Not taking luxury for granted: The luxury goods sector is thriving, but top brands need to find a balance between widening appeal and maintaining their exclusivity

When Posh and Becks nipped down the shops recently to buy little Brooklyn something nice for his birthday, they came back with a pounds 48,000 toy Ferrari. OK, so the Beckhams aren’t typical consumers, but they are members of a set that’s rocket-fuelling growth in the luxury goods sector.

When Posh and Becks nipped down the shops recently to buy little

Brooklyn something nice for his birthday, they came back with a pounds

48,000 toy Ferrari. OK, so the Beckhams aren’t typical consumers, but

they are members of a set that’s rocket-fuelling growth in the luxury

goods sector.



Luxury goods companies’ stocks are among the strongest performers on the

world’s financial markets and are by far the fastest growing in the

consumer goods sector. At the end of 1999, while other giant consumer

groups like Unilever and Scottish & Newcastle saw their year-on-year

share price fall by over 30%, the likes of Gucci, Louis Vuitton and

Hermes sashayed down the catwalk with gains of over 100%. Gucci’s was

the most impressive, with a 178% end-of-year increase in its stock and a

70% leap in profits to dollars 273.2m (pounds 170.75m).



Claire Kent, luxury goods analyst with Morgan Stanley Dean Witter,

explains the star performance: ’There’s a combination of factors driving

this sector, which has been booming since mid-1999. The recovery in the

Asian markets is by far the most important, as this is a crucial area

for a lot of these brands, and a stronger yen has also increased the

spending power of Asian tourists. Lastly, there is generally a lot of

new wealth, generated by the strength of the stock market and the

e-economy.’



The importance of the Asian recovery cannot be understated. These brands

are hugely dependent on Asia; 40% of Gucci’s sales come from the region

and not so long ago, in the midst of the Far East’s economic crisis,

luxury brands were in trouble. But now things are very different. The

effect of Asia’s recovery has been boosted by the creation of a new

generation of e-millionaires, generating spending power across a wide

range of demographic groups.





Logo mania



The result is that luxury goods brands are able to reach out to a larger

slice of the population than ever before. Andrew Wiles, director of

press and advertising at Harrods, is in a good position to observe these

trends.



He says that while many retailers expected sales of luxury brands to

boom over the millennium, few expected demand to remain so high. ’It’s

logo mania at the moment,’ he says. ’There’s a noticeable increase in

younger consumers with disposable income. The 30s to 50s have always

been into luxury brands, but now younger people are looking to get into

the market for the first time. Brands like Gucci, Prada and Cartier are

repositioning to attract this audience, which is something they’ve never

done before.’



Cartier, for example, has recently adapted its brand to appeal to

younger, hipper and more urban consumers than its more traditional

customer base.



It has launched a new ’Bijou’ range of entry-level jewellery and

embarked on a radical ad campaign, using youth magazines instead of its

normal hunting ground of Tatler and Vanity Fair. A campaign for its new

Cronograph 21 watch was placed in iD and Dazed & Confused.



The company is so encouraged by demand for its products from younger

consumers that it is opening new ’youth boutiques’ in London, Paris and

Tokyo. Targeting 21- to 35-year-olds, the boutiques are not replacing

its traditional retail sites but providing a more accessible, modern

alternative.



A Cartier spokeswoman says: ’We want to attract younger customers and

make them feel comfortable about buying a pounds 600 ring.’



The important point to remember with this strategy is that these brands

are not necessarily reaching out to new customers with cut-price

products.



Dropping prices is a risky game in a market where exclusivity and

premium are the core attributes of the brand. Make them too cheap and

you’re in danger of undermining everything the brand stands for.



One way that some premium goods manufacturers get around this conundrum

is by launching sub-brands targeting different price points. For

example, Donna Karan has its top end designer line, and then less

expensive diffusion lines under the Signature and DKNY labels. Klein

Cosmetics divides its business into Classic Brands and the CK Franchise

line, which includes the CkOne and CkB fragrances. Even Rolex has a

cheaper sub-brand, trading under the name of Tudor.



Tudor allows Rolex to offer a less expensive product without, heaven

forbid, cheapening the master brand. Mention lowering Rolex’s prices to

the company’s UK regional manager, David Cutler, and you could hear a

diamond-studded tie-pin drop. He sniffs: ’It’s not our policy to

introduce starter-level watches. It’s not a move Rolex is looking to

pursue.’



However, like Cartier, Rolex is reaching out to new customers with

funkier additions to its range. The new Cosmograph Daytona watch, which

comes in a range of pastel colours, is targeted at younger women than

may have bought into the brand before. The new watch is backed by a J

Walter Thompson press ad campaign, which uses the tagline, ’Time to

share the legend’.



This makes it clear the Cosmograph is a new type of Rolex for a new type

of customer. But you’ll still need a spare pounds 1400 to get one.



Further instances of luxury brands broadening their appeal can be seen

in their exploration of e-commerce. The Italian design house Bulgari

recently tip-toed onto the web with an online catalogue that will soon

have e-commerce capability - www.bulgari.com. It plans to sell some of

its lower-priced jewellery, watches and fragrances online. French luxury

goods giant LVMH, which owns Louis Vuitton, TAG Heuer, Givenchy and Moet

& Chandon is the sector’s biggest internet user, with links to 30

subsidiaries at www.lvmh.com





Exclusive distribution



Yet industry analysts have serious concerns about luxury brands muddying

their crocodile-skin shoes in the field of online retail. E-commerce,

they say, is a bit below them. Andrew Gowen, luxury goods analyst with

Lehman Brothers says: ’I’m sceptical about luxury brands going on to the

internet. They don’t need to find a lower-cost distribution channel and

they don’t need to establish an online presence in order to protect

their brand, because the barriers to entry into the luxury goods sector

are already secure. Moreover, luxury goods are all about exclusive

distribution, while the internet is a mass distribution medium.’



Added to that, it’s hard to see too many people spending thousands on

diamond necklaces over the internet.



Gowen warns luxury brands not to be over-eager in reaching out to new

customers. Taking advantage of widespread spending power is one thing,

but over-exposing your brand to the whims of the newly wealthy is

another.



He says: ’I get nervous about companies with marginal consumers, who are

those who can’t really afford what they are buying, but trade up when

times are good. When the tough times come, it’s the ones with the

marginal consumers whose income streams disappear overnight.’



But, if luxury brands can succeed in tempting the temporarily wealthy

while still pandering to the demands of the seriously rich, then they

are on to a winner. Profits in the low-end designer accessories sector

are fabulously high, which is not surprising when you realise that all

you are paying for is the brand. Let’s face it, a pair of Gucci oven

gloves, or Louis Vuitton hair bobbles, will hardly have come straight

from the drawing boards of top Paris designers.



Gowen argues that unless they get the balance between broad appeal and

exclusivity right, luxury brands are on a hiding to nothing.



Luxury brands have got better at exploiting their name without

cheapening their brands. Not long ago, many of them fell into the trap

of entering into too many licensing agreements, allowing their brands to

be plastered across an endless array of products. Gucci got itself into

particular trouble and its recent success has been attributed to new

president Domenico de Sole’s strategy of buying back licensing

agreements and regaining control over the brand. Ever since he did,

Gucci’s fortunes have been dramatically revived. Late last year, Gucci

acquired the French designer brand Yves Saint Laurent, to which it is

now applying the same rescue formula. YSL had been suffering from even

more excessive licensing, which, in many people’s eyes, had irrevocably

cheapened its image.



As well as cutting down on licensing deals, some brands are also

tightening their control over marketing. For example, Burberry recently

re-launched itself with a single, globally consistent image and ad

campaign. Previously, advertising had been under the control of regional

offices, which, says a spokeswoman, had confused consumer perceptions of

the brand. The new advertising is part of a pounds 10m push to

re-establish Burberry as a globally renowned British label.



Jan Lindemann, a director of Interbrand Newell and Sorrell, says: ’I

think we’re seeing much better brand management by these companies than

there was in the past. They’re beginning to see the bigger picture,

realising it’s better to build the brand in the long term than gain

short-term hits from licensing sales.’



It’s not just the design houses which are adapting their position to

appeal to a wider consumer base. The trend is affecting luxury brands

from all sectors, including cars. Mercedes Benz’s A-Class is a classic

example of a luxury brand stretching itself into less affluent territory

while trying to retain its premium status. The car got off to a bad

start, by initially failing the notorious ’Moose Test’, a check on road

handling safety. But since it has had suspension modifications and

passed the test it is an established member of the range. Mercedes has

also launched a people carrier, a 4x4 and a small roadster.



Simon Oldfield, Mercedes-Benz general manager of car marketing, says

launching the A-Class made sense because there’s more growth in the

small end of the car market. But he says this logic had to be balanced

with the danger of appearing downmarket. He argues: ’If we’d built a car

that looked like a Golf with a Mercedes badge, there would have been

huge potential to say we’d cheapened the brand. So we tried to design a

premium smaller car that somehow defined a new segment.’



With annual sales of 16,000, the A-Class is not a volume-seller like a

Golf, but Oldfield says it was never meant to be.



’A Golf-style car may have sold more, because it would have been an

easier consumer offer. But we could have damaged the brand in the

process,’ he says.



Another luxury car brand exploring new possibilities is Jaguar. The

company has been posting record sales recently, bucking the trend while

the majority of British-built cars weather a torrid time on the

international market.



The boom in the luxury sector has played into its hands, with worldwide

sales growing from 35,000 units in 1997 to a projected 90,000 in

2000.



It is still a good few laps behind BMW and Mercedes, which each sell

around one million units, but it is heading in the right direction.



Like Mercedes, Jaguar is pursuing an aggressive brand extension

policy.



Its 60s-throwback S-Type, launched in 1998, targeted a less affluent

consumer than its big saloons had previously reached out to.



Positioned to compete against the BMW 5-Series and the Mercedes E-Class,

the S-Type has been a success and is a more subtle repositioning of the

brand than Mercedes’ radical plunge into the small car market.





New markets



Next on the agenda for Jaguar is a bolder move. In a year’s time it will

enter the mid-range saloon world with the X400. Although not quite

lowering itself to target Mondeo Man, the X400 will compete in the

hugely competitive arena occupied by the BMW 3-Series and Audi A4 - a

very different value proposition to its accustomed territory.



Jaguar Cars’ marketing director Phil Cazaly says: ’There’s only a danger

of cheapening the brand if we over expand or try to do so too quickly.

But we do a fifth of the volume of BMW and Mercedes, so there’s little

risk as long as we’re careful.’



Interestingly, Jaguar plans to balance its entry into the mid-range

market, with the recreation of a classic from its past. Although it is

yet to get the final go-ahead, Jaguar plans to launch the F-Type, a

modern version of its E-Type roadster from the 60s and 70s. Cazaly says:

’In terms of brand extension it’s the area that holds the most appeal

for Jaguar.’



So, luxury brands are surfing a wave of unprecedented demand, but they

are doing so with a degree of caution. Tapping into increased demand

from previously untouched consumer areas is an opportunity they are all

seeking to exploit. But in doing so they are trying to retain the

mystique and sense of exclusivity that made them luxury, premium brands

in the first place. Tighter brand management, careful product design and

positioning and, to borrow a phrase from a well-known beer,

’reassuringly expensive’ prices, are also part of the formula for

success.



CHEAPEST AND TOP OF THE RANGE LUXURY ITEMS


CHEAPEST ITEM               PRICE   EXPENSIVE ITEM                 PRICE

                           POUNDS                                 POUNDS

Gucci key ring                 35   Gucci Ottoman fabric coat       2410

                                    with funnel neck

Cartier gold wedding ring     165   Cartier necklace with           6.5m

                                    ’Tavernier’ 50-carat diamond

Rolex women’s stainless      1380   Rolex gold/diamond men’s      54,000

steel watch                         watch with meteorite hands

Louis Vuitton                  40   Louis Vuitton ’Stokowski’     14,100

spectacle case                      desk trunk

Mercedes-Benz A-Class      14,490   Mercedes-Benz SL600           96,370

(Source: Harrods/Cartier/Louis Vuitton/Mercedes)



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