Luxury: Because you're still worth it

The country may be in the middle of an austerity drive, but consumers are still willing to treat themselves, writes Nicola Clark.

There are very few marketers who would describe 2010 as a 'vintage year'. Yet this is exactly how Bernard Arnault, chairman and chief executive of the world's biggest luxury-goods group, described his company's impressive financial results.

In the final three months of 2010, LVMH's revenues increased by a record 20% year on year. This is far from being an exception to the rule, with numerous high-end brands, including Burberry and Mulberry, also having reported bumper sales over the past 12 months.

The strong performances of brands selling consumers a slice of luxury would seem to suggest that the notion of the UK tightening its purse strings in unison is wide of the mark. Consumers, it appears, still love luxury.

Marc Nohr, managing partner at integrated agency Kitcatt Nohr Alexander Shaw, says that luxury brands can thrive in a recession.

'People trade down on consumables and commodities, but treat themselves with items of personal luxury,' he says.

'If people don't have the money to treat themselves, they may still fantasise about flashing their Rolex behind the wheel of their Mercedes-Benz.'

The definition of a 'luxury purchase' varies considerably across different groups of consumers. For some, it's about spending money at the hair salon and treating themselves to a meal out. For others, it means splashing out on flash cars, yachts or a vintage bottle of spirit. To take advantage of consumers trading up, brands are turning to what they label a 'premiumisation strategy': launching upmarket variants to fit the bill.

Continued investment

Throughout the economic downturn, Pernod Ricard has steadfastly stuck to its policy of premium pricing and continued investment in creating more high-end and limited-edition products. Thierry Billot, managing director of brands at Pernod Ricard, claims the idea that its premium brands simply collapse during a downturn is a fallacy.

'We need to invest in innovation and marketing, and protect the balance between substance and image,' he says.

For Pernod Ricard, maintaining this is not simply about product positioning, but ensuring the quality of products stand up to scrutiny. While Billot concedes that the premium end of the market has been most exposed to the downturn, consumers do not always act in rational ways.

'If people are less able to go out, they treat themselves to more premium products at home,' he adds.

In the haircare sector, John Frieda's experience has been similar. Despite the challenging economic climate, the brand's household penetration has increased. To capitalise on this trend, it has launched into the premium hair-colouring market with its Precision Foam brand.

While the company reports that there are consumers trading down, by cutting out costly visits to salons in favour of at-home treatments, it also believes that sales are being driven by people trading up to the brand.

Kelly Marcham, senior product development manager at John Frieda, says that while some consumers have given up buying the latest hand-bag every season, they simply 'can't afford to experiment' when it comes to their hair.

Marcham points to the growth of 'mixers': an upmarket, middle-class group who would previously have gone to the salon every six weeks but are turning to premium at-home treatments instead.

While 'the lipstick effect' - the notion that consumers will treat themselves to little luxuries in a downturn - is well-established, on a broader basis, marketers have struggled to get to grips with the seemingly irrational purchase habits of shoppers. The risk for them is that if consumers trade up or trade down from their usual product, some could be lost in the middle ground.

Forging a connection

Although predicting luxury spending trends in an economic downturn is a precarious business, Crispin Reed, managing director of branding specialist Brandhouse, says that a good way to start to pre-empt this is for a brand to engender an emotional attachment.

'While middle-class consumers are practising austerity on a day-to-day level, when it comes to big-ticket items and the quality they represent, they are still willing to invest in high-end products,' he says.

Some high-end brands have opted neither for premiumisation nor creating an emotional attachment. Ben & Jerry's, for example, once firmly positioned at the upper end of the ice-cream market, has followed a path of price promotion, with Sainsbury's selling two tubs for £5.

Many marketers believe, however, that maintaining a premium position is essential, not only for profit margins, but for protecting brand equity.

Despite the clearly identifiable trend of an increase in the popularity of premium items, not all wealthy consumers are comfortable buying luxury products when the country is on an austerity drive. In January this year, McKinsey undertook a survey of 5000 purchasers of luxury goods in the US, China and Europe. Findings revealed a significant shift in their attitudes toward splashing out on luxury products.

Forty per cent of the US and European participants, and an even greater proportion of those from China, said they felt guilty after buying luxury brands, or believed it was 'distasteful to show them off'.

In light of this, luxury brands are looking to assuage this consumer guilt with a renewed investment in charitable foundations and the arts. This is allied to a further change in consumer attitudes to luxury purchases, according to Margaret Johnson, group chief executive of creative agency Leagas Delaney. She says that while at the start of the downturn craftsmanship dominated luxury marketing, consumers no longer need to be consistently reassured that luxury products are a worthwhile expenditure.

While the market for luxury products has remained remarkably robust in the downturn, marketers still face challenges. Luxury companies now have to manage complexity to a much greater degree than ever before.

As McKinsey's report states: '[Luxury brands] need to use the internet shrewdly to create inviting stores, respond to social concerns and sell a sense of tradition. They need to do this while continuing to create both uniqueness and a sense of belonging.'

It's a tall order, but in a global climate where many businesses are having to adapt to survive, the luxury sector must do likewise.

FIVE KEY TRENDS LUXURY MARKETING

- Social media

Consumers who check into Louis Vuitton or Marc Jacobs stores on Foursquare are rewarded with special 'badges'. Jimmy Choo had consumers chasing around London, spurred on by the chance to win limited-edition trainers. The jury is out as to whether this strategy appeals to the brand's high-end consumers, or is simply a way of connecting with 'fans' who have less disposable income.

- Affinity marketing

Marketers seeking inspiration on best-in-class examples of affinity marketing need look no further than the luxury-goods market. While conglomerates as mighty as LVMH benefit from sharing consumer data across the company, the 'product swap' - where VIP tickets for events are exchanged for products - is a simple marketing mechanism that is now being adopted by a growing number of brands.

- Conspicuous consumption: the shift to emerging markets

A report from Barclays Capital says that China now accounts for 12% of global sales of luxury goods. This looks likely to rise because the country's market is set to grow by a further 20% to 30% a year. The impact of this is evident in the increasing number of products and ad campaigns aimed at the Chinese market.

- The growing role of ecommerce

For an industry built on lavish flagship stores and tightly policed brand experiences, it is hardly surprising that the luxury market has been slow to embrace ecommerce. However, half the adults who were surveyed by McKinsey said they made a search online before completing a luxury purchase.

- The rise of 'responsible prosperity'

Reassuring consumers that it is appropriate to treat themselves to luxury products - whether it's a premium-priced, limited-edition whisky or a Mulberry handbag - is a key challenge for marketers. Increasingly, brands are essentially 'offsetting' consumers' purchases with charitable endeavours. One example of this is the Cartier Foundation, an organisation that funds a contemporary art museum in Paris, and which offers young artists the opportunity to showcase their work.

LUXURY - The numbers

- Last month, Mulberry announced that own-store sales were up 66% in the six weeks to 15 January, results that prompted the brand to raise its profit forecasts for the year to 31 March for the second time in six weeks.

- Analysts at investment bank ING have predicted that the market for prestige and luxury goods will boom in 2011, especially the luxury watches category.

- Porsche reported that sales of new cars in 2010 were up 25% last year to 95,000, and that 63% more - a total of 14,785 vehicles - were driven away from Chinese showrooms.

- According to Verdict Research, global expenditure on luxury branded products will reach £225bn by 2012.

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