2. The Luxury Goods Industry 2013
What is luxury?
Luxury goods have more than the
necessary and ordinary
characteristics compared to other
products of their category
3. The Luxury Goods Industry 2013
characteristics of
luxury products
“The Concept of Luxury Brands”, 2012
5. The Luxury Goods Industry 2013
Global Market size
Bain Company, 2012
6. The Luxury Goods Industry 2013
growth by geographic
markets
Pwc, 2012
7. The Luxury Goods Industry 2013
Growth by product category
Pwc, 2012
8. The Luxury Goods Industry 2013
recent trends
• Globalization – over 40% of sales is from “luxury tourism”
Bain Company, 2012
9. The Luxury Goods Industry 2013
recent trends
• Globalization – plenty of untapped potential in emerging
markets
Bain Company, 2011
10. The Luxury Goods Industry 2013
recent trends
• Consolidation – individual brands are bought up by large
luxury groups
Bain Company, 2011
11. The Luxury Goods Industry 2013
recent trends
• Consolidation – large companies experience much higher
margins
Brand recognition (esp. emerging markets)
Economies of scale (eg. advertising)
Optimal brand portfolio management
Pwc, 2012
12. The Luxury Goods Industry 2013
recent trends
• Diversification – apparel brands branch out to other
luxury product categories, eg. jewelry, cosmetics, perfume,
even restaurants
McKinsey, 2012
14. The Luxury Goods Industry 2013
The five forces model
Porter’s
Five Forces
Model
The Threat
of New
Entrants
Rivalry
among
Existing
Competitors
Suppliers’
Bargaining
Power
Buyers’
Bargaining
Power
The Threat
of
Substitutes
15. The Luxury Goods Industry 2013
Threat of new entrants
Brand Loyalty
Scale Economies
Capital
Requirement
Exclusive Access to
Suppliers
Distribution
Potential Retaliation
from Existing
Companies
16. The Luxury Goods Industry 2013
brand loyalty
❧ Brand image and CRM programs
build high brand loyalty
17. The Luxury Goods Industry 2013
brand loyalty
❧ Decreasing brand loyalty as a result of
different needs in emerging markets
Emerging TraditionalEmerging
• Extravagance
• Status
• Obvious brand
logo
Traditional
• Craftsmanship
• Exclusivity
• Innovation
• Service
• CRM
• Heritage
easily switch to
other brands of
similar status
Pwc, 2012
18. The Luxury Goods Industry 2013
Scale economies
❧ Consolidation of luxury brands
achieve high economies of scale
– e.g. LVMH, PPR (Gucci), Prada
Group, Richemont
– Minimize risk through
diversification in the company
brand portfolio
– More financing options e.g. IPO
– Operating synergies e.g.
advertising
19. The Luxury Goods Industry 2013
capital requirement
❧ A very high break-even point
❧ “…In the luxury sector, even the smaller brands
have to pretend they are powerful and rich, and by
doing so they end up with a very high break-even.”
❧ “..For example, every brand must be present
everywhere in the world.”
❧ “…If the Japanese tourist cannot find his Givenchy
or Aquascutum store when he visits Milan or New
York, he may well conclude that these brands are
weak and he might decide to stop buying them in
Japan.” (Abstract from “Luxury Brand Management:
A world of Privilege”)
20. The Luxury Goods Industry 2013
capital requirement
❧ High marketing management costs
– Distribution Fees:
• High rent to develop monobrand boutiques in
prestigious shopping areas
• e.g. South Korea’s Apgujeong; HK’s Tsim Sha Tsui
Canton Road
• To develop global presence, 400 stores are needed to
cover the world!
– High salaries for craftsmen
– High investment for promotional activities
• e.g. Chanel’s elaborate runway shows during Paris
Fashion Week; Louis Vuitton’s microfilm
21. The Luxury Goods Industry 2013
Exclusive Access to
Suppliers Distribution
❧ Many brands have acquired
suppliers to protect competitive
advantage and insulate against
future rising supply costs
❧ E.g. LVMH acquired two watch
dial manufacturers – Léman
Cadran and ArteCad SA, French
artisan shoemaker Delos Bottier
Cie and haute couture
manufacturer Arnys.
22. The Luxury Goods Industry 2013
Exclusive Access to
Suppliers Distribution
❧ More and more distribution
access points are available to
brands
❧ Contemporary areas like The
Bund in Shanghai brings a multi-
sensory experience to luxury
Value Partners, 2007
23. The Luxury Goods Industry 2013
Potential retaliation from
the existing companies
❧ Small luxury brands do not
have high barriers of
distribution
– Pressure from powerful groups to
prevent them from having access
to multi-brand retailers
24. The Luxury Goods Industry 2013
The five forces model
Porter’s
Five Forces
Model
The Threat
of New
Entrants
Rivalry
among
Existing
Competitors
Suppliers’
Bargaining
Power
Buyers’
Bargaining
Power
The Threat
of
Substitutes
High
25. The Luxury Goods Industry 2013
threat of substitutes
Price of
Substitutes
Quality of
Substitutes
Switching
Costs to
Customers
26. The Luxury Goods Industry 2013
price of substitutes
❧ Rising popularity of middle price (“high
street”) brands
❧ Consumers tend to “trade down” during
economic crises
❧ Worldwide shipping of counterfeit goods
from China
27. The Luxury Goods Industry 2013
quality of substitutes
❧ Increased Internet accessibility of top
luxury brand designs allow fast fashion
brands to respond and copy trends within
weeks after fashion shows
❧ e.g. Zara, Steve Madden
28. The Luxury Goods Industry 2013
switching cost to customers
❧ No monetary switching costs
❧ Loss of prestige if switch to
high street or fast fashion
brands
29. The Luxury Goods Industry 2013
The five forces model
Porter’s
Five Forces
Model
The Threat
of New
Entrants
Rivalry
among
Existing
Competitors
Suppliers’
Bargaining
Power
Buyers’
Bargaining
Power
The Threat
of
Substitutes
High
Moderate
30. The Luxury Goods Industry 2013
buyers’ bargaining power
Number of
Buyers relative
to Suppliers
Level of
Dependence on
a Buyer
Switching
Costs
Possibility of
Buyer’s Vertical
Integration
31. The Luxury Goods Industry 2013
number of buyers
❧ Decreasing buyer concentration
– Increasing number of buyers relative to
suppliers
– Example: China’s emerging middle-
class buyers
• Concept of “affordable luxuries” spreading in
second-tier cities satellite towns
– Increasing number of wealthy
households
• Of the 1.6 million wealthy households, about 50
percent were not rich four years ago
33. The Luxury Goods Industry 2013
level of dependence on a
buyer
❧ Luxury industry depends heavily
on top-tier customers
• Average spending by luxury consumers
rose by 30% in 2009
• MOST driven by small groups of super-
affluent top-tier consumers
❧ Top-tier customers eg. celebrities
are usually early adopters and can
drive consumption
❧ But not one single buyer can
determine prices
34. The Luxury Goods Industry 2013
switching costs
❧ Buyers who develop an emotional attachment
to the brand may have emotional switching
costs
❧ Increasing switching costs with the
introduction of customer loyalty programs
– E.g. LV’s VIP clients receive free gifts
35. The Luxury Goods Industry 2013
Possibility of backward
integration
❧ Extremely low possibility
❧ Customers purchase luxury
products for direct consumption
– No business reason for backward
integration
❧ Size of luxury companies usually
way out of a buyer’s purchasing
power
36. The Luxury Goods Industry 2013
The five forces model
Porter’s
Five Forces
Model
The Threat
of New
Entrants
Rivalry
among
Existing
Competitors
Suppliers’
Bargaining
Power
Buyers’
Bargaining
Power
The Threat
of
Substitutes
High
Moderate
Low
37. The Luxury Goods Industry 2013
suppliers’ bargaining power
Number of
Suppliers
relative to Buyers
Level of
Dependence on
a Supplier
Effective
Substitutes
Switching Costs
(Switch
suppliers)
Possibility of
Supplier’s
Vertical
Integration
38. The Luxury Goods Industry 2013
number of suppliers
❧ Limited high skilled workers
❧ Skills shortage – retiring
craftsmen, not many youngsters
willing to learn
❧ Couture-level embroiderers in
France: ~10,000 in 1920,
dropped to ~200 now
39. The Luxury Goods Industry 2013
level of dependence on a
supplier
❧ Some key components and
materials are outsourced
– e.g. LV outsources its
monogrammed leather
– Chanel ordered a large bunch of
leathers from one supplier at one
time in case they wouldn’t find a
better one
40. The Luxury Goods Industry 2013
effective substitutes
❧ Highly specialized “atelier
d’arts” with a narrow scope of
expertise
– E.g. Feather-maker Maison
Lemarié, Costume jewellery and
button-maker Desrues
– Very hard to replace
41. The Luxury Goods Industry 2013
switching costs
❧ Cannot easily switch to another
suppliers
– Past cooperating experience is
important
– Risk a lower quality of products
after switching to new suppliers
42. The Luxury Goods Industry 2013
possibility of forward
integration
❧ Extremely low possibility
❧ Luxury companies, especially
large groups, are much more
powerful and wealthier than
their manufacturers
43. The Luxury Goods Industry 2013
The five forces model
Porter’s
Five Forces
Model
The Threat
of New
Entrants
Rivalry
among
Existing
Competitors
Suppliers’
Bargaining
Power
Buyers’
Bargaining
Power
The Threat
of
Substitutes
High
Moderate
ModerateLow
44. The Luxury Goods Industry 2013
rivalry among existing
competitors
Competitive
Structure
Demand
Condition
Exit
Barriers
45. The Luxury Goods Industry 2013
market structure
❧ Oligopoly
– A few large luxury groups
dominate
– Large number of small
independent brands
– “Big Three”
• LVMH
• Richemont
• PPR Gucci
46. The Luxury Goods Industry 2013
Top 10 Industry players
*Size of bubble= Revenue
Bloomberg, 2012
47. The Luxury Goods Industry 2013
demand condition
Country
Growth in €
(2011/12)
China
20%
Hong Kong
18%
The US
13%
Korea
13%
Middle East
10%
The UK
9%
Japan
8%
Russia
7%
Country Personal Luxury Goods Market Growth
• Demand will grow at a relatively high rate in the near
future
Bain Company, 2012
48. The Luxury Goods Industry 2013
exit barriers
❧ Emotional Barriers
– Some brands may not break even
but continue operating due to a
small number of extremely loyal
customers and critical acclaim
– E.g. Christian Lacroix
• Never made a profit for the 22 years
in operation
49. The Luxury Goods Industry 2013
exit barriers
❧ Specialized Assets
– May be difficult to sell the highly
specialized supply chain
components
– E.g. Chanel has 6 atelier d’arts
under it
• Specialized machines no
alternative purpose
50. The Luxury Goods Industry 2013
The five forces model
Porter’s
Five Forces
Model
The Threat
of New
Entrants
Rivalry
among
Existing
Competitors
Suppliers’
Bargaining
Power
Buyers’
Bargaining
Power
The Threat
of
Substitutes
High
Moderate
ModerateLow
High
51. The Luxury Goods Industry 2013
conclusion
❧ Luxury remains one of the best-
performing, highest-growth sectors
Pwc, 2012