By: Judith Russell
December 8, 2014
The Robin Report
We in the industry have been bandying about the term “luxury” pretty freely of late, but there is growing realization that if a product or brand is easily accessible and relatively inexpensive, it’s not really a “luxury” product. And the minute you add the term “affordable,” it becomes an oxymoron.
As the ever-widening income inequality gap illustrates, the rich are still getting richer. According to Pew Research, the top 1% of households in the US, or those making $400K or more annually, earn 23% of the total income in the country, and control 35% of the net worth. Both figures have been steadily growing for more than a decade.
One ever-present behavior in the spending habits of the superrich of any generation is opting for the special over the mundane. Makers of high-end jewelry and electronics, cars, exotic vacation hotels, and other products and services target this group of discerning consumers for a reason: They value, and are willing to pay a steep premium for, that which is appreciated by and accessible to only an elite few.
Milton Pedraza, CEO of The Luxury Institute, a research firm that tracks and advises the global luxury goods market, says that consumers consistently define luxury as the best of design, quality, craftsmanship, and service. Brands that always deliver against these attributes, including Audemars Piguet, Chanel, and Buccellati, also tend to have a compelling brand heritage story.
Dumbing Down the High End
So where is true luxury retailing today? The high end is on a steady course down market. Nordstrom, Neiman’s and Saks are slowly evolving into off-pricers, expanding their Rack, Last Call and Off Fifth concepts much faster than their full-line businesses. This is eroding their credibility as purveyors to the elite, since one of the strongest pillars of luxury is pricing integrity. But Wall Street can be pretty unforgiving. In order to satisfy investors, these businesses must grow. Opportunity for organic growth is limited, due to intensified competition and more demanding consumers.
Look at the auto market. Mercedes, BMW and Audi are all adding cheaper models to the low ends of their product lines. You can’t turn on the radio without hearing an ad for their affordable lease deals, wooing us to experience a taste of luxury at a discounted price.
Exacerbating the situation is the fact that many luxury brands, including Louis Vuitton, Prada, Hermès, Burberry and Dolce and Gabbana are now bypassing their retail partners and going direct to consumers, launching their own e-commerce sites and brick-and-mortar stores. The fastest way the Nordstroms and Neiman-Marcuses of the world can grow sales and earnings is to trade down. But they can only do this for so long before becoming known primarily for their discounting, the kiss of death in luxury.
Ubiquity Erodes Exclusivity
Then there are the outlet stores. Many of the veteran brand leaders, such as Coach, Tiffany, Michael Kors, and Ralph Lauren, are finding that they’ve tapped out the full-price specialty market opportunity and are now growing exponentially by expanding their outlet store footprints. Overexpansion breeds ubiquity, ultimately the downfall of premium brands whose hallmark is limited distribution.
Ubiquitous availability in outlet stores also compromises perception of pricing integrity. “Wealthy people are smart,” says The Luxury Institute’s Pedraza. “They’re willing to pay a high price for the best, as long as it’s fair, but they don’t want to get taken advantage of.” Also, many of the leading industry bloggers are of the opinion that much of the merchandise in luxury outlets has never seen a full-price store. It is, they believe, a lower level of design, quality and craftsmanship created specifically for the outlet, and carries faux full-price tags that are then reduced to obfuscate their real value. This breaks another rule of luxury, authenticity.
The New Luxury Customer
In what used to be the high-end luxury sector, a big, gaping void is forming, ripe for the filling by a new breed of luxury brands. Several key factors are contributing to this opportunity.
- Millennials, who will account for 30% of all retail sales by the year 2020, according to Pew Research, are an increasingly important force in the marketplace. They are already wielding tremendous influence in retail, demanding more elevated, contemporary and technology-driven products and experiences. They are forcing retailers to offer better high-tech, high-touch engagement and greater personalization.
- Many high-end consumers are beginning to show a distinct preference for experiences over things, having become sated with too much “stuff.” This is driving growth in segments like the ultra-luxury travel industry. These experiential customers are also demanding a meaningful brand connection that elevates the products they buy with an emotional investment. We know that a unique personal experience will make it more likely for that consumer to become a loyal customer.
- A group of consumers has moved away from playing it safe and shopping with the flock to desiring more individualized offerings. Leading fashion-trend forecaster David Wolfe of Doneger says, “Bye-bye mainstream, hello to thousands of tiny consumer tribes.” And these tribal members are demanding fresh, frequent new products and experiences that can be customized, personalized and unique.
The New Face of Luxury
The next generation of luxury brands, I predict, will focus on meeting the needs of a relatively small, yet potentially profitable group of consumers. The brands will deliver quality of workmanship, authenticity of design and materials, and customized fit and trims. Whether casual or dressy, products will be limited in availability. There will be no sales, no coupons, no department store gatekeepers, and no need to get big fast. These brands will need to reach critical mass of between $500 million and $1 billion to generate sufficient profit and cash flow, while remaining exclusive, premium, and ultra-special. Needless to say, service—or its newest moniker, customer relationship building—will be out of this world.
Does this sound like the couture world of times past? You bet it does. But there will be differences enabled by 21st century technology. Brands will use digital tools, including big data, to develop and maintain an intimate relationship with their consumers and engage them on a personal level.
Curated offerings of products and services will be created especially for customers who opt into the relationship. Brands will use store-scanned measurements of their customers’ bodies to deliver a perfect fit. With geo-fencing and other technological capabilities, companies will know where their customers are and where they’re going—even going so far as to deliver a fresh wardrobe to their client’s hotel while on vacation. Sound futuristic? The technology exists today.
Who will be included in the next generation of the luxury elite? Brands like Elizabeth and James, Tom Ford, Bottega Veneta come to mind. The extent to which they succeed in creating luxury businesses with staying power depends on how well they can deliver on their product, service, and customer engagement features, and how well they can rise above the relentless discounting fray that is decimating brands today.
The luxury brands of tomorrow will be privately-owned and managed by a team possessing design genius, marketing savvy, financial prowess and technological wizardry. They will view their work as the intersection between art and science. They will control every phase of the value proposition from product conception to delivery, with customer focus front-and-center every step of the way. These innovators will not think of their businesses in terms of the products they sell or distribution channels, but rather in terms of serving their affinity tribe, a community of customers that share similar values and a passion for the brand, bordering on obsession.
So, back to Wall Street, these guys may not pay any attention to these businesses because they will be privately held. But there’s little doubt in my mind that they’ll become personally invested in the luxury brands of the future—by becoming some of their best tribal customers.