Brand management and marketing of luxury goods

From the historical development of luxury to our present-day perception


Master's Thesis, 2011
88 Pages, Grade: 1,3

Excerpt

Table of Contents

Table of Figures

1 Introduction
1.1 An Approach to the Concept of Luxury
1.1.1 Historical Development of Luxury
1.1.2 The Relativity of Luxury
1.1.3 Target and Outline of Work

2 Luxury Products and Brands
2.1 Delimitation of Luxury Brands
2.2 Luxury Brands and the Economic Context
2.3 The Luxury Brand Customer

3 Personal and Social Functions of Luxury
3.1 Personal Functions
3.2 Social Functions

4 Specificities of the Luxury Industry
4.1 Market Characteristics
4.1.1 Company Size and Competition in the Market
4.1.2 Financial Characteristics
4.1.3 The Worldwide Luxury Market
4.2 Counterfeiting
4.2.1 Economical and Reputational Damage
4.2.2 Customer Behaviour
4.2.3 Countermeasures

5 Characteristics of Luxury Brand Management
5.1 Product
5.1.1 Handcraft and Quality
5.1.2 Innovation and Design
5.2 Price
5.2.1 The Challenge of Fixing the Price
5.2.2 Price Elasticity
5.3 Place (Distribution)
5.3.1 Characteristics of Distribution Channels
5.3.1.1 Flagship Stores
5.3.1.2 Franchise Shops, Specialist Dealers and Department Stores
5.3.1.3 Duty Free Shops and Outlets
5.3.1.4 Internet
5.3.2 Management of Distribution Channels - Artificial Shortage
5.3.3 Point of Sale and Customer Touchpoints
5.4 Promotion
5.4.1 Communication Strategy
5.4.1.1 Heritage and Country of Origin Effect
5.4.1.2 Social Responsibility and Sustainability
5.4.2 Communication Channels
5.4.2.1 Classical Media
5.4.2.2 (Sponsoring of) Events
5.4.2.3 Celebrity Endorsement
5.4.2.4 Company Website and Social Media
5.4.2.5 Product Placement
5.5 The Interaction of the Four Ps: Managing a Luxury Brand

6 Conclusion: The Future of Luxury

Bibliography

Table of Figures

Figure 1 The Seven Deadly Sins: Luxuria (Pieter Bruegel the Elder 1558; (http://elizabethanliterarystudies.files.wordpress.com/2011/04/pieter_bruegel_the_elder-_the_seven_deadly_sins_or_the_seven_vices_-_avarice1.jpg)

Figure 2 The Pyramid Brand Model according to Kapferer (2008) (Figure by the author according to Kapferer 2008)

Figure 3 Combination of Maslow’s and Kapferer’s Pyramids according to Pätzmann (2008) (Figure by the author according to Pätzmann 2008)

Figure 4 Increasing Luxury Consumption in China (http://thechinaobserver.com/wp- content/uploads/2011/03/china-lux.jpg)

Figure 5 The Hybrid Customer according to Werle (2005) (http://www.manager- magazin.de/img/0,1020,407917,00.jpg)

Figure 6 Self-Gratification: Luxury Shopping (Luxury Blog 2011) (http://www.moluxury.com.au/themodown/wp-content/uploads/2011/08/Luxury-Shopping- Bags.jpg)

Figure 7 Diamonds are a Girl’s Best Friend (1953) (http://www.freakingnews.com/pictures/29500/Marilyn-Monroe-Diamonds-29664.jpg)

Figure 8 Relationship between the Need for Status and Financial Power (Figure by the author)

Figure 9 Quiet versus Loud Luxury: Gucci Sunglasses (Gucci 2011) (http://www.gucci.com/de/category/f/sunglasses)

Figure 10 Luxury Triangle according to Alvaraz/ Kemanian/ Malnight (2004) (Critical Eye, Vol. 09-11/ 2004; p. 45)

Figure 11 Breakfast at Tiffany’s (1961) (http://entimg.msn.com/i/filmfashion/BreakfastTiffany_300x298.jpg)

Figure 12 Alerting the Public: Destruction of Counterfeit Goods (Rourke 2010) (http://dailycaller.com/2010/04/27/steamroller-crushes-thousands-of-fake-rolex-watches/)

Figure 13 Louis Vuitton Ads: Handcrafted Luxury Products (Louis Vuitton 2010) (http://brandconsultantasia.files.wordpress.com/2010/05/louis_vuitton_malletier-ad-campaign3.jpg) (http://www.stephaniefiermanmarketingdaily.com/wp-content/uploads/2010/05/louis-vuitton-ad- shoe-painting-stephanie-fierman.bmp)

Figure 14 Brand Pentagon according to Pätzmann (2008) (Figure by the author according to Pätzmann)

Figure 15 Brand Model for Luxury Brands (Figure by the author)

Figure 16 The Identity of the Chanel Brand: Coco Chanel and Audrey Tautou (Coco Chanel: http://upload.wikimedia.org/wikipedia/en/3/3a/Chanel.JPG) (Audrey Tautou:

Figure 17 The Country of Origin Effect at the Example of Patek Philippe (2011) (http://www.patek.com/)

Figure 18 Mythically loaded Symbols: Ferrari’s Black Horse (Ferrari 2011) (http://upload.wikimedia.org/wikipedia/en/thumb/d/d1/Ferrari-Logo.svg/344px-Ferrari- Logo.svg.png)

Figure 19 Protest for more Sustainability in Taipeh (AFP 2011) (http://img.metro.co.uk/i/pix/2011/10/21/article-1319193699205-0E73BF5A00000578- 107270_433x645.jpg)

Figure 20 Sponsoring of Events: Cartier Polo Tournament (Cartier 2011) (http://nelsonwademagazine.com/wp-content/uploads/2011/02/Cartier_Inter4.jpg)

Figure 21 Celebrity Endorsement: Madonna for Versace (Versace 2005) http://1.bp.blogspot.com/- Q1lcKU_Vr4o/TcVL2PRwypI/AAAAAAAABFo/hfATADA7Ir8/s1600/madonna - versace.jpg)

Figure 22 Louis Vuitton on Facebook: Accessing Insider Information (2011) (https://www.facebook.com/LouisVuitton)

Figure 23 Product Placement: The Devil Wears Prada (2006) (http://desktopwallpaper-s.com/36/-/The_Devil_Wears_Prada/)

1 Introduction

Luxury as is the case with most abstract notions has a somewhat floating and mercurial character. It has undergone considerable changes during the last centuries (Kapferer 2008; Lasslop 2005; Valtin 2008) and there are good reasons for supposing that the concept will be subject to changes in the future as well. Luxury finds its expression in tangible products or services and there is a huge industry which caters to the needs of those who can afford the ultimate in price and quality. We will try and analyse the ways and means with which luxury goods succeed in finding or defending their position in this highly competitive market (Strauss 2011: online). In order to better understand the concept of luxury in our time it is useful to highlight some historical and economic factors which have contributed to the shaping of our present-day perception without attempting an in-depth historical or sociological analysis.

1.1 An Approach to the Concept of Luxury

1.1.1 Historical Development of Luxury

Throughout the course of history the conceptualization of luxury has varied according to social developments and economic and political circumstances of a given time (Lasslop 2005: 472). The basic guideline however, of what has mostly been considered luxury, is that it is beyond everyday necessities, in some ways unnecessary, often exaggerated and superfluous (Sombart 1992: 85). Thus, the demonstration of luxury is often seen as a pronounced and deliberate contrast to existing social norms and patterns of behaviour and it is not amazing that it has often been subject to severe moral and ethical criticism:

“No other moral or social issue is as unclarified as that of luxury, andwhat behaviour toward it can be considered to be well befit” (Kambli1890 preface, cit. in Valtin 2008: 248).

Etymologically, the term luxury derives from the Latin luxus and luxuria both referring to the deviation from the normal measure (Valtin 2008: 248).[1] Classical Christian theology narrowed luxuria, lechery or lust mainly to the sexual context giving the notion a severely negative meaning - even considering it one of the seven deadly sins (Newhauser 2007: 239) (cf. Figure 1).

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Figure 1 The Seven Deadly Sins: Luxuria (Pieter Bruegel the Elder 1558; (http://elizabethanliterarystudies.files.wordpress.com/2011/04/pieter_bruegel_the_elder-_the_seven_deadly_sins_or_the_seven_vices_-_avarice1.jpg)

In Europe in the 17th and 18th century moral and philosophical doctrines underlined the negative connotation of luxury and used the term to describe the immoderate consumption of the dominating social classes. Nobility was considered to use luxury as a means to express power and to mark the social difference between their class and the rising bourgeoisie. Luxury was associated to excessiveness, swank and outrageousness despising and condemning it as immoral and indecent (Lasslop 2005: 472).

The industrial revolution of the 18th and 19th centuries brought about the advance of mass production leading eventually to the growing prosperity of a larger part of the population. Formerly inaccessible products became more affordable, and a gradual change towards a more positive attitude to luxury ensued. The accessibility of luxury goods entailing the “secularisation of luxury” assured that these goods were increasingly valued and associated with good taste, intelligence and elegance. Luxury got more and dissociated from moral considerations and thus lost a good part of its bad reputation (Lasslop 2005: 472; Pätzmann/ Frank 2004: 32).

1.1.2 The Relativity of Luxury

The changing concept of luxury in the course of the years illustrates that luxury is not an absolute but a subjective as well as a relative term (Kapferer 2008: 96; Valtin 2008: 248). Its perception is closely related - in fact is a function of the prevailing social and economic living conditions. To get a grip on the notion of luxury it is therefore necessary not only to select a given point in time but also to choose a definite socio- economic context as point of departure for analysis. Automobiles, for example, were considered luxury goods in western countries sixty years ago but today have largely become ordinary consumer goods which are mostly taken for granted - apart from a few highly expensive and exclusive brands. This example illustrates what Lasslop and others call the “democratization of luxury” (Lasslop 2005: 470; Tanneeru 2006: online; Valtin 2008: 249). With the spread of the product, its price diminishing, it becomes available to more and more individuals and loses its exclusivity and consequently its luxury status. This development applies to a well-defined social and historical context and cannot be transferred to other contexts. In most of the developing regions in Africa or Asia for example where the average income in many countries is extremely low, automobiles in general are still highly expensive and as very few people can afford them, are luxury goods for the overwhelming majority of the population. As luxury can only be evaluated in proportion to the degree of affluence which serves as the basis for analysis there is not much sense in comparing the notion of luxury in Third World countries to that in the western world. In fact, luxury is as relative a notion as are wealth and poverty.

In addition to social and historical conditions the subjective character of luxury has to be considered. Again it reflects - this time on a personal basis - the individual’s economic status. For a homeless person in Los Angeles, luxury might mean to have a warm place to sleep at night, whereas a movie star might see luxury in the purchase of a new $ 32 million villa in Beverly Hills.

1.1.3 Target and Outline of Work

Jean-Noël Kapferer, the internationally recognized authority on branding and one of the most influential brand experts in the world, has summarized the huge range of definitions proposed by a large number of authors:

“There is no single definition of luxury. Most of them do refer to well crafted, hedonistic and aesthetic objects, priced excessively above their functional utility, sold in exclusive stores delivering personal service and unique consumer experience, most often from a brand with history, heritage, the whole delivering a rare feeling of exclusivity” (Kapferer 2011: online).

For Kapferer (2011: online) modern luxury is characterized by a shift from absolute to relative luxury: Thanks to the industrial revolution and the corresponding rise of the standard of living everyone can have access to power with the benefits of a hedonistic lifestyle surrounded by exquisite products. Formerly inaccessible products become more affordable and are in principle available to everyone. The possession of these goods (e.g. cars) per se is no aspect of distinction anymore. According to Kapferer the question of luxury then is no longer to have or not to have but rather what to have. The quality of the product, its ideal value and the brand become more and more relevant:

“At the early beginning of the 20th century living in a mansion, with the latest comfort, driving a car, going skiing where in themselves sign of luxury […]. No brand was needed at that time: this absolute luxury was by essence conspicuous, visible by all, walking in the streets of New York, or London or Paris or along the wharfs” [sic] (Kapferer 2011: online).

It is quite evident that Kapferer’s definitions of “absolute and relative luxury” only make sense if applied to a coherent socio-economic context. The background of Kapferer’s analysis is the affluent western society where indeed the need for status has spurred the significance of well-known and visible brands.

The overall aim of the present thesis is to take up this idea and to analyse in what ways luxury brands distance themselves from ordinary brands and how some of them find their place in the luxury market while others fail. From there we will try to draw some conclusions on the requirements of successful luxury brand management.

For the sake of conceptual clarity it will first of all be necessary to make a clear cut distinction between luxury and premium products - a task not frequently undertaken in current literature. The reason for this being that the differentiation between premium and luxury goods cannot only be achieved by comparing the products themselves but has to take into account the social function of the respective product. The distinction, difficult as it may be, is compulsory however, as the management of luxury brands differs considerably from the management of premium brands as a more comprehensive analysis will demonstrate. It will be based on a detailed analysis of the four elements of the marketing mix, namely product, place (distribution), price and promotion which will disclose the special particularities of luxury brands and throw into relief the requirements of successful luxury brand management.

We will briefly discuss the influence of the economic context on the luxury industry with a special view on whether the sales of luxury goods are likely to suffer in times of economic difficulty. The answer to this question requires the analysis of the typical characteristics of a present-day customer of luxury brands.

The third chapter deals with the functions of luxury brands and analyses the motivations of individuals to purchase luxury goods. As is well known, brands in general help consumers take purchase decisions by fulfilling three basic functions, namely risk reduction, image benefit and information efficiency (Kotler/ Pfoertsch 2010). The task is to determine in what ways and to which degrees these factors are also relevant for luxury brands.

The next chapter focuses on the specificities of the luxury industry which in many ways is quite different from other economic sectors. Special attention will be paid to the composition of the market and the specifics of competition in that market. We will deal with one of the major problems of this industry segment, counterfeiting, and the motivations for customers to buy counterfeit goods. This will serve to gain a deeper understanding of the functions of luxury in society and thus provide the basis for the extended analysis of the specificities of luxury brand management which is to follow. Chapter five will then highlight the characteristics of luxury brand management by examining the four elements of the marketing mix. The analysis of the luxury product itself will demonstrate that in order to be considered a luxury good, a product has to be - at least to a certain degree - manufactured by hand. The role of pricing and the importance of the points of sales and other touchpoints will be discussed in detail when analysing the specific channel architecture of the selective distribution of luxury goods.

Special attention will be given to the specificities of the communication strategy, which focuses on the creation of an emotional benefit for the customer and is widely referred to as “emotionalization” (Diepstraten 2009: 16).

Finally, we will try a prospective outlook over the future perspectives of the luxury industry and discuss possible new expressions of luxury. The question we try to answer is whether there really is a tendency away from material to more intangible and symbolic luxury and, if that is the case, the consequences and challenges this development entails for the luxury industry.

2 Luxury Products and Brands

2.1 Delimitation of Luxury Brands

Kapferer’s pyramid branding model distinguishes between four types of brands: brands, upper-range brands, luxury brands and the griffe (Kapferer 2008: 98). Regular brands, also called private labels, are branded goods made in big quantities through standardized mass production. This production type ensures a low purchase price and a wide availability of the goods.

At the second level of the pyramid Kapferer places premium brands. These upper-range brands generate an impression of intangible added values for expensive and prime quality goods. Kapferer argues that these products tend to look increasingly like the rest of the market and equates premium brands with mass prestige (Kapferer 2008: 98).

In contrast, luxury brands, which the author positions at the third level of the brand pyramid, are characterized by their very high quality products. Superior quality is guaranteed through the mode of production: Luxury goods are produced in small quantities and always - at least to a certain degree - manufactured by hand. In contrast to premium products, luxury goods are not produced in factories but manufactured in smaller series within workshops (Diepstraten 2009: 14f).

The top of the pyramid is occupied by the so-called griffe. Griffes are unique luxurious specimens, where the creator’s signature is engraved. Kapferer characterizes these products as “materialized perfection” (Kapferer 2008: 98):

“[…] the ideal behind a griffe is a unique work of art which can never be reproduced. Yves Saint Laurent is a griffe when he signs his haute couture gowns in his boutique on the Rue St Honoré: they are one of a kind, luxury brand items” (Kapferer 2003: 80).

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Figure 2 The Pyramid Brand Model according to Kapferer (2008) (Figure by the author according to Kapferer 2008)

With the purchase price for the branded product increasing towards the top of the pyramid, the four brand categories fulfil different functions for the customers.

Jens Pätzmann (Pätzmann 2008: 17) combines the Maslow pyramid of needs and Kapferer’s pyramid brand model in order to identify the different purchase motivations of customers. According to his approach normal brands fulfil basic needs: For the satisfaction of physiological and safety needs like hunger, thirst and the protection against diseases, individuals tend to select basic brands, mostly private labels. Although their aura and sentimental value is rather low, they are quite sufficient for everyday use and convincing with their low purchase price (Pätzmann 2008: 17).

Premium brands in contrast tend to fulfil higher needs, especially social and belonging needs: Premium products enable individuals to distinguish themselves from others and to identify with certain peer groups.

The function of luxury brands - which we will examine in detail later - corresponds with the two top levels of the Maslow pyramid of needs. Luxury brands deliver the highest sentimental and ideational value and fulfil needs of self-esteem and self-actualization. Luxury brands serve to prove and demonstrate achievements in life and provide respect and recognition from others and, last but not least, from oneself - as a well-known cosmetics manufacturer puts it “because you’re worth it” (L’Oreal 2011: online).

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Figure 3 Combination of Maslow’s and Kapferer’s Pyramids according to Pätzmann (2008) (Figure by the author according to Pätzmann 2008)

Although the functions of the different brand categories overlap and the assignment of brand categories to human needs therefore is not always clearly possible, the combination of Maslow’s and Kapferer’s pyramids proves a very helpful instrument.

The accuracy of Pätzmann’s approach is further corroborated by Kapferer himself who summarizes the distinction between premium and luxury brands as follows:

“The difference is in the social function of luxury. Luxury is tied to the social hierarchy. Premium goods are just better goods: they are the best in class products, after examination of their comparative performance. Luxury is elsewhere. No comparison here, except between people themselves and their ability to stand out” (Kapferer 2011: online).

The ability to stand out provided by luxury goods is tied to their high purchase price which makes them affordable only to a small number of individuals who command the necessary high degree of available financial liquidity. At first glance, difficult economic circumstances should therefore have severe repercussions on the sales of luxury goods. We will consider this in the light of the economic crisis of 2009.

2.2 Luxury Brands and the Economic Context

For a long time the worldwide luxury market was considered immune to the “ebbs and flows of economic fluctuations” (Krauss 2008: online).

“Downturn, credit crunch, recession, global meltdown: there’s no escaping the fact that the economic outlook is grim. But there’s one market that is showing remarkable resilience: luxury” (Fellowes 2008: online).

The common assumption was that people who can afford buying luxury goods continue to do so even in financial downturns - either because they are not so much affected by the depression or because they see luxury goods as a means of investment (Strauss 2011: online). Yet in 2009 this wishful thinking came to an end as the actual results of the financial crisis became visible. “The economic recession has hit luxury, as most other sectors. Many luxury brands have reeled by lack of clients and cash” (Kapferer 2011: online). By 2009 the global luxury market had shrunken by eight per cent (The Economist 2010a: online) and annual profits had fallen drastically. Multinational luxury goods conglomerates like Moët Hennessy Louis Vuitton (LVMH) and Richemont had lost more than 40 per cent of their market value as their annual profits had fallen by up to 13 per cent (Süddeutsche 2008: online) and numerous layoffs had become necessary.

The entire luxury segment with very few exceptions was affected - from luxury sports car manufacturers like Porsche to luxury house estate agencies (Ageorges 2010: online; Weber 2009: online). Sales of Porsche had dropped by an average 27 per cent in the company’s 2008/ 2009 fiscal year. The worst-affected product was champagne (Ageorges 2010: online).

Only very few brands remained exempt from the crisis showing resistance to economic downturns (Grundhoff 2009: online). Such examples can be found in the car segment: Rolls Royce, Maserati and Lamborghini suffered less from the economic crisis than other brands. A possible explanation for this fact could be that these absolute top-class automobiles are only purchased by extremely rich customers who do not suffer excessively from economic downturns. As recent publications show, the number of such super-rich people has increased in the last years and will continue to do so. Nowadays there exist approximately 90,000 persons who belong to this category, in ten years this number will increase to 125,000 (Welt Online 2011).

In addition, the acquisition of these types of cars is usually not a spontaneous decision but is well planned far in advance - due also to the rather long time of delivery. In contrast, luxury brands like Dior or Chanel also make large parts of their profits by selling cheaper items like sunglasses or cosmetics which are also purchased by less affluent customers who in economically challenging times do without these luxury items. To come back to our model then, it is only the absolute top of the pyramid which does not suffer from any economic crisis; all the other levels are more or less affected by it.

Despite the economic setbacks many experts and CEOs of luxury goods companies remained optimistic and considered that the outcome of the crisis could have been even worse: “The reason why […] sales aren’t any worse than they are […] is that way: China […]” (Bloomberg 2009: online). China’s growing appetite for luxury products managed to offset the decline in sales in the United States and Europe, the regions most affected by the recession (Ageorges 2010: online). It is expected that China will remain to be the most powerful country by means of its luxury consumption in the coming years (Lee 2011: 3) (cf. Chapter 4.1.3).

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Figure 4 Increasing Luxury Consumption in China (http://thechinaobserver.com/wp- content/uploads/2011/03/china-lux.jpg)

Very current figures (October 12th 2011) demonstrate, that luxury companies apparently have recovered from the financial crisis but that investors do remain sceptical: In the last three months share prices of luxury goods companies have fallen perceptibly - on the average by 15 per cent. LVMH stock prices sank by 14 per cent and those of the Richemont group by even 20 per cent (Le Soir October 12th 2011: 24).

Clearly the financial crisis with the economic insecurity it generated - even for the very well-off - had hit severely if not decisively the purchasing power of the luxury goods customer reducing his willingness to spend his money liberally and more or less indiscriminately on luxury goods. Not only did the crisis have an impact on the sales volume of luxury goods but also on the type of luxury products sold indicating a change in the buying behaviour of customers: “In the dark days of the recession people didn’t want to show the bling […]” (The Economist 2010a: online). People who could afford buying luxury goods did not want to flaunt their purchases before recession-pinched passers-by and asked for plain white shopping bags to avoid moral condemnation (The Economist 2010a: online; Kapferer 2011: online).

This behaviour illustrates once again the eminent importance of social conditions on the perception and display of luxury: In “normal” times the customers of luxury goods are quite willing not only to accept but indeed enjoy the glamour of luxury. In times when social discrepancy becomes too pronounced, however, there is a noticeable reluctance to parade luxury, be it from a genuine compassionate feeling for the difficult situation of others, be it for a slight feeling of guilt triggered by a bad conscience. At any rate, there seems to be some sort of social regulatory mechanism which prevents what in a certain economic situation is felt to be excessive. In other words, Thorstein Veblen’s “conspicuous consumption” - the term he coined in his book “The Theory of the Leisure Class” (1899) - used to demonstrate influence and power is seen as inadequate, inappropriate - or simply unnecessary - in times of economic hardship for many.

When social regulatory mechanisms do not work automatically, some governments take unusual actions: The government of China this year has moved to ban billboards promoting a luxurious lifestyle over concerns that the endless advertisements remind people of the wealth gap (Moore 2011: online).

During the recession, instead of showing off, western luxury customers increasingly wanted quality and better value for their money (Fellowes 2008: online). Obviously, the recession confronted a certain layer of society with questions that had not emerged before like for example the question of whether a product was really worth its price. The necessity of spending resources more carefully brought about a certain change of attitude:

“The wealthy have learned some lessons. Like the rest of us working stiffs, they're buying selectively things they feel are really worth the price […]. Like most of us, the wealthy want a good deal” (Strauss 2011: online).

2.3 The Luxury Brand Customer

As the different sub-segments of the luxury industry differ widely concerning product categories and target groups it is difficult to make general statements about luxury customers. First and foremost, luxury customers vary strongly in their buying power: A very small group of customers is able to purchase luxury goods spontaneously without having to think about spending the necessary amount of money. A much larger proportion of customers have to systematically save their money to be able to afford a luxury product. According to surveys more than 70 per cent of luxury customers plan the purchase of luxury goods far in advance (Die Welt 2009: online; KPMG 2009: 5; Van der Gathen 2009: online).

Purchase power then is not sufficient to adequately describe the typical luxury customer. With the certain exception of the very low income earner he is equally present at more or less all intermediate income levels from the top earners to the medium incomes although of course there must be considerable differences in the frequency with which these two groups do in fact buy luxury products.

What is common to these groups is that according to experts their behaviour has become unpredictable and frequently - at least at first glance - contradictory. Companies have to deal with the so called „hybrid” or “bipolar” customer (Alvarze/ Kemanian/ Malnight 2004: 43; Werle 2004: online): A customer who is active and well informed, constantly looking for bargains in discount shops but at the same time quite willing to spend a lot of money on luxury goods. Due to this unpredictable and at times volatile behaviour some authors even use the term “schizophrenic” to describe modern shoppers (Werle 2004: online).

Brands offering cheap products and private labels like H&M, IKEA and ALDI enjoy great popularity as they give customers the feeling of being able to save money. Customers do not want to be taken advantage of - after all, if a product can be bought somewhere at a lower price why not take advantage of that offer? Surely, in the customer’s mind, the profit margin is larger if the product is sold at a higher price and he does not want to be outwitted by clever marketers.

This becomes visible especially in the food segment where discounters have been able to radically increase their turnover (Hamburger Abendblatt 2011: online; Werle 2004: online) but also other industry segments like the electronic sector appeal to the alleged cleverness of the customers. Advertisements like “Ich bin doch nicht blöd” (Media Markt 2011: online) are exemplary.[2] Customers compare prices and shop for the best bargains - hence the success of search engines comparing prices on the internet.

On the other hand, once the rather basic needs of food and body care products are covered, the customer is willing to spend considerable amounts of money on meaningful products allowing himself some luxury (Valtin 2008: 252; Werle 2004: online):

“New luxury customers are willing to spend an amount of money disproportionate to their income for a product they consider highly important” (Tanneeru 2006: online).

In consequence, it may well happen to see a luxury car in the parking lot of a food discounter (cf. Figure 5). Customers are especially eager to invest in luxury clothes and expensive leisure activities or cars (Valtin 2008: 252).

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Figure 5 The Hybrid Customer according to Werle (2005) (http://www.manager- magazin.de/img/0,1020,407917,00.jpg)

Pätzmann and Frank (2004: 32) emphasize that luxury customers do not spend their money indiscriminately and identify the so-called “smart shoppers”. Even in the luxury sector these customers compare prices and quality with the aim of getting the best possible value for their money. In the process, luxury gets at least partly dissociated from high prices.

The analysis of the demographics of luxury customers shows that the luxury customer mainly is a well-educated citizen living in an urban area. Whether the typical luxury customer is rather male or female cannot clearly be identified. Results of studies are contradictory some of them assuming that women tend to purchase luxury brand products more often - simply because in general they shop more - others assuming that men spend more money on luxury goods because they generally have higher purchase power (Sriviroj 2007: 7).

Concerning the German luxury customer, experts found out that the attitude towards luxury has changed:

„Die grundsätzliche Einstellung der modernen Verbraucher zum Luxuskonsum hat sich positiv verändert. Besonders die Deutschen, die dem Luxus lange kritisch gegenüber standen, haben heute weniger Gewissensbisse, sich zum Luxus zu bekennen und ihn zu genießen” (Valtin 2008: 252).

In the following chapter we will take the analysis of luxury customers a little further analyzing the personal and social functions of luxury.

3 Personal and Social Functions of Luxury

Experts have detailed the well-defined functions brands fulfil for the customer. First of all, they reduce the risk of making wrong decisions: Brands create trust in the expected performance of a product and provide continuity in the predictability of the product benefits. Additionally, bundling information about the manufacturer and the origin of a product in the form of a brand helps consumers find their way in a commercial environment that gets more complicated day by day. Additionally brands provide the creation of image benefit and deliver self-expressive value (Kotler/ Pfoertsch 2010).

These functions are also relevant for luxury brands but their relevance and relative importance is different compared to private labels and premium brands. The functions of risk reduction and information efficiency tend to play a rather subordinated role in the purchase decision of luxury brands (Lasslop 2005: 475).

By contrast, the function of image benefit is more important and is supplemented by a couple of other personal and social functions which help customers construct and maintain identity and social meanings:

“The symbolic meanings of products operate in two directions: outward in constructing the social world, and inward towards constructing our self-identity. Products help us to become our Possible Selves” (Mootee 2008: 11).

The personally oriented purchase of luxury goods is to a large part internally driven and reflects self-fulfilment goals. Socially oriented purchasing behaviour in contrast is externally driven, reflecting a desire to impress others. It is often referred to as conspicuous consumption (Veblen 1899). It is evident that a clear-cut distinction between personal and social functions of luxury brands is not always possible as they are usually intricately linked. Nevertheless, for analysis sake this chapter will discuss both personal and social functions of luxury brands in distinct sections and analyse their interaction.

3.1 Personal Functions

Luxury brands offer customers the possibility to reward themselves and have self- expressive and sentimental value. In contrast to the social functions of luxury, personal functions reflect self-fulfilment goals rather than the desire to express status towards others. It has been suggested that internally motivated customers purchase luxury goods for personal satisfaction or to secure superior quality, not to signal their wealth (Valtin 2008: 252).

Luxury items as being high-quality goods are able to deliver intrinsic pleasure to the owner and to fulfil the hedonistic drive to treat oneself (Husic/ Cicic 2009: 231f; Valtin 2008: 252). Apparently, purchasing expensive and elaborate goods is a way to reward oneself: After suffering a high amount of stress, work and pressure, people enjoy allowing themselves a little bit of luxury. The purchase decision is not based on the need for the items or functional product characteristics, but on the desire to relieve stress, hardship and pain from work. Spending money on unnecessary items and irrational consumption in order to enliven the daily grind delivers pleasure. Experts see a new trend in the wish to pamper and reward one-self which matches the new trend of well-being (Lasslop 2005: 470).

Brand managers and marketing specialists are aware of the human desire to recompense oneself and have used self-gratification in advertisements to exploit the consumers mind into buying luxury items. Especially in advertisements of premium brands which try to be perceived as high-end products the main pitch is often “you deserve this“, or as a famous cosmetics producer states it “because you’re worth it” (L’Oreal 2011: online).

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Figure 6 Self-Gratification: Luxury Shopping (Luxury Blog 2011) (http://www.moluxury.com.au/themodown/wp-content/uploads/2011/08/Luxury-Shopping- Bags.jpg)

The consumption of luxury is a way to reward oneself through the purchase of single goods. Although, as John Keats says in his poem Endymion “a thing of beauty is a joy for ever” (Keats 1818: 3) whose loveliness will never pass into nothingness the acquisition of a luxury good is a short term gratification. Thus, the purchase of luxury goods has a certain inherent addictive character: The more you buy luxury goods, the more you get rewarded, the more you depend on it and want of it. The desire of growth and maturation - experts call self-realisation (Lasslop 2005: 480) - becomes bigger. One can conclude that the more a luxury company convinces customers that by purchasing a luxury good, they reward themselves, the more likely customers will repeat their purchase decisions and continue to buy products of the brand. In line with classical behaviouristic theories one can assume that customers “learn” through rewards - it is in fact a form of conditioning.

Humans tend to consider their possessions parts of themselves (Belk 1988: 139f). As luxury goods are very valuable items they increase one’s perceived worth. If one accepts the assumption that consumption is an extension of the self (Belk 1988: 139f), then the consumption of luxury goods is the extension of a “better self”.

The behavioural economist Dan Ariely points out that we always overvalue what we possess (Ariely 2009: 130) because our possessions are intricately interwoven with our experiences and feelings which we value very highly. The possession of luxury goods works in both directions: We appreciate them because they are expensive and beautiful and we appreciate them even more if they are ours. At the same time their high value reflects and enhances our own value - they work as some sort of convex mirror which augments our ego.

Luxury goods are also regularly purchased as presents. High-quality presents offer the possibility to give someone a treat while enabling the giver to present himself as a wealthy and generous person with good taste. A large number of luxury presents is given to women by men who want to win or to keep the ladies’ favours. The 1953 movie “Gentlemen Prefer Blondes” immortalizes Marilyn Monroe singing “Diamonds are a girl’s best friend” and illustrates although in light-footed Hollywood style the intricate relationship that exists between wealth expressed in luxury goods and the possibilities this offers in emotional or amorous relationships.

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Figure 7 Diamonds are a Girl’s Best Friend (1953) (http://www.freakingnews.com/pictures/29500/Marilyn-Monroe-Diamonds-29664.jpg)

The tradition of luxury gift-giving is especially pronounced in the Chinese culture partly explaining the luxury boom in Asia. Sales of luxury goods rise during the Lunar New Year when everybody gives each other presents.

3.2 Social Functions

Traditionally, luxury items have been defined as goods which by the mere use of a specific branded product bring prestige and social esteem to the owner, apart from any functional utility (Husic/ Cicic 2009: 231):

“The basis on which good repute in any highly organized industrial community ultimately rests is pecuniary strength; and the means of showing pecuniary strength, and so of gaining or retaining a good name, are leisure and a conspicuous consumption of goods” (Veblen 1899: 51).

Luxury brands provide the possibility to demonstrate the belonging to a certain privileged group of individuals and to a specific social class. The need for status calls for well-known and visible brands. Depending on the reference group of your status need, different brands will be chosen, known by different people, sometimes by only a few of them (Kapferer 2011: online). Individuals build their own prestige vis-à-vis their social network by having the right objects, signalled by the right brands.

Experts distinguish between different groups of luxury customers based on their financial buying power and their need for status and demonstrate how each group’s preference for conspicuously or inconspicuously branded luxury goods corresponds predictably with their desire to associate with their own and other groups (Han/ Nunes/ Drèze 2010: 15).

Wealthy consumers high in need for status use conspicuous luxury items to indicate less affluent individuals that they are not one of them. Those who are high in need for prestige but cannot afford true luxury items use conspicuous counterfeit goods to emulate those they recognize to be affluent (Han/ Nunes/ Drèze 2010: 15). The relationship is illustrated in the following diagram.

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Figure 8 Relationship between the Need for Status and Financial Power (Figure by the author)

A clear-cut definition and precise characterisation of luxury customers is necessary for luxury brand managers as it has implications on the audience targeted: Manufacturers can produce a product with “loud” or conspicuous branding or tone it down to “quiet” or discreet branding to appeal different types of customers (Han/ Nunes/ Drèze 2010: 15) (cf. Figure 9).

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Figure 9 Quiet versus Loud Luxury: Gucci Sunglasses (Gucci 2011) (http://www.gucci.com/de/category/f/sunglasses)

Some groups need distinction more than others, up to the point where to differentiate themselves maximally from the commoners, elite groups may even ask for very subdued and subtle forms of brand recognition, only recognizable to a few educated ones (the ultimate sign of one’s superiority). Bottega Veneta’s explicit “no logo” strategy targets customers who apparently do not want to show off. The Italian luxury goods house - which in the 1970s began advertising with the tag line “When your own initials are enough” - positions the brand mark at the inside of the products. The casual observer does not recognize the brand and the worth of the item. Customers buying Bottega Veneta might not want to impress or - and this is the more probable alternative - the intention to impress is more subtle; the reference group are only those “in the know” (Han/ Nunes/ Drèze 2010: 15).

Luxury goods are status loaded objects that serve as essential artefacts for impression management (Kapferer 2011: online). The human desire to gain social acceptance is satisfied through the external denotation of one’s privileged position or status in society with the help of luxury goods.

As will be demonstrated in following chapters (cf. 4.1.3) the growth in the worldwide luxury segment is mainly generated by developing countries. The so-called BRICS countries (Brazil, Russia, India, China and South Africa) are seen as the most promising markets of the future. After years of communism and forced uniformity and equality, the forces of individual competition have been unleashed. Everyone can now aim at making more money.

Showing one’s personal success as the fruit of tremendous labour and sacrifices has become significant for many citizens; status symbols play an increasingly important role (Kapferer 2011: online).

Luxury is intimately tied to the dynamics of living together, to the need to compare oneself to others, and to the between-person competition, which is at the heart of economic development in worldwide modern capitalism. This is why conspicuousness is built-in into the luxury behaviour. Luxury inspires the desire to reach the upper echelons of a hierarchical system in which pleasure is gained through hedonistic values.

Experts have put some efforts in identifying the typical luxury customer and its motivation to purchase luxury goods. It seems that the suggested clear delimitation between personal and social functions fails to go into sufficient depth. It rather seems as if both were interacting. New results underline the assumption that there definitely exist trends among customers to be rather intrinsically or extrinsically oriented but that the mere focus on the dichotomy is too short sighted (Truong 2010: 1). Different models are presented by marketing experts and researchers in order to classify customers more precisely (e.g. Husic/ Cicic 2009).

4 Specificities of the Luxury Industry

Representatives of any business sector are usually eager to emphasize that their industry segment is different from others “[…] but managers working in the luxury industry are possibly the only ones who are justified in claiming so. The luxury sector really is different” (Chevalier/ Mazzalovo 2008: 1).

The following chapter will try and pinpoint the specificities of the luxury industry by taking a look at major companies, analysing the composition of the market and its competitive situation, and finally by describing the financial characteristics of the industry. Special attention will be given to one of the most important challenges to the luxury industry namely the problem of counterfeit goods.

4.1 Market Characteristics

4.1.1 Company Size and Competition in the Market

According to Chevalier and Mazzalovo (2008: 2) the company size and financial characteristics are major differences between the luxury segment and other industries. Many brands belong to big luxury groups like Moët Hennessy Louis Vuitton (LVMH), Richemont and Vendôme. It is striking that in terms of annual sales luxury brands are rather small: The biggest luxury group in the world LVMH is active in five different business segments (Focus 2009: 6) and possesses more than 60 brands (Kapferer 2008: 95). The group has total annual revenues of approximately € 20 billion (LVHM 2011: online), so the average LVHM brand has revenues of approximately € 0.3 billion. In contrast, non-luxury groups like the fashion companies Zara or Gap have annual revenues of more than € 8 billion. So in other words, the average LVMH brand is more than 20 times smaller than Gap or Zara. It applies to most luxury companies that they are small to medium-sized enterprises (Chevalier/ Mazzalovo 2008: 2). This leads to the conclusion, that in the case of difficult economic conditions smaller and economically weaker brands in conglomerates like LVMH have to be supported by the more established brands because they do not have the stamina to withstand a decrease in sales for a considerable length of time:

“Der weltweit größte Luxuskonzern LVMH […] ist mit seinen fünf Geschäftsfeldern […] besonders breit aufgestellt. So können derzeit die Rückgänge bei Spirituosen und Uhren & Schmuck kompensiert werden durch Soft-Luxus wie Accessoires und Textilien. Dies war insbesondere im ersten Quartal 2009 entscheidend, zeigte sich doch unter den erschwerten Bedingungen der Wirtschaftskrise in allen Segmenten außer Mode und Accessoires […] ein teilweise deutliches Minus“ (Focus 2009: 9).

Most experts agree that the luxury market has dramatically expanded over the years: Rising disposable income and demographic changes have allowed more people to buy luxury goods. The “Global Elite” - households with annual earnings over $100,000 - is estimated to represent 56 million worldwide (Alvarez/ Kemanian/ Malnight 2004: 43). Additionally, luxury has become more affordable as luxury brands have increasingly developed lower-price items to target a broader customer group. This so-called “democratization of luxury” enables customers to get a sense of luxury at an affordable price. Even if a Dior suit is still beyond the reach of many consumers, Dior glasses or makeup is affordable (Alvarez/ Kemanian/ Malnight 2004: 43).

Competition in luxury markets has also undergone changes: The growth of the more affordable luxury market has attracted large consumer brands suffering from decelerating growth rates and private label competition. It is not surprising that many companies looked to luxury markets as one way to stimulate development. Thus traditional luxury markets evolved from a narrow range of products and brands serving a select group of consumers to a ‘luxury triangle,’ spanning traditional and new luxury goods and customer groups. The emergence of this luxury triangle has consequently altered the rules of competition and requirements for success (Alvarez/ Kemanian/ Malnight 2004: 43) (cf. Figure 10).

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Figure 10 Luxury Triangle according to Alvaraz/ Kemanian/ Malnight (2004) (Critical Eye, Vol. 09-11/ 2004; p. 45)

4.1.2 Financial Characteristics

The luxury industry differs from other industry segments also in terms of financial values. Two aspects are of major significance: the profitability and the high break-even point of luxury brands.

A significant number of luxury brands are in deficit. In any other industry segment, a firm losing money is rapidly eliminated, merged with its competitors or goes bankrupt. In the luxury segment, however, there are brands that have been losing money for multiple years and still survive as part of a luxury group or as a diversification within another industrial business. The Christian Lacroix brand for example never generated profits while in the LVHM group (Chevalier/ Mazzalovo 2008: 6).

A plausible explanation for this is that luxury brands can be so successful and profitable that they compensate for many years of losses. The value of the intangible brand name is considered to be of higher value than the tangible assets, therefore the temporary losses are accepted. This of course is only possible with the backing of a financially strong group which can afford and is willing to run the risk of a long-term loss-making investment.

One of the consequences of the high value of luxury brands is that they tend to survive even if the firm carrying it goes bankrupt. This was the case with the German firm Escada which after going bankrupt in 2009 was taken over and restructured by the Indian investor Megha Mittal. The brand continues to exist to this day (Busse 2011: online).

It is striking that there is an extremely large spread between unprofitable and extremely profitable companies. Chevalier and Mazzalovo (2008: 6) attribute this to the fact that the luxury business is a very high break-even business. The difficulty for the luxury industry is that the standing of a brand is often determined by costs that rarely generate a corresponding gross margin. In order to establish and keep that standing luxury brands face extremely high expenses: Everything from the production process to the sale has to be of top quality, the international presence is highly expensive due to the need for elaborate flagship stores - all being financially unprofitable activities in the short term.

The luxury fashion segment is especially affected by the high break-even point: The costs for fashion shows often exceed revenues as the cost of making the clothes may never be recovered because they will probably never be sold. The clothes are manufacured to promote the image of the brand and to make it stand out rather than to make money. All of this adds to the very high break-even point and to the difficulty for a new brand to establish itself and develop credibility before the business has built sufficient volume to balance all the upfront investments. Chevalier and Mazzalovo emphasize that luxury brands must be patient as cutting costs can be extremely dangerous (2008: 7). Nevertheless, as soon as a luxury brand achieves sales above break-even, generating profits gets much easier due to very high margins. Because of the difficulty to establish luxury brands, the authors summarize the market as “win all or lose all” (Chevalier/ Mazzalovo 2008: 9):

“It is great for the top profitable brands. It is difficult for those striving to make an impression. It is a nightmare for those who cannot afford a flagship store in Paris, Milan, New York and Tokyo and who have to keep on losing money in some of their activities to maintain the dream and glitter around their brands” (Chevalier/ Mazzalovo 2008: 9).

4.1.3 The Worldwide Luxury Market

Most of the internationally leading luxury brands have their roots in Europe; especially France and Italy are countries of origin of luxury brands with a long tradition (Focus 2009: 5). This is probably largely due to the historical reasons we have outlined in the introduction, especially in the case of France where the Royal Court and absolute monarchy with its predilection for extravagance, pomp and sumptuousness not only provided the necessary customers for luxury goods but also generated in larger parts of the population the “refined taste” indispensable for the appreciation of these goods. Today the Louis Vuitton brand is the world’s leading luxury brand in terms of financial value (Kapferer 2008: 95).

Switzerland is the leading country in the segment of luxury watches (e.g. Rolex, Patek Philippe). Only few luxury brands originate from the United States. One of the most prominent examples is the jeweller Tiffany & Co (Focus 2009: 5) who with the help of the highly successful film “Breakfast at Tiffany’s” based on the novel by Truman Capote has almost become a synonym of luxury.

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Figure 11 Breakfast at Tiffany’s (1961) (http://entimg.msn.com/i/filmfashion/BreakfastTiffany_300x298.jpg)

The growth in the luxury segment in Europe is mainly generated by the emerging Eastern European countries (Focus 2009: 2).

Japan is the country with the biggest share of the worldwide luxury market - approximately 12 per cent (Focus 2009: 2). The rest of the Asian pacific region also strongly influences the development of the worldwide luxury industry. The so-called BRICS countries (Brazil, Russia, India, China, South Africa) with their growing GDP and rising income per capita are seen as the most promising markets of the future. „Als Faustregel gilt: Der Luxusgütermarkt wächst in der Regel doppelt so stark wie das weltweite Bruttoinlandsprodukt“ (Sievers 2010: online). In developing countries people continue to spend money on luxury goods despite financial difficulties. This is largely due to the significance of status symbols in these societies, which we have examined in chapter 3.2.

4.2 Counterfeiting

Many challenges the luxury industry has to face are similar to those of other businesses. Among them, the dependence on the propensity of customers to buy, increasing commodity prices or changing statutory regulations. One problem, nevertheless, challenges the luxury industry more than any other sector[3]: Counterfeiting. Counterfeiting is the imitation of genuine goods usually with the intent to take advantage of the superior value of the imitated product (Okonkwo 2007: 172). It is clearly illegal as in most cases it breaches copyright and related rights and aims at deceiving the customer.

For Kapferer (2008a: 134) counterfeiting is a constitutive element of luxury brands and a proof of their success. According to him - apart from some exceptions - a brand which is not counterfeited is not a luxury brand:

“The existence of counterfeits (up to a certain limit) is therefore a proof of the health of a luxury brand, in the same way that pain is a proof that we are alive!“ (Kapferer 2008a: 134).

Yet counterfeit brands are the parasites of regular brands, living off their reputation and their market value. Just as true parasites they must be careful not to exaggerate and multiply without limits: They would kill the host. In other terms: Too many fake copies of a brand may eventually end up in making the brand undesirable - finishing off the copies as well.

4.2.1 Economical and Reputational Damage

Counterfeiting has become a global and profitable business, involving organised crime. The OECD estimates that in 2009 the international trade in counterfeit products was up to $200 billion. This figure does not include domestically produced and consumed counterfeit and pirated products and the significant volume of pirated digital products being distributed via the internet. If these items were added, the total magnitude of counterfeiting and piracy worldwide could be several hundred billion dollars more (OECD 2008: 15). The luxury industry is estimated to suffer damages of $600 billion a year (Der Westen 2010: online). China is a major world centre for counterfeiting and the worst violator of intellectual property rights. Other major producers of counterfeit luxury goods are found in Turkey, Morocco, Thailand and South Korea (Okonkwo 2007: 172).

European and American luxury brands are constant targets of counterfeiters seeking to capitalize on the seemingly insatiable consumer demand for status goods. Most notably, French and Italian designers such as Louis Vuitton, Fendi or Gucci face significant competition from nearly identical fakes (Pollinger 2006: 87). Apparel, perfumes and watches are counterfeited much more intensively than food products for example, due to production and distribution advantages and associated profits. High profit margins are considered the main factor driving production of counterfeit goods (OECD 2008: 46): Producing and selling fake luxury goods is cheap compared to the revenues.

[...]


[1] Whether there is any etymological reference to the Latin word for light “lux” is open to doubt even if it

is tempting to associate the often glittering world of luxury to light

[2] As it turns out, customers are even cleverer than the Media Markt managers suspected, turning their backs to Media Markt markets and turning to internet sales points instead thus dealing Metro’s half- year balance a nasty blow (Dierig 2011: online).

[3] Although it is remarkable that in recent years the range of counterfeit products has dramatically increased including not only luxury products but technical appliances, pharmaceutical products, food and drink, personal care items, toys, tobacco and automotive parts (OECD 2008: 69).

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Details

Title
Brand management and marketing of luxury goods
Subtitle
From the historical development of luxury to our present-day perception
College
University of Applied Sciences Neu-Ulm
Grade
1,3
Author
Year
2011
Pages
88
Catalog Number
V187819
ISBN (eBook)
9783656120728
ISBN (Book)
9783656132585
File size
28600 KB
Language
English
Tags
Marketing, Luxury, Luxus, Brand Management, Künstliche Verknappung, Distribution, Promotion, Place, Price, Preis
Quote paper
Lucie Scholz (Author), 2011, Brand management and marketing of luxury goods, Munich, GRIN Verlag, https://www.grin.com/document/187819

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