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Luxury brands challenged to embrace the new normal in doing business

INSIGHT ARTICLE  | 

Last year was difficult for most luxury brands. From currency fluctuations to economic volatility, these factors and more are likely to be evident in 2017 as well. Demographics and market saturation have changed the dynamics of the luxury business. Brand extension and broadened distribution were keys to significant growth over the past two decades. However, consumers are spending differently today, whether it be how, where, brand, product and by whom. Additionally, some brands and products appear to be reaching the end of their life cycles. It will not be business as usual for luxury brands going forward. Survivors will need to adapt to the evolving consumer and environment at a faster pace. 

Searching for the new normal

The luxury sector is a victim of its own success as product line extension and increased distribution propelled strong sales growth, higher than average gross margins, return on investment and cash flow, which in turn, financed rapid growth. Luxury brand sales softened over the past two years, consistent with weakness in the overall retail sector. Whether its downturn was due to the economy, saturation, demographics or a combination, the anticipated recovery this year will likely be more muted than past cycles.

In its hay day, luxury meant stature, aspiration, limited in distribution, unique and differentiated. It represented high-quality fashion. Consumers were willing to pay high prices yielding high-profit margins and cash flow for the brand owners. Its customers were generally well educated, older and had a high rate of spendable income. The brand and label translated credibility of fashion and quality. It was not a fad. It had staying power, but less so in recent years.

Over exposure diluted brand uniqueness as did the failure to consistently update product offerings shortened the life cycle for many. Licensing accentuated the growth for a number of brands, but more often than not, with merchandise was not consistent with its heritage. Today, luxury brands are everywhere and available at discount pricing. A number of brands such as Ralph Lauren, Michael Kors, Kate Spade and Coach have redefined their distribution and promotional strategies in an effort to address this and rebuild profitability.  

Adapting to change and opportunities

Luxury brands face a generational shift in the demographics of its U.S. target market, from maturing baby boomers to millennials. Both generations are roughly similar in size, but the latter have considerably less spending power. The baby boomers’ segment grew more affluent, acquiring the taste of and demanding luxury lifestyles. Millennials, on the other hand, do not have the same interests and place a higher priority on experiences and lifestyles. These trends will likely continue to disrupt the traditional luxury market, which will need to target a new customer differently in order to reverse the sales downtrend. The good times of easy growth are probably over for many; winners will need to adapt.

Many luxury brand executives have acknowledged this new environment, but few appear to have embraced a new strategy. Luxury brands need to identify with this new generation; create new and compelling reasons to own their merchandise. Digital communication and social media are critical for success, as well is understanding consumer values, attitudes and lifestyles. Key will be positioning products as solutions to issues and providing a longer-term value proposition, as well as leveraging omnichannel capabilities to serve this new consumer.

Ralph Lauren makes a strategy pivot

Ralph Lauren initiated a program of reducing its product assortment and brands, and closing stores, both full price and factory outlets. Promotional activity is being curtailed, although there is still considerable excess merchandise in the pipeline that is still being liquidated. There are lower growth expectations for China, once a rapid growth market. Minimizing brand and product overlap, as well as distribution, should allow for a better targeted marketing campaign to the appropriate consumer. Lastly, sourcing and logistics need to be streamlined so as to introduce new products faster and more efficiently. Ralph Lauren has made important first steps in acknowledging its business model is obsolete and putting in motion these updated strategies to meet the needs of the consumer and marketplace. Burberry, Coach and Michael Kors are all following suit as well.

It’s all about the consumer

Successful brand management needs to focus first on the consumer; who they are, how they shop, what they buy, but more importantly, create the want to purchase. There needs to be less focus on the targeted margin based on a high markup, but rather implementation of strategies to build gross profit dollars. Unique and differentiated merchandise might justify a high markup, but volume targets must be reachable for a profitable business model. Most important, luxury brands must realize the value equation is different for every consumer who will place different priorities on fashion, quality and price. Yesterday’s hot brand does not ensure success in the future.

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