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14: Entering and Leaving Luxury

Some brands begin in the luxury market and remain there throughout their lifespans, but it is more common for old brands to die off and new ones to be born.

However, the focus of this chapter is on existing brands that ascend into the luxury category from the premium market, or descend from luxury to the premium market as a matter of strategic choice, rather than as the consequence of economic hardship or an unfortunate accident.

Wanting to be luxury is not enough

Many companies are envious of the high price of luxury items, and wish to command a high price for their own products out of avarice: their goal, after all, is to make money, and as much of it as possible, so posing as a luxury item to get more revenue is a means to an end.

However, a company's opinion of itself or the image it wishes to project is not sufficient to make it a luxury company: the customers must agree. If the customers do not agree, they will not purchase and the firm will be compelled to obey its true status - or perish while trying to maintain a false image.

That is not to say that a firm must obey the wiles of the market, or that it has no ability to influence the perception that the market has of it. The earlier chapters of this book indicate the rules, practices, and objectives of luxury. If a firm complies to those rules, it does not need to pretend to be luxury - it is luxury.

Marketing can have a strong influence on the perception of a luxury good. This does not mean that a poor quality product can be sold as luxury if it is heavily marketed, but it does help to ensure that a good quality product is held in high enough esteem to be validated as luxury.

A common problem among firms that are attempting to become luxury, as well as for those that are attempting to remain within it, is a lack of total commitment. Luxury is an absolute that cannot sustain with one foot inside the boundaries. Consider the discussion of the four Ps of marketing - they are pursued in a very specific way for luxury products. It is very dangerous, and ultimately unsustainable, for a luxury brand to have one or two of the Ps aligned with a luxury strategy and allow the others, by neglect or intention, to be managed according to mass-market principles. Such a product will not be regarded as luxury, but at best will be considered a premium product with some luxurious qualities.

That is not to say that a firm must obey every rule of luxury too the letter, but must take a pragmatic approach to the rules it chooses to obey or disobey. There is a reason behind every rule, and that reason may or may not apply. For example, the authors are staunch in their conclusion that luxury cannot be sold on the internet, but this is because it is impersonal and not exclusive. If the Internet can be personalized and if clients feel the experience is exclusive, then perhaps it can be used as a retail channel without damaging the esteem of the brand.

Why envisage a luxury strategy?

The luxury strategy is a significantly different approach to business than the mass-market strategy. For any given product, you can choose to sell to many customers or to few, and find success regardless - so why choose to pursue the luxury strategy?

High Risk and High Reward

Luxury is a "jackpot business" in which the entrepreneur is taking a gamble that will fail miserably or succeed considerably. A successful luxury firm makes an enormous markup on the goods it sells, and if well managed can produce a tremendously high return on the capital investment. In that sense, luxury appeals to men who have lofty goals or are willing to undertake a very risky challenge.

The mass-market alternative also has its risks, but the risks and rewards are much less dramatic. So long as the product is serviceable and the price is moderate, a good will find buyers, and there's a great deal more latitude in increasing/decreasing prices and improving/degrading the product to find the sweet spot.

The Pursuit of Perfection

Mass-market goods seek to be "good enough" to justify their price to their target market, and to make them one iota better is deemed wasteful. Companies that make such goods are eager to increase their market share and sell more units, but disinterested in providing a product that is more than merely sufficient.

Luxury, meanwhile, represents the pursuit of perfection, in which no expense is spared for the sake of creating a product that is as fine as humanly possible, and are constantly interested in making the product even better. Its products are objects of desire for the few people who have discerning tastes and the willingness to pay a high price to satisfy them with a superlative product.

Indifference to Size

Mass market goods are concerned with bigness: to be a large company, employing many people, serving a majority of customers, etc. While profit may be the ultimate motive, the means by which it is pursued is scale.

Luxury firms do not have this obsession - the firm must only be as large as necessary to be sustainable and accomplish its goals. It may also have a profit motive, but the means by which it is achieved is the high price of its goods, validating their quality.

Esteem

Owning a luxury company, or working for one, is a mark of social distinction - much in the same way that owning a luxury product identifies its owner as belonging to a small class of the social elite.

The motivation for esteem may be internal or external: the satisfaction may derives from accomplishing great things, or it may derive from having other people acknowledge that you have accomplished great things.

Start small and become profitable

While the size of the company is not a factor in luxury, it is the tendency of luxury firms to be small. To provide a product only to the highest classes means that there is a limit to how large a firm can grow, in terms of sales, without departing the luxury classes. And while it is theoretically possible for a large organization to maintain high standards and maintain its identity, that seldom happens in reality: as a firm grows large, it becomes diffuse.

Launching a luxury brand from nothing requires a firm to start small and to be profitable on a small scale. It can grow to serve the luxury class in more markets, but any expansion beyond the luxury customers degrades the product, and it falls to premium status. Growth must therefore be carefully managed and controlled.

For luxury brands that have grown too much, or for premium brands that wish to become luxury, downscaling the operations is necessary - it can be quite expensive, and it may not ultimately be successful, which is another reason to be extremely careful in growing.

For example, Ralph Lauren recognized that it had grown too ambitiously and had fallen from the ranks of luxury, but downsizing came at significant expense, such as a payment of $155 million to repurchase licenses it had sold, closing down and relocating stores, and reengineering its production lines. As a result of all this expense, revenue plummeted by profitability rose - but it remains arguable whether Lauren's brands have regained luxury status, or merely pulled themselves out of the standard market to the premium.

However, this has not been universally successful, Yves Saint Laurent found itself in the same position after aggressive growth and took some of the same measures - cutting licenses and closing shops to retreat from the premium market back to luxury. Not only did this fail to produce financially positive results, but the firm remains steadfastly anchored in the premium market.

Once profitable, grow quickly

A small operation in a single market can be used as a "launch base" for an international luxury brand. Firms that wish to become international must make haste to conquer the markets.

The authors provide a few reasons for fast expansion: the brand must move quickly to prevent competitors, including premium brands, from responding to demand for a luxury product of its class; it must demonstrate its strength by being among other luxury brands in many locations; and it must act quickly during a window of opportunity that can close if socioeconomic change dulls demand before the brand can become established.

There is a "swing threshold" when the brand is ready to be launched: in financial terms, the brand must be adequately profitable that it can grow quickly and undertake the expense of expanding into new markets. If a brand is losing money on each unit sold, then a rapid expansion will cause utter collapse. In terms of status, the brand must have enough esteem among enough consumers to ensure its introduction will be successful. Until both thresholds have been crossed, the brand should remain small, seeking to achieve a profitable operation while attracting clients slowly to help spread the desire for the brand.

In addition to having the means to produce more product and open more retail outlets, the brand will also need to invest heavily in communications as it enters new markets - while at the same time avoiding the vulgarization of the brand by over-promotion in mass media channels.

In geographic development: create your roots

While a luxury brand may reach an international audience, it is rooted in the culture of a specific location. Every luxury good carries the marks of its birthplace, and even entire classes of product have a specific association: wine is French, silk is Chinese, caviar is Russian, etc.

Of particular importance is that a luxury good remains true to its native culture. While it is possible to customize certain things to suit foreign markets (offering a selection of products that is most appealing, or making minor changes to the service to suit local laws and customs), it should not change the core of its identity. A luxury product adapted to local requirements is no longer a luxury product

While growth should be rapid, a luxury brand should not move in all directions at once - but instead begin in markets that are most receptive to the brand, and whose customers will accept the product as luxury and be willing to purchase it without demanding modifications.

It's also important to consider how the demographics change. For example, Vuitton's clients in its native France were mostly older married women, whereas in Japan it is mostly younger single women. Distribution and communication must be appropriate to the clientele in a given market.

Specific bits of advice are to carefully choose the location of the first sales point, to choose a prestigious location where the brand will compete will with others in the same neighborhood, and to make the opening event a statement of the brand's status and a strong first impression.

In product development: create your reference

As for luxury brans that seek to grow by selling more products to the same clientele, much of the same advice applies:

Finally, it would be highly inadvisable for a luxury brand to attempt to expand geographically and develop new products all at once. In theory, it is not impossible, but it involves so many moving parts that it is unlikely to be executed optimally.

Acquiring an existing brand

If "you are rich and in a hurry," it is possible to leap into the luxury universe by purchasing an existing luxury brand. The authors suggest two ways to approach this.

The first strategy is to acquire a brand that has luxury status, but has either been abandoned or insufficiently exploited. As an example, Mercedes Benz reactivated the Maybach brand to reenter luxury - which had been a luxury brand prior to the Second World War, but was shelved because of the company's association to the Third Reich. After sufficient time had passed for its sins to be forgotten, the brand was launched.

The second strategy is to acquire a luxury brand that is currently in the marketplace. The problem with this approach is that if the brand were at the peak of its success, it would not be for sale, so doing so means acquiring damaged goods - the brand may be faltering, or it may be fearful of a hostile takeover - but in any case there are things that must be put right.

Whichever approach is used, maintaining the luxury status of an acquired brand is a very difficult proposition. It is very common for luxury brands to fall from luxury, either due to guilt by association in the marketplace (Jaguar's esteem significantly diminished simply because they were acquired by Ford, and was totally eradicated by their sale to Tata Motors) or by mismanagement. Because buyers of a brand do not know its history and culture, do not understand the vision and dream, and are eager to tinker with their newly acquired firm, there is a high likelihood of making serious and even fatal mistakes.

The end of a luxury brand

Luxury itself is eternal - so long as humans exist, there will be a desire for luxury, for hedonistic pleasure and social stratification. But this does not mean that luxury brands are eternal - as much as they want to last forever, few will remain in existence for more than a few generations, and most will expire much sooner.

Some luxury brands disappear altogether, though other brands remain and descend to the premium market. In the latter case, this can be an awkward fall from grace, or it can be managed as a graceful transition - provided management is aware and accepting that its position in the luxury universe is untenable.

While some delight in seeing the debasement of a great house, the authors do not - nor do they believe there to be any shame in making an intentional departure from luxury: it is smart management to recognize that there have been environmental changes that make a luxury position untenable, or to have a change in the mission of a firm that requires a departure from luxury to accomplish its long-term goals.

As much as economy-standard-premium-luxury are perceived as a hierarchy due to the price of the product or the social class of the customers, one is no better or worse than the other - it is simply different. The quality of a firm is to be assessed by its success in meeting the needs of its market segment profitably, which can be done at any of the "levels" described.

What is foolish and damaging is to fail to recognize the level at which a given brand operates. Much like a wealthy family that has exhausted its financial resources will damage itself by attempting to pose as if there were no issues, so will a premium brand damage itself by attempting to pose as if it were a luxury product.

Some of the main reasons a brand withers away:

The deadliest of all of these is shareholder greed - as they have the authority and power to command the employees to do all of the other things. When an organization is compelled to make as much money in as short a time as possible, it quickly falls from grace.

The pyramid business model

The principal risk of the pyramid model is that luxury reaches downward to make money, but its appearance in the lower markets diminishes the status of the brand. When a fashion label begins appearing id department stores or discount stores, such that the scruffy people can wear designer fashions, then the same designer falls out of favor with the luxury market.

It does not matter whether the lower range of the pyramid has the same quality as the pinnacle: if it is of similar quality, then it is foolish for anyone to pay more for the brand. If it is of lesser quality, the brand gets a reputation as being low-quality and those who purchase the pinnacle still lost the respect of their inferiors.

The galaxy business model

The principal risk to the galaxy model is a weakening of the gravity that holds the stars in alignment. This can happen due to a weakness at the center (the creator dies or abdicates power to management who are less passionate about the dream) or because there are too many stars, planets, and satellites in the universe.

It's suggested that the Pierre Cardin brand fell very quickly because both of these things occurred - but it's not uncommon in luxury for one to follow on the heels of the other: the creator leaves, and the new management grows the galaxy rapidly and with insufficient control.

Particularly when a galaxy grows too large to be controlled, a firm will either depart from luxury, or at least transform to a pyramid type structure with a few products remaining in luxury while the others sink into the lesser markets - often in a disorganized manner.

By contrast to the Cardin model, Yves St. Laurent's protege took control after his death, and made a conscious decision to restructure the product line into a pyramid, and the transition was handled gracefully.

The perfume business model

The authors question whether the perfume business model is "doomed" in the long term. The product itself has fallen out of fashion - it was once "the gift product that pleases women most," a title now claimed by the iPod.

(EN: The authors do not explore the decline in demand further, but in general women have become more mannish as gender equality progresses. I am aware that cosmetics in general are in decline, and suspect the same will be true of any product that is associated to the traditional [passive] qualities of the female stereotype.)

The financial situation of perfume has been discussed: as a relatively inexpensive item it has fallen from luxury. There are no longer firms for whom perfume is the core product - it is an extension of the brand rather than its core. At the same time, many consumers regard perfume as if it were a stand-alone product: a designer fragrance is often worn by those who are not and will never become a consumer of the designer's clothing. Neither seems to regard the perfume, itself, as a true luxury item.

Meanwhile, the expenses of launching a new perfume remain very high (a firm can spend the first year's revenue on marketing to launch a fragrance), the profit on each unit is low, so there is a necessity to adopt a mass-marketing mindset at attempt to sell as much product as fast as possible to make enough to cover the cost of launching it.

It is no longer feasible to create an exclusive product that a small segment will purchase, not is it possible to control distribution tightly and remain a financial success. Counterfeiting is generally simple and, given the lack of a physical object, difficult to pursue.

It can even be argued that, given the number of brands in the market, it is impossible to create a distinctive product, whose scent is rare and significantly different to the rest. Nor is it possible to devise a unique marketing message, as all the various appeals have been overused.

Consider some numbers:

There are few success stories for perfume in recent years. The two that the authors cite are extension products of fashion designers (Gauthier and Mugler), and it's acknowledge that it is "the exception rather than the rule" that a new perfume should be financially sustainable at all.

Taking a brand out of the luxury universe

When a brand cannot or no longer wishes to respect the constraints of the luxury business model, it is inadvisable to remain within the luxury market and should make a graceful descent into the premium end of the mass market.

The authors look to Christian Dior as an example of affirm that handled the transition gracefully: when Christian Dior died in 1957, the house quietly phased out haute couture within a few years and entered the premium market under a derivative brand (simply "Dior"), then scaled back its boutique operations, and eventually became a premium brand.

(EN: Looking to other sources, the authors' account is a bit idealized. It's suggest that the House Dior was "in chaos" and the gradual retraction of the brand was seen as mitigated panic - but then, this is likely the view of outsiders who merely saw the firm deflating

Another example is that of Mercedes, which was once a luxury vehicle but was unable to sustain itself financially as sales decreased. During the 1990s the firm descended from luxury with the C-class and later the A-class. Recognizing that the brand had fallen from luxury, the firm did not attempt to revive Mercedes, but instead launched a different brand to attempt to recapture the luxury market (Maybach).

Leveraging the image in a low-cost strategy

The benefit of making a graceful exit from luxury is that it retains an aura of superiority. A brand that has made a smooth transition is seen as bringing qualities that were once exclusive to the lesser markets, whereas one that fell awkwardly from luxury is seen as an impostor who never deserved to be considered luxury in the first place.

The authors consider the example of Mauboussin, a traditional jeweler established in 1898 in the epicenter of haute joaillerie in Paris. After a century of success, the firm found that its customer base had shrank to a level that could not longer be profitably served. The firm repositioned its product to the premium market, selling its goods at lower prices, outsourcing production, opening more outlets, doing more advertising, and selling its goods online.

In doing so, Mauboussin became profitable, but the authors concede that they have been turning only a small profit and there remains the chance that the firm is not sustainable - but at least the brand remains financially viable and has the opportunity to work toward profitability, as opposed to falling clumsily from luxury and losing all prestige and allure.

Of importance: departure from luxury is not cheap or fast: it requires the time and money to reengineer the firm and introduce the brand to a lesser market if its image is to be at all preserved. In particular, luxury brands that wish to make a graceful descent must avoid the common assumption that the brand will enjoy instant recognition and popularity in the premium of mass market without any effort - and instead take the perspective that the brand is entering a new market in which it is wholly unknown - which is entirely accurate.

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