz Aldrin. The ads have emphasized the company’s support for the Climate Project, and the celebrities appearing in them have donated at least part of their modeling fees to the nonprofit group, which was founded by Al Gore.

Last month, upscale retailer Barneys New York began promoting a collection of $75 sneakers with uppers and linings made of organic material. The sneakers were designed by organic-clothing brand Loomstate in a partnership with Keds.

This fall, luxury menswear label Ermenegildo Zegna will begin selling an “Ecotech Solar” jacket under its Zegna Sport label, with solar panels on its sleeves that can be used to recharge a battery and heat up the jacket’s collar.

Whether the new tack will work remains to be seen. Increasingly, consumers and nonprofit groups are scrutinizing the validity of corporate environmental and social responsibility efforts.

For corporate alliances with nonprofit groups to succeed, companies need to disclose how much money they are donating or risk allegations of “greenwashing” — or paying lip service to environmental causes to promote their products, says Mike Lawrence, an executive vice president at Cone LLC, a Boston-based marketing agency. “Puffery, unfortunately, is legal in advertising,” he adds.

The global recession is adding challenges that defy simple solutions. Global sales of luxury goods are expected to fall 10% this year to €154 billion ($218 billion), the first decline in 15 years, according to Bain & Co. The industry isn’t expected to return to 2008 levels, €170 billion, until 2012, says Claudia D’Arpizio, a consultant at Bain’s Milan office. In response brands are slowing store expansion, lowering prices and trimming ad spending to cut costs.

Still, the economy may also accelerate the greening of luxury, industry executives say. A February survey by Cone found that 50% of Americans ages 18 to 24 said they have “higher expectations of companies to make and sell environmentally responsible products and services during the economic downturn,” compared with 35% of Americans overall.

April 15, 2009

Ethical and Environment Friendly Luxury

Economic Times -10 Apr 2009, 0605 hrs IST, Reshmi Dasgupta, ET Bureau

“I have always been influenced by women,” says luxury czar Francois-Henri Pinault, almost shyly. It is the day before the launch of his new Foundation for Women’s Dignity and Rights, a cause he was made aware of by, who else, a woman in his life. Not any woman though, but the woman he married just this Valentine’s Day: Salma Hayek, the sizzling Mexican-born filmstar and mother of his daughter.

It’s logical, given that his business hinges mostly on women – both as employees and customers – that he focuses on this crucial constituency, which he concedes with another bashful smile. However, the women’s story of the 46 year-old head of PPR, the conglomerate that his father Francois Pinault built up from scratch in 1963 to rival Bernard Arnault’s LVMH, goes back further. Not to the ladies he squired around much to the delight of the tabloids, but to his stepmother who almost made him go vegetarian years ago and his first wife Dorothee who opened his eyes to animal rights.

His interest could just as well have stopped at the women who covet Gucci and Bottega Veneta, Balenciaga or Boucheron. That it did not end there led him to this moment, at the Imperial Hotel in New Delhi on a muggy March evening, to speak about twin consuming passions. It could almost be called a culmination of all the female influences in his life for what Pinault spoke of was not the latest Gucci ‘Sloaney’ bag or Nicolas Ghesquière’s 2009 requiem for YSL at Balenciaga, but the foundation (which has writer Taslima Nasreen among its directors), and a film by Luc Besson and Yann Arthus-Bertrand that he’s financed, on what concerns us all: Home.

Pinault was inspired by the famous French photographer’s stunning aerial shots of the earth to commission Arthus-Bertrand to do a film to drive home the message that the Earth can only be saved by the ones who are killing it – us. But why would the head of a Euro 19 billion retail-to-fashion group be concerned with the Earth, given that PPR has plenty of internal issues to be dealt with? After all, while net profit in 2008 was Euro 924 million or $1.16 billion, it grew just 0.1% with retail ventures Fnac, Redcats, La Redoute and Conforama seeing a fall, and Gucci group sales remaining flat.

The answer lies in the slowdown, which has prompted introspection about the raison d’etre of luxury and its sustainability in this economic hiatus, as incomes shrink faster than the polar ice caps. As ethical business becomes a factor in buying choices, as much as value for money, suddenly, the connect becomes obvious in the otherwise oxymoronic phrase ‘sustainable luxury’. Concern about seemingly unconnected issues – population explosion, biodiversity under seige, climate change and polluted water bodies have actually become ways for the luxurati to prove their true worth.

The independent New York-based Luxury Institute says elite consumers’ preference for socially responsible brands has been growing steadily every year, from 51% in 2006 to 57% in 2007 and rising. “The global crisis of confidence in governmental, financial, and other institutions will drive luxury consumers to demand that luxury brands serve not just them but society as a whole,” says the Luxury Institute report. “They will require luxury brands to be ethical with all constituents, charitable in ways that make a difference to their beneficiaries, and ecofriendly in ways that can be documented.”

Pinault can credibly claim a head start on that count, as PPR adopted an ethical charter in 1996 and in 2007 when he took over and a team was Henri Pinault constituted for corporate social responsibility in seven priority areas. “My father and I want to give a sense of purpose to business besides just profit,” he says earnestly. So energy consumption has been cut by brands from Gucci to Puma, eco-friendly packaging adopted, and suppliers told to employ fair labour practices. Given India’s A-list’s partiality for Bottega’s signature latticeworked leather handbags, Pinault also mentions a school set up to ensure the continuity of that distinctive art in Italy’s Veneto region. “And it’s not merely meant for Bottega Veneta workers!” he clarifies.

Even the carbon cost of Arthus-Bertrand’s travel to 50 countries for Home has been offset by a development initiative with an NGO in Kolar, Karnataka to recycle kitchen waste and animal manure into biogas and compost, to combat depletion of forests and climate change. India also figures on the agenda of the new foundation, which will fund a project in Andhra Pradesh, Gujarat, Bihar and Jharkhand to train 200 women from disadvantaged families in hairdresssing and beauty in 2009.

This clearly points to India being high on Pinault’s radar as an important emerging market for the group – apart from being a place where it sources, for instance, for Gucci, Balenciaga and Boucheron – despite India accounting for just 0.4% of global luxury good sales (according to Bain & Co) and the static caused by the current downturn. The dim economic outlook had Pinault announce 1,200 job cuts this February, lower advertising spending and and slower store openings even though his leather and fashion goods did all right. Reiterating that PPR was “looking east even more,” alluding to the limited growth prospects at present in the US, UK and Japan, he stresses that capex will be more cautious.

The Luxury Institute reports that its 500 high net-worth respondents list quality (82%), craftsmanship (78%) and customer service (60%) as the top three requirements of a luxury brand. No wonder Pinault believes that while PPR cannot ignore smaller pockets as, “in tough times, brands have to remain accessible yet aspirational, and store merchandising has to adapt to changing situations,” he is equally convinced that “expensive items have to be worth their price, particularly if those who buy are buying less. It would be a mistake to lower prices, craftsmanship and service, or cut R&D. A high-end product has to be constantly reinforced with quality and innovation – it cannot depend on the brand to justify its price.”

And from that sentiment it is a short jump to what Pinault says in his speech a day later: “Sustainable development is equally unable to dispense with innovation, if it is to avoid repeating our past mistakes and invent new modes of production, with growing concern for the planet and greater respect for people.”

In Los Angeles a year ago, at the annual Global Green Globe pre-Oscar party, 42 year old Salma Hayek, who serves on its local board had revealed that she was more focused on environmental initiatives since her daughter, Valentina Paloma Pinault, was born in September 2007. “I get a bigger fear of what kind of world she’s going to live in. Is she going to run out of water? What kind of water is she going to drink? It’s really scary and it’s not that far away if we don’t do something about it,” she had said. The imperatives of these two important women in his life, then, will surely continue to influence Pinault’s drive towards sustainable luxury.