The Business of Luxury

Jeremie Lahmi September 25th, 2015

Global Luxury Management

WHAT IS LUXURY?

3 sectorsPERSONAL

TRANSPORTATION

EXPERIENTIAL

o  Clothing o  Jewelry o  Cosmetics o  Accessories

o  Private aviation o  Luxury car o  Yacht o  Luxury cruises

o  Hospitality o  Art o  Real Estate o  Personal Concierge

○  Rarity○  Excellence○  Expensiveness○  Timelessness○  Honesty○  Tailored○  Pleasurable○  Experience

8 criteria

LUXURY MARKET 2014

1st USA - $77 Billions

2nd JAPAN - $33 Billions

3rd ITALY - $18 Billions

TOP 3 LUXURY MARKETS HNWI

HIGH NET WORH INDIVIDUALS

Increased by 3% from 2013 to 2014

Held a total wealth of $20.8 trillions

172,850 people were qualified as HNWI

Highest number of HNWI across the globe: EUROPE - 60,565 USA – 44,922 ASIA – 42,272

63% were most likely to collect art and 48% to collect wine

$GROWTH TOP TRENDS

AMERICAS: +6%

EUROPE: +2%

CHINA: -1%

JAPAN: +10%

LUXURY MARKET 2015

% of HNWI’s investments will be allocated to Real Estate

% of growth of the luxury good market

% of global HNWI increase in 2015

2-4

SHARE OF GLOBAL LUXURY SALES IN 2015

20.6%AMERICAS

(Datamonitor)

EUROPE

33.4% ASIA40.2%32

34

2015 FORECASTS

3 LUXURY SECTORS

PERSONAL TRANSPORTATION EXPERIENTIAL

$ Market Value: $295 Billion

Top groups:

²  LVMH ²  Richemont ²  Estée Lauder Top brands:

²  Louis Vuitton ²  Cartier ²  Tom Ford

Growth: 4-5% by 2017

$ $

Top groups:

²  Volkswagen ² Dassault Aviation ²  Feadship Top brands:

²  Bentley motors ² Dassault Falcon ²  Cunard Line

Market Value: $400 Billion

Top groups:

²  Starwoods ²  Sotheby’s ²  American Express Top brands:

²  St. Regis ²  Christie’s ²  Barnes

Market Value: $700 Billion

Growth (2014): Private jet: +9% Luxury cars: +10% Yachts: +2%

Growth (2014): Luxury hotels: +9%

Key Trends for the Future of the Global Luxury Market

GROWTH OF LUXURY MARKET

The luxury industry has continuously experienced growth in the last 5 years, gaining the nickname of “recession-proof” industry.

INDUSTRY GROWTH

WINE / CHAMPAGNE: + 5.8%The market was driven by emerging economies such as Nigeria, which become the second largest champagne consumer in the world.

ACCESORIES: + 8.1%Accessories are what make luxury houses profitable as they benefit from larger margins. Asia experienced the strongest growth in 2014.

LUXURY GADGET: + 8.4%This is the fastest growing market in the global luxury industry. Part of the reason is the penetration of wearable and connected technology into the luxury market.

WATCHES / JEWELRY: + 4.9%China is leading the luxury watch market growth with a year-on-year increase of 14%. Global demand for jewelry is finally significantly increasing by 6% after it was slowed down by the 2008/09 economic downturn.

GEOGRAPHIC GROWTH

AMERICAStrong growth driver in 2014 with a 6% increase in its luxury market. Countries like Mexico and Canada contributed to this increase by delivering very promising performances.

EUROPELuxury market grew by 2% despite struggling economies, social and political challenges and a tourism that lost its dynamism. UK will most likely become the key driver of the European luxury market in the next couple of years.

ASIAWhile Japan (+10%) led the Asian growth in the luxury industry in 2014, China was a huge disappointment with a negative growth of -1%. This was mainly due to new anti-corruption laws and changing consumption patterns.

NEW MARKETS, NEW OPPORTUNITIESFrom market penetration to market adaptation

EMERGING MARKETS

PROMISING MARKETS

MEXICONIGERIAIn 2014, Mexico became the largest luxury market of South America. Sales reached $14 billion with a year-to-year growth of 11%, which equals 5 times the economy growth of the country. Euromonitor expects luxury sales to increase by 34% in the next five years.

Even though Africa is only at the early stage of its luxury penetration, Nigeria is gradually gaining more weight on the global luxury map. Last year, Nigeria became the second largest consumer of champagne in the world after France, and by 2020, the amount of Nigerian millionaire is expected to reach 15,800+. In a more global perspective, Africa is the second fastest growing luxury market after the Middle East, according to Euromonitor International

INDIAIndia is the most promising market in Asia. The number of millionaire has increased by 27% in 2014 and is expected to reach 437,000 in 2018 according to Wealth-X. CBRE group predicts that in the next couple of years, luxury retailers will take one to two million square feet of retail space. Finally, luxury car sales are expected to triple by 2020 to hit 100,000 for that year.

EMERGING MARKETS

DISAPPOINTING MARKETS

CHINA BRAZIL ARGENTINA2014 was a rough year for China. For the first time, China’s luxury market experienced a negative growth of -1%. This is mainly due to the slowing down of the economy, the Yuan devaluation, new government regulations and a change in the consumer dynamics. Luxury brands who have retails in China served an aspirational purpose, but Chinese consumers mainly spent their money on luxury in European markets.

Among the reasons why the luxury market has been very slow in the recent years, we can find inflation, currency depreciation and social issues that all led to pessimism in the business world. Furthermore, 80% of Brazil’s luxury goods spending takes place in foreign countries, as taxes on imported goods are very high.

The luxury industry has experienced one of the worst market penetration in Argentina. First, the country imposed heavy taxes on imports, making it very difficult to stock foreign made merchandises. Thus, prices of luxury goods are up to 4 times more expansive than in Europe, making it extremely difficult for Argentineans to buy goods in their home country. The black market has also seriously impacted luxury retailers, which ultimately decided to leave the country and wait for a better time to come back.

“GLOCALIZATION”

If business is now done on global scale, local adaptation is what will allow luxury companies to successfully penetrate new and emerging economies.

DEMOGRAPHYMen are driving luxury sales in China. They represent 45% of the Chinese luxury handbag market and spent on average 62% more than women on fragrances.

PRODUCTSIn India, Hermes launched a collection of traditional Indian Saris while Ermenegildo Zegna and Etro have found success in designing Indian-influenced men’s jackets.

SERVICEIn Brazil, Yves Saint Laurent adapted to local customer service expectation. They organize private showings at customer’s houses and allow them to take products home, to try them, at no costs.

MARKETIn India, the gem and jewelry sector contributes 6-7% of the country’s GDP. This market has the potential to grow to $85 Billion by 2018 and according to the World Gold Council, demand for Gold in India exceeded the one in China.

THE DIGITAL ERAOnline, Brick & Mortar and Social Media

ONLINE VS. RETAIL

McKinsey’s Digital Report for Luxury - 2013

Now that E-commerce and M-commerce represent a big part of the retail industry, we would be tempted to think that physical stores are not relevant points of sale anymore. The reality is very different.

Consumers have used the available online resources, in order to make extensive research on a product before buying it in a store. For them, it is a convenient way to browse products at their own pace and to look for customer reviews. Nevertheless, they still have to need to touch and feel the product before purchasing it

The luxury in-store experience can hardly be reproduced online. However, luxury companies are now realizing how important it is to incorporate new technologies to the current in-store experience, in order to enhance it even more and provide a superior customer service.

TECHNOLOGY

Luxury companies have had a lot of difficulties to digitally reproduce the full luxury experience as it heavily relies on human interactions. Instead of digitally transferring this experience, new technologies are now used as a way to enhance the already existing customer’s experience.

Customer ExperienceBurberry salespeople are now using iPad in order to check on stock availabilities or in order to charge their customers. Prada recently opened a NYC store with connected mirrors in fitting rooms in order to be in direct contact with social media. Therefore, technology really allows to increase the customer experience.

Product InnovationsProducts have benefited from the penetration of new technologies in the industry. For instance, last year, Ralph Lauren launched a Ricky Bag with an embedded smartphone charger and an inside light that is being activated when one of the flaps is being lifted. More recently, in 2015, they launched a connected t-shirt that tracks your heart rate and how healthy you are.

Key peopleLuxury groups and tech companies recently understood that in order to integrate technologies to traditional heritage, they needed to hire people coming from each other’s industry. For instance, Apple hired Burberry’s former CEO in order to launch the iWatch, and LVMH recently hired Apple’s executive digital director in order to develop their online strategy.

TECHNOLOGY AND

LUXURY

Paul DeneveApple hired the former CEO of Yves Saint Laurent in order to lead the “Special Projects” department

Angela AhrentdsStepped down as CEO of Burberry to become Vice President of Retail at Apple

Ian RogersLVMH recruited Apple’s former Executive Digital Director in order to develop their digital strategy

Lubomira RochetFormer Managing director of Valtech who now works as Chief Digital Officer at L’Oréal

KNOW YOUR CUSTOMERS

Fashion and Luxury Goods: Deloitte, 2014

According to Deloitte, 94% of retail transactions still take place in-store. This means that technology and online experience must be leveraged in order to strengthen customer relationship management and ultimately the in-store experience.

CASE: BURBERRY (1) Burberry is now considered to be the luxury company that best embraced the digital and technological penetration of the luxury industry. It has developed a digital ecosystem that allows it to have one of the best customer experience of the retail world.

Customers browse online

and experience a digital service with music, look

book and bespoke service

Customers shop to brick and

mortar locations that display on

large screens the same content than the one found online

Store employees have access to

iPad to check on inventory and to

finalize sales. They also have access to smart

analytics

Clothes purchased by

customers hold a digital chip that

can “unlock” exclusive content on stores’ screens

After purchasing clothes,

customers also have access to

exclusive content only available

online

1

2

3 4

5

SOCIAL MEDIA

We have learned that consumers are not in social to shop and they are not on your website to be social ”

“

Marko Muellner, VP of marketing at ShopIgniter

à With one billion smartphones in use and 67% of online adults active on social media, these platforms are now playing a major role in the luxury marketing.

Smart use of social media While social media platforms are getting full of content, Luxury brands struggle to remain engaging and relevant to their target consumers. Having 3 million followers or fans on a Facebook page is great, but if only a couple of thousands like your posts then your strategy is not as successful as it seems to be.

Adopt a new strategy Posting pictures and videos will most likely not have the expected engagement if it is purely to promote a product. Consumers are looking for stories and emotions that will raise their interest for a product or a brand. Moreover, your content must intertwine with the overall digital experience. For instance, a post of Twitter should have a link to your brand’s website on which followers could have access to exclusive preview of a new campaign video.

CASE: BURBERRY (2) In addition to a strong digital experience, Burberry also is the indisputable leader of social media. It is by far, the luxury brand with the largest amount of followers and fans across all social platforms.

BURBERRY RALPH LAUREN

Facebook 16.9 M 8M

Instagram 4.3 M 2.2 M

Twitter 4.56 M 1.36 M

YouTube 185 k 23 k

TOTAL 26 M 11.6 M

WHO ARE THE LUXURY CONSUMERS?Keep the HNWI, cherish the HENRYs and invest in the Men

LUXURY CONSUMERS

Billionaires 1,426 Global 442 in the U.S.A

High Net Worth Individuals

200,000 Global 60,657 in the U.S.A

$30 M+ in Assets

Affluent Earners1% of U.S Households

$750k Median Income + $7.5 Million Median Assets

High Earners, Not Rich Yet

4.3 % of U.S Households $275k Median Income + $2.3 Million Median Assets

Uninvolved

Luxury Market Consumer; Ellen Rohde Presentation 2015

4 types of luxury consumers

(HENRYs)

(HNWI)

HENRYs

In order to remain competitive, luxury companies must be aware of the evolution of their core consumers and must adapt to it. Solely focusing on the HNWI and Billionaires is not a strategy that will pay-off on the long run.

HENRYsThis category of luxury consumers is mistakenly forgotten by major luxury companies. Even though they have less spending power than the HNWI or Affluent Earners, they are the “gateway demographic through which most of those who reach ultra-affluent or HNWI status move through” according to luxury consultant Pamela Danziger.

Luxury companies must create value for this consumer segment so that HENRYs will become loyal to these brands when they will start earning higher incomes.

How to attract HENRYs?

•  Develop campaigns that are aspirational to them

•  Focus on the quality, craftsmanship and authenticity of your brand rather than the brand name

•  Integrate multi-channel marketing approaches to engage HENRYs whether they are traveling, shopping or simply browsing

•  Leverage social media, technology and digital platforms to connect with HENRYs, as they are mainly composed of a young crowd of people

+13%

MEN AND FASHION

The Rise of The MenEven through women have been the economic driver of the luxury goods consumption in 2014, luxury groups are now betting on the men’s luxury fashion market in order to boost their sales.

Between 2009 and 2013, the market for menswear increased by 9 to 13% per year.

In 2013, men’s apparel sales increased by 5% and outperformed womenswear according to NPD group.

In the next three to five years, Prada hopes to double its menswear business to $2 Billion. It also plans to open an additional 50 men’s stores to its 30 already existing ones.

“We clearly see a big potential for men. This segment of what we call metrosexuals — those men, living in cities, making a lot of money, taking care of themselves, buying cosmetic products, buying the best brands for apparel, even wearing luxury bags — this is a growing segment.”Jean-Marc Bellaiche, SVP Strategy at Tiffany & Co.

+5%

x 2

TWO MAJOR CHALLENGES TO FACEControl your distribution, find new talents

SUPPLY CHAIN CONTROL

Controlling your chain of supply is ultimately controlling your brand. This is certainly why, according to a Deloitte report, 63% of executives are very concerned about the risks within the extended value chain.

Tighten your Supply Seed up your Timing Control your DistributionIt is essential that luxury companies vertically integrate their supply chains. This will allow them to have more stable costs, higher quality control and to guarantee high-quality materials for product.

Tightening the supply chain can provide companies with a better delivery timing. The moment from when clothes will be presented on a catwalk to when it will arrive to retails will be reduced in order to better answer the customer demand.

Luxury companies need to increase the control over their brand’s image. Now that business is done on a global scale, customers are expecting the same service all over the world. One of the way to better control distribution points is to buying back franchised stores and to limit the off-price channels that hurt the value and image of a brand.

NEW TALENTAccording to a 2014 Boston Consulting Group report, 50% of the executives in the fashion and luxury industry believe that they lack access to the best creative talents. This number is illustrative of the difficulties luxury companies have to recruit new talents.

Recruiting the right people is the key to success for luxury companies. Firms that have superior quality recruits have a revenue growth that is 3.5x faster than other companies according to BCG.

According to the World Federation of People Management Association, the most difficult jobs to fill out are in design and product. 67% of luxury executives believe that creative directors are impossible or very difficult to find.

BCG points out that from a candidate’s perspective, the four main recruiting channels are company websites, job portals, online ads and social-media pages. Yet, only 1/3 of companies use digital, online and social sources to recruit.

Companies can’t exclusively rely on their name to attract new talents. They need to “brand” their company in order to tell a story to future talents and clearly identify their differentiation points with other luxury companies

Companies must develop close partnerships with schools if they want to find the best talents. By finding talents at the source, companies can more easily recruit, train and retain them.

Finally, it is essential for luxury companies to find creative talents that will also have at least basic business skills. As competitors are multiplying in the industry, keeping a business mindset while implementing creative skills can be a precious advantage.

Only recruit the best Leverage digital and social media

Brand your company Recruit at the source Creative skills are not enough

Creative talents are rare

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http://www.businesstoday.in/lifestyle/off-track/india-to-be-home-to-4.37-lakh-millionaires-by-2018-wealth-x/story/221456.html

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