In February Deutsche Börse, the operator of the Frankfurt Stock Exchange, launched the World Luxury Index to track the performances of the 20 largest names in fashion, jewellery, travel and leisure. Constituent companies, which include LVMH, Starwood Hotels & Resorts, Porsche and Burberry Group, must generate at least half their revenue from the sale of luxury goods. Ironically, this ranking comes at a time when “luxury” is no longer a useful label for the goods in which many of these companies are trading. As economic growth has driven up incomes in many Western countries by 20% during the past decade, and media-fuelled aspirations gallop further ahead, the notion of “exclusivity” is almost meaningless. Boundaries are blurred even more as consumers routinely get blasts of luxury from high street retailers such as H&M, which assembles collections by top-end names including Viktor & Rolf and Stella McCartney, and luxury pioneers like Giorgio Armani regularly diversify and roll out ever more affordable lines. Suki Larson, chief executive of London luxury brands agency Provenance, believes the high-end market has segmented into “accessible” luxuries such as pricey Coach handbags and “real” luxuries like hand-stitched Chanel creations. Chanel chief executive Maureen Chiquet recently reached the same conclusion; the iconic French company’s new strategy is to become even more exclusive, expanding a category of “ultra-lux” goods, including €15,000 alligator handbags. Underscoring the whole “luxflation” spiral, as it has been termed, Coach has just announced the opening of two new boutiques called Coach Legacy that will take its brand “to a more sophisticated customer base” – who must be willing to spend €600 on a handbag rather than €250. Chanel is certainly not the only venerable brand aiming to exploit this phenomenon. At last December’s International Herald Tribune Luxury Conference in Istanbul, François-Henri Pinault, CEO of PPR, said his Gucci Group was adopting a new category of “high” luxury, rebuilding the peak of a pyramid once graced by haute couture, while shoring up the lower levels so that every customer’s aspirations could be met. Pinault suggested that aspirational and high-luxury customers create two separate forces. The first group, with $1m (€760,000) or more in financial assets, has been growing globally for a decade, especially in emerging markets. Extreme luxury is targeted at another expanding group: individuals of high net worth with more than $30m (€22.8m) in net financial assets, of whom there are reckoned to be 85,000 worldwide. Armani’s strategy to reverse the forces that “devalue the sense of luxury” is to go back to a fully bespoke service. According to investment bankers Merrill Lynch, there will, by 2009, be around €1.7bn a year designated for ultra-expensive purchases. Much of this will come from Asia, as shown in a recent report by MasterCard that showed the wealth of the “rich and mass affluent” in 12 Asian countries reaching €470bn by 2015, double the figure for the end of 2005. Predominantly European luxury goods companies have been focusing on China, which will, according to Goldman Sachs’ Jacques-Franck Dossin, become the world’s top consumer of luxury goods by 2015. Nevertheless, while there is a perpetual upward swirl of luxury consumers, the same rules still apply, according to Milton Pedraza, chief executive of New York-based research outfit the Luxury Institute. “Luxury brands have to consistently offer superior quality, not just in the product but in the whole customer experience; the shops, the sales-people. Lexus built a luxury brand in the US not through exclusivity but through customer service.” Pedraza warns that diversification is a danger. “Become the neuro-surgeon of your category. People might know Montblanc will make the best pens, but they know someone else will probably make better briefcases.” The most successful example of recent diversification, he says, is the Armani Casa homeware line, which seamlessly built on Armani’s heritage and core values. Pedraza points out, however, that sometimes customers’ values shift as well as their perceptions. Corporate social responsibility, he says, is already influencing some high-end purchasing decisions, and the issue of ethics is looming large over the way in which customers think about luxury brands. “Often the top 10% of consumers and the top 10% of philanthropists will be the same people,” he explains. “They will want to know that luxury goods are produced ethically and that the corporations behind them are doing something for the world too.” |