LUXURY GOODS: NO SIGN OF SLOWING
Discussion question :
a) The word “luxury” is ambiguous, in the sense that the perception of luxury is subjective. A poor person with less than $1 each day to survive on would think that a proper dinner is luxury while the CEO of a MNC would consider five Ferrari cars as luxury. Thus, everything could be luxury depending on the circumstances, experiences and features of an individual. Chevalier and Mazzalovo (2008) define a luxury brand as a brand that is selective, exclusive and contributes an emotional and creative value to the customer.
They set three criteria for a product to be considered luxurious; it needs to have an artistic dimension, be the result of craftsmanship and it needs to be international. Regarding the artistic aspect, the product must be perceived as a refined object, almost like a work of art. In the aspect of craftsmanship, the object should be designed in a way that the consumer wants to believe that it is unique and produced directly from the creator’s workshop, even if it is in fact an industrial product. To be international implies being present in major fashion cities in the world such as Paris, Milan, New York, Tokyo, London etc. When customers travel to these cities, they will notice whether or not the brand is established. If a brand is not present, the customers would assume that it is less appreciated.
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Based on the article, the reasons why there are no signs for the sales of luxury goods to slow down, are most likely due to the rapid change in the social lifestyle, attitude and demography of the people in China. The plausible consumers of luxury goods in China, which consist both of the wealthy and the very wealthy households, are growing at an unforeseen pace. The wealthy comprise the upper middle class; a section with a yearly household income between RMB 300,000 (MYR 150,000) and RMB 1 million (MYR500,000).
The very wealthy are defined as those with a yearly household income of more than RMB 1 million, who most likely own assets greater than RMB 10 billion (MYR 5 billion).
The increasing potential consumer base, not only the very wealthy, but the growing upper middle class are new opportunities for luxury brands to target. Lu (2008) identifies these two groups as China’s super rich and the upper middle class. Together, they make up the “China elite” and are considered to be the main drive to the growth of luxury consumption in China.
To understand the rapid growth in consumption of luxury products in China, it is necessary to identify the key segments of the Chinese luxury customers. Along with developed infrastructure, increased urbanization and a growing proportion of the population in China becoming wealthier, an emergence of new luxury consumers has been witnessed. This includes a group of consumers in diversity, ranging from young to middle-aged, ordinary white-collar employees to business executives, celebrities to the “new riche” . There were 7,905 multimillionaires in China at the end of 2011, an increase of 41% compared to 2007 .
They are among those who demand for the luxury goods in China besides the celebrities and luxury followers. Besides, the high-end manufacturers all over the world had shifted their distribution channel towards the directly owned retail outlets, which give them more control over their business strategy and future in the target market.
b)
Equilibrium price (P) and quantity (Q) in the market for luxury goods is shown in diaggrammatical analysis as below:
In a competitive market, especially in China which has the most citizen in the world, the demand and supply for luxury goods is very inelastic. Firms may be attracted into the market for a number of reasons, but particularly because of the expectation of profit. This causes the market supply curve to shift to the right. Rising prices may provide a sufficient incentive and provide a signal to potential entrants to enter the market.
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There is a chain reaction in the market, starting with an increase in demand, from D to D1. This raises price to P1, which provides the incentive for existing high-end firms to supply more, from Q to Q1. The higher price also provides the incentive for new firms to enter, and as they do the supply curve shifts from S to S1. A market where prices are rising provides the best opportunity for the entrepreneur and global-player companies. Conversely, lower prices encourage firms to leave the market. The equilibrium point will shifts accordingly based on the demand and supply changes and market reaction towards price and quantity.
Graph shows the relationship between income (Y) and Quantity (Q) for three types of good and the (Y) is a key determinant of consumer demand (Qd).
The relationship between income and demand can be both direct and inverse.
Demand for the three goods, shown here, all respond very differently to the same change in income, Y to Y1. Demand for the normal good increases from Q to Q1, demand for the luxury good rises much more, to Q2, and demand for the inferior good falls from Q to Q3.
In standard demand theory, it aims to answer basic questions about how badly people want things, and how demand is impacted by income levels and satisfaction (utility).
Based on the perceived utility of goods and services by consumers, companies adjust the supply available and the prices charged. In this case study analysis, the situation can be classified as Veblen goods, which are a second possible exception to the general law of demand. These goods are named after the American sociologist, Thorsten Veblen, who, in the early 20th century, identified a ‘new’ high-spending leisure class. According to Veblen, a rise in the price of high status luxury goods might lead members of this leisure class to increase in their consumption, rather than reduce it. The purchase of such higher priced goods would confer status on the purchaser – a process which Veblen called conspicuous consumption.
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Elasticity is the concept in economics that measures the responsiveness of one variable in response to another variable. The best measure of this responsiveness is the proportional or percent change in the variables. This gives the most usable results for any type or range of data. Thus, elasticity is the proportional (or percent) change in one variable relative to the proportional change in ...
c)
Each price a company might charge will lead to a different level of demand. The relationship between the price charged and the resulting demand level is shown in a demand curve, a curve that shows the number of units the market will buy in a given time period, at different prices that might be charged. In the normal case, demand and price are inversely related; the higher the price, the lower the demand.
In the case of prestige products, an increase in price may actually result in an increase in the quantity demanded because consumers see the products as more valuable. In such cases, the demand curve slopes upward. If the price decreases, consumers perceive the product to be less desirable and demand may decrease. The higher-price/higher-demand relationship has its limits, however. If the firm increases the price too much, making the product out of range for buyers, demand will begin to decrease.
Most companies try to measure their demand curves by estimating demand at different prices. The type of market makes a difference. In a monopoly, the demand curve shows the total market demand resulting from different prices. If the company faces competition, its demand at different prices will depend on whether competitors’ prices stay constant or change with the company’s own prices.
In measuring the price-demand relationship, the market researcher must not allow other factors affecting demand such as increases in promotion to vary. Understanding and estimating demand is extremely important for marketers. A firm’s production scheduling is based on anticipated demand that must be estimated well in advance of when products are brought to market. In addition, all marketing planning and budgeting must be based on reasonably accurate estimates of potential sales.
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d) Johann Rupert, the Chairman is bullish in his ambition to control the distribution channel, for he believes that in order to deliver the right image to his clients, Richemont needs to control the whole supply chain from manufacturing to distribution where the brand image is finally conveyed to its clients. In order to create the same look and feel all over the world, Richemont should emphasize the strategies to closed or bought back all franchisees and licensees, including airport duty-free shops, and shops in shops in large department stores. He also heavily promoted directly operated/owned stores (DOS) in exclusive locations. In order to achieve the goals of company, all stores around the world were redesigned simultaneously, in order to impact the clientele worldwide simultaneously.
Richemont’s strong focus on controlling the distribution channel was instrumental in controlling the brand’s image, and delivering consistent value to its clientele throughout the world. One might then consider that it is then developing some Ricardian rents by securing exclusive locations on the best locations around the world. Although the argument has some truth to it, it can be challenged.
Firstly, with the explosion DOS, Richemont is supposedly by now developing another conglomerate business, which is very capital intensive and not its core business. It is investing massive amounts in securing locations that cannot be leveraged with other brands since all DOS have to maintain an exclusive image. It can be argued however that a store offers economies of scopes by presenting different product segments (fashion, leather goods, perfumes, watches, etc.) under the same brand umbrella. Additionally Richemont might develop a bargaining power (and hence economies of scale) to negotiate more and more real estate locations. However I recommend that Richemont to develop a strategy to cover the best locations with a subset of their brand portfolio if they do not want to have all their brands compete for a slot of the same street.
Along with other businesses, the new economy is changing the face of the high-end retailer; there are now, more than ever, acquisitions and consolidations in the luxury industry, competition is fierce and credit is hard to get. Business as usual isn’t a mantra that works anymore and so customer-centric, prestige retailers are turning to technology and the Internet to create new passions for their brand and provide their customers with the luxurious experiences that have come to expect. According to Luxury Institute (October 2009), has outline a few approach and strategies to sustain the profitability in the luxury goods market: Social Media: An online identity will be paramount for luxury brands to incorporate in their marketing plans, starting immediately. While they all have web sites offering products for sale, they haven’t been quick to jump on the Facebook and Twitter band wagon.
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High end retailers are hiring luxury consultants and branding agencies to help them understand how to get the most value in building niche-focused friends, fans and followers. CRM: Customer Relationship Management is a software tool that companies employ to consolidate information from many data sources with the organization, about each individual customer. Having this information available at their fingertips through mobile devices (phones or hand-held computers) enables the salesperson to understand the customer’s buying preferences, which he or she can then use to up sell or cross sell their products. This vital information lets the sales associate provide the customer with unparalleled, personalized service based on their shopping history.
Customer Management: One of the most important assets of any company is the house list, a customer database containing detailed contact information and buying history. Many luxury brands ignored building and maintaining this list in years past, and some were even negligent in understanding its value to the customer experience of purchasing. Demographic and transactional data are more often appreciated by company accountants rather than sales or marketing departments. That will change as luxury brands discover the customer insights these lists provide.
Strategic Alliances and Partnerships: In an effort to build brand equity, edge out the competition and enhance customer loyalty, many luxury brands are partnering with other non-competing, luxury companies to provide mutual customers with experiences, products and services they might have gone to different venues to obtain. The value add of two respected brands working together for the customer’s buying experience or enjoyment, is exponential in terms of future purchasing and goodwill. Richemont can adapt this strategy by engaging with local partners to better understanding the local market and capture the country which the national spirit is very high for example socialist countries.
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