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5: Customer Attitudes Toward Luxury

As discussed in the second chapter, there are a number of definitions of luxury. This book considers the luxury strategy applied by firms, primarily concerned with providing goods to the luxury market.

As discussed in the second chapter

The authors feel that luxury in terms of the market and individual customer is ambiguous - so this chapter will focus on luxury in the sense of the product and the marketing strategy.

In particular, some luxury firms are seeking to downgrade to the premium market, and some premium firms are aspiring to join the luxury market. It is of particular importance for firms who are considering crossing the boundary to consider the difference.

What is the size of the market?

The luxury market was estimated to be over $250 billion in 2012. The United states is considered the clear leader with a market of about $64 billion, followed by Japan ($24 billion) and the European countries (no figures given).

Mainland China was estimated at only $12 billion but given that its growth is in the double digits it is expected to become the top luxury market within a decade by many experts.

Another study considers the growth in the number of "High Net Worth Individuals," who have liquid assets of more than $1 million. Their numbers have swelled from 8.7 million in 2005 to 10.9 million in 2011. However, the number falls to 98000 when the bar is raised to $30 million

There is significant growth in the luxury market overall because of the rapid development of the BRIC countries is to the benefit of a very small number of people, who are growing immensely rich while the majority of their populations have only marginal improvements in their incomes.

Meanwhile, it is suggested that the "Cost of Living Extremely Well" index has increased at double the rate of the standard Cost of Living index, suggesting that the cost of luxury is increasing at a faster rate, and the luxury lifestyle is therefore accessible to fewer people.

This may also serve to explain the significant growth in the premium market - as people are becoming wealthier but the cost of luxury is increasing at an even faster rate, they are having to settle for sub-luxury lifestyles in spite of their purchasing power.

(EN: The author does not explore this, but the growth in private pensions in the US means that many more people will retire as millionaires, which in economic terms means that the value of a million dollars will be significantly less, in terms of its purchasing power, as there will be more money chasing the same supply of goods - unless, of course, some wondrous increase of supply also occurs, money will buy far less.)

To be rich or to be modern?

The previous consideration considers the resources (wealth) as a qualification for the luxury market, but other studies look less to their financial profile and more to behaviors: the luxury market consists of those who purchase luxury brands. This seems sensible because a person who has high net worth but does not purchase luxury items is not really participating in the luxury market.

What has been found is that there are two factors that motivate luxury purchases: the amount of disposable income (not necessarily wealth) is influential, as is a person's "modernity," driven by the desire to be in step with their culture. This in turn is driven by their willingness to change in response to external influences.

(EN: both factors seem to focus on future potential rather than past actions, which is likely to be of greater interest to a firm seeking to sell items. If you've already purchased a luxury vehicle and are happy with it, feel no need to get the latest model simply because fashions have changed, then you are not in a state to wish to buy another, hence you are of little interest to those who wish to sell luxury vehicles.)

The market for luxury focuses on frequent purchasers of products and heavy users of services, who contribute the most revenue to providers in the market.

The authors present a four-square analysis that considers two binary factors: whether their disposable income makes them rich or non-rich, and whether their tastes in products is traditional or modern. It becomes clear that the modernity of an individual leads them to acquire things, and that the richness leads them to acquire expensive things. However, disposable income is the stronger factor in this analysis. The top 5% of income earners account for about a third of luxury spending.

The author observes that people with high disposable income are not necessarily those with the highest income or the most wealth. The study of "office ladies: in Japan, with expensive tastes in fashion (particularly luxury handbags) are not the social elite, but among the lower grades of white-collar workers. They do not have much wealth or an impressive income level - but because many of them live at home and are supported by their families, they have the ability to spend a significant proportion of their incomes in self-indulgent consumption.

Conversely, it can also be observed that high-income and high-net-wealth individuals can also have very pedestrian tastes. It has regularly been observed that there is, in America, a "millionaire next door" segment in which people with significant monetary resources reside in middle-class neighborhoods, drive average cars, and drink inexpensive wines. They save much of what they earn and while their income is not significant, they amass considerable savings.

As an aside, the relationship between age and luxury is not linear - it's generally considered that older people spend their life savings on the "good life" as a reward for their lifetime of hard work, but statistically luxury consumption is a bell curve that peaks at the 35-49 age group (based on a sample of 12,000 luxury clients in Europe).

Heavy users and day-trippers

Until 2000, growth in the luxury market was attributed to "day trippers" or "excursionists," which is people who are not habitual consumers of luxury, and have limited means, but who occasionally purchase a luxury brand, motivated by self-indulgence or hedonism or to celebrate a momentous occasion of unusual accomplishment.

Today, this is no longer the case, due in large part to the economic uncertainties. The middle class is fearful of the future and more likely to save their disposable income as a hedge against possible future hardship than to splurge. This effectively stopped their occasional consumption of luxury.

It's noted that the Chinese, whose income is one-tenth of western individuals, are more likely to splurge on luxury. The difference is in their perception of the future: the Chinese feel they are riding an economic wave upward, and that the future will be better than the present, whereas westerners feel they are riding it downward, and the future will more difficult.

In both instances, we find the rise of what the author calls "masstige" (a portmanteau of mass and prestige) in that people who do not have the means or the will to obtain true luxury are seeking to gain prestige from less expensive products that still carry the brands that signify luxury - or said another way, premium products.

The four luxury clienteles

A separate study of "young managers with high disposable income" considered the factors that define luxury in their view, which generally fell into four categories:

  1. Some seek to possess an item that is beautiful or excellent.
  2. Some seek the pleasure of consuming an item that delivers sensual stimulation.
  3. Some seek items that will convey to their owners a sense of esteem
  4. Some seek items that are rare or unique, the object and prize of a contest between haves and have-nots

The author provides tabular data of the qualities the respondents attributed to luxury (uniqueness, excellence, sensuality, etc.) and correlates them to the four categories above.

The product or the logo

The luxury-for-self and luxury-for-other subset of luxury represent the two extremes on a continuum which questions whether the product or the logo is their motivation for purchasing.

The luxury-for-other extreme is highly motivated by conspicuous consumption, and the logo identifies (to others) exactly what they are consuming.

The luxury-for-self extreme may have some interest in the brand prior to purchase, as a guarantee of the qualities and quality of the product, but is entirely indifferent to the brand after purchase, as consumption is for their own individual pleasure, rather than the impact on any observer.

(EN: My sense is this sets up a binary fallacy - or more specifically, that the desire for logo is discussed in its positive an neutral forms, but not in its negative form: those who are not merely indifferent to logo display, but hold it in contempt. It's likely not a separate group, but a subset of the luxury-for-self group, that removes the labels from clothing and the emblems from vehicles to eschew conspicuous consumption.)

The authors consider logo sensitivity according to the four groups they defined in the previous section: The third and fourth groups (who see luxury as evidence of distinction and esteem and those who see it as the prize of a contest between haves and have-nots) are enthusiastic about displaying logos. The first and second (who seek to possess or experience something exquisite or who seek sensual stimulation) are indifferent.

Particularly in emerging markets, the third and fourth groups are most prevalent: the nouveau riche have recently risen from the ranks of the lower classes and wish to proclaim their victory and be esteemed for their success. Correspondingly, there is a taste for "big logos" that make the cost of their possessions obvious to observers.

As an aside, it's also noted that members of the lower classes are also very enthusiastic about displaying luxury brands, and are meanwhile indifferent to the quality of experience, which plays neatly into the hands of brand counterfeiters.

History and authenticity

Luxury has a close association to history in the European market, where buyers are conscious of the tradition of the brand and expect brands to have a long history.

However, in America and emerging markets, customers do not have the same relationship with time. Having only a short history themselves, they do not value the history of their brands to the same degree. Anything over a few decades old seems like vintage by comparison to most of the brands in the market.

Authenticity of these markets does not require vintage, and the stories that support luxury brands need not be from the distant past. In nations where history is being made, the likelihood that stories of the present will be remembered in the future substitutes for stories of the past that have actually persisted.

It's also suggested that the "Hollywood" mentality blurs the line between fact and fiction, and that Americans enjoy a good story even if it is entirely fiction. As such, the history of a brand can be fabricated or implied.

Disruption or integration

Another "axis of differentiation" is considering whether a product will transform the consumer's lifestyle or integrate into their existing lifestyle. Particularly among the nouveau riche, who are new to luxury, the expectation is more transformative - they are becoming wealthy, and seek brands that will help them make the transition.

But even in making the transition, there remains the question of whether the nouveau luxury customer wishes to integrate himself into existing definitions of luxury or define a "new" luxury. Consider the consumers of Crystal Roederer champagne, popular among the nouveau who disdain Dom Perignon as a mark of older generations.

How countries differ in their attitudes

Globalism brings the challenge of serving a multitude of local markets, and particularly when it comes to luxury, which is personally defined and culturally derived, there is great heterogeneity.

To begin, consider the appeal of luxury throughout the world. A market research company studying luxury consumer behavior asked a simple question: "Do you like luxury?" On a scale of one to ten, the results showed that China gives the highest rating (8.2), followed by Mexico (8.0), India (7.3), the UK (7.3), the United States (6.8), South Korea (6.4), Germany (6.1), Italy (6.1), then France (5.7) and, last, Japan (5.6).

The authors seem to babble randomly for the remainder so to extract some key points germane to the topic:

They then turn to theories of one of their colleagues on the differences in luxury in the US, Japan, and France, who makes a number of additional observations:

Why are Western luxury brands globalized?

Travelling the world, it is more common to see reverence for western luxury brands in eastern nations than the other way around, and many western luxury brands compete in Asia with upscale shops and boutiques. There are not, in the west, a similar prominence of eastern brands.

(EN: This may be true of the present age, but consider the fascination with Asian goods during the Renaissance period. That may be mitigated by the difference between product and brand - westerners crave spices, silks, and other oriental products but are not concerned with the brand.)

One reason for this may be that wealth is established in the western nations whereas it is new to the eastern world: in essence those in emerging markets are attempting to emulate the vision of luxury from the old world, much in the way that Americans emulate European luxury.

(EN: This is a valid point, though perhaps more closely related to politics. America was a British colony, and the earliest Americans considered themselves to be Englishmen living in a remote colony. Even when America established a national identity, luxury remained a British concept, and to some degree still does, though Americans no longer seek to overtly emulate English culture and express disgust for the French. We see much the same thing in Europe previously, as the elite in any nation were foreign conquers, such that the highest classes of English were at one time Romans, and later Saxons, and later Normans, and it was quite some time before there was a distinct British identity. I do wonder how this plays out in the emerging markets, and suspect it differs among nations. Doubtless that India, having only gained independence in the mid-twentieth century, still looks to the English trappings of wealth and power, but the Brazilians seem less inclined to emulate their Portuguese former masters. The same difference may be seen in more recent conquests, such as the way in which the Japanese emulate their American conquerors or the significantly lesser degree to which German culture has assimilated into the French - but in these instances the period of occupation was much briefer.)

One overlooked reason for the success of Western brands is the simple lack of domestic competition. China is a manufacturing superpower, but the design of Chinese products is still done elsewhere. The same can be said of Japan, which focused on efficiency and quality of manufactured goods but did not define the goods themselves.

Of China, particularly, the authors indicate that the Chinese were taught to despise their own culture during the communist revolution, and as such they have not shown signs of reviving it. Instead, they worship the brands of the foreign culture that the leaders of the revolution envied.

Another factor that has inhibited the rise of luxury in emerging countries is related to social classes or caste systems. The lack of an aristocracy to model luxury, or the present repudiation of a caste system, removes also the incubation of luxury among an elite class so the "new money" lacks a model to imitate. In a sense, you must be grandfathered into the luxury class.

Finally, there is the desire of Western nations to prevent Eastern markets from developing their own luxury brands. The sales and advertising practices of Western brands are in effect propaganda campaigns to maintain the perception that luxury is imported, and that domestic producers are to be considered inferior.

China today and tomorrow

Reiterated: predictions seem to agree that China should become the top luxury market in the next ten years.

The same prediction was made of Japan, but that was a bit different given that:

These factors are absent in China.

The authors also turn to Deng Xioping's commandment to his people to "get rich and glorious," which many seem to have taken to heart. His intention may have been to create economic growth rather than a country of money-obsessed people, but the latter seems to have happened instead. Even so, personal glory is compatible with luxury.

An important factor in Chinese luxury is that about half of its expenditures are spent abroad, in the travel market. As many as 100 million Chinese people travel abroad, and to say that a gift was purchased in a foreign land is a mark of status - and gifting luxury they purchased on their travels is a significant market.

The average income remains very low in China, an the middle classes do not participate in the luxury market, which essentially skews young (73% under 45 years old) and male (a natural consequence of population restriction).

Some random survey results:

Presently, China is a market of 960,000 millionaires and 60,000 super-rich ($30m or more) who have developed expensive tastes quickly and wish others to recognize their success.

There's a bit on using e-commerce to reach them. On the upside, the Chinese use the Internet heavily to educate themselves about the outside world, but while a Web site can provide information it cannot provide a shopping experience, not does receiving a package in the mail have a sense of luxury at all - hence the likely reasons they travel to purchase luxury goods.

This leads to the question of whether there will be an emergency of luxury brands in their own domestic market, or will the Chinese continue to trade cheap junk in mass quantities for a smaller amount of luxuries. Some brands are attempting to assert themselves, but with limited success, and thus far are a threat to the premium market, but have yet to achieve luxury status.

Another potential landmine for luxury brands is being too eager to get into Chinese hands. This is rather a paradox because the Chinese are eager to have luxury, and luxury is not in a hurry to be had. As such there is opportunity for new luxury brands to step into the breach - the Chinese customer who wants a Ferrari will not have the patience to wait two years for his trophy and may consider other options.

Ironically, while China is the source of many designer fakes, the Chinese people themselves do not consume them: "We do not want Chinese, we want the best" is a sentiment that leads them to seek foreign products and insist on their legitimacy. However, the Chinese have different concepts between fake and counterfeit - a poorly made imitation is undesirable, but a well-made one may be acceptable.

(EN: A recollection of a Chinese acquaintance in grade school, whose parents decorated their home with "fake" paintings, but who spoke of the accuracy of the reproductions and suggested that the artist, in signing the original master's name, was giving credit. I would expect that counterfeiters of other goods, and their Chinese customers, might feel the same way about superb counterfeit goods.)

Why India resists Western luxury

The authors see India as a paradox, a nation nearly equal in size in India, and which is also booming economically, yet its luxury market remains severely atrophied. Though it is the nation where one finds the most Rolls-Royces in the world, few other luxury brands have been in demand there.

The authors offer a staccato burst of conjecture:

Russia: the psychology of oligarchs

Like China, Russia instantly gravitated toward luxury after the fall of communism, and whose culture was crushed, leaving their newly rich to look to foreign aristocracy for role models.

Moscow has the largest number of billionaires of any capital cities, who often travel abroad to experience luxury. Members of the Russian luxury market are flashy hedonists, to the extreme.

The first phase of their relationship to luxury is a level of debauchery summon to people in many cultures who have become very rich in a short amount of time. They still have their bourgeois values, and see their wealth as a means to consume to excess, celebrating their perseverance over years of deprivation, and rub their success in the noses of those they have left behind.

Also, given their history, there is a sense of urgency and immediately - to enjoy now what might at any moment be taken away. There doesn't seem to be much faith in the future, which undermines the desire to have durable things that will stand the test of time, and be cherished by their descendants.

Aside of garishness, the Russians are also characterized by having less regard for material goods and more for experiences: they are more likely to splurge on an extravagant party than buy an expensive item, to travel abroad to meet the owner of a famous winery rather than to amass a cellar full of vintage wine.

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