luxuryindustry

Presented by: Stephanie So, Evan Lui, Vanessa Yau, Richard Kan & Trevor Li

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


characteristics of luxury products

The Concept of Luxury Brands, 2012

INDUSTRY BACKGROUND


Global Market size

Bain & Company, 2012


growth by geographic markets

Pwc, 2012


Growth by product category

Pwc, 2012


recent trends

Globalization over 40% of sales is from luxury tourism



recent trends

Globalization plenty of untapped potential in emerging markets



recent trends

Consolidation individual brands are bought up by large luxury groups



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


recent trends

Diversification apparel brands branch out to other luxury product categories, eg. jewelry, cosmetics, perfume, even restaurants

McKinsey, 2012

INDUSTRY COMPETITIVE ANALYSIS


The five forces model

Porters Five Forces

Model

The Threat of New Entrants

Rivalry among

Existing Competitors

Suppliers Bargaining

Power

Buyers Bargaining

Power

The Threat of

Substitutes


Threat of new entrants

Brand Loyalty Scale Economies Capital Requirement

Exclusive Access to Suppliers & Distribution

Potential Retaliation from Existing

Companies


brand loyalty

Brand image and CRM programs build high brand loyalty


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


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


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)


capital requirement

High marketing & management costs Distribution Fees: High rent to develop monobrand boutiques in

prestigious shopping areas e.g. South Koreas Apgujeong; HKs 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. Chanels elaborate runway shows during Paris Fashion Week; Louis Vuittons microfilm



Many brands have acquired suppliers to protect competitive advantage and insulate against future rising supply costs

E.g. LVMH acquired two watch dial manufacturers Lman Cadran and ArteCad SA, French artisan shoemaker Delos Bottier & Cie and haute couture manufacturer Arnys.



More and more distribution access points are available to brandsContemporary areas like The

Bund in Shanghai brings a multi-sensory experience to luxury

Value Partners, 2007


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



Porters Five Forces

Model


Rivalry among



Power

Buyers Bargaining

Power

The Threat of

Substitutes

High


threat of substitutes

Price of Substitutes

Quality of Substitutes

Switching Costs to

Customers


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


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


switching cost to customers

No monetary switching costsLoss of prestige if switch to

high street or fast fashion brands



Porters Five Forces

Model


Rivalry among



Power

Buyers Bargaining

Power

The Threat of

Substitutes

High

Moderate


buyers bargaining power

Number of Buyers relative to Suppliers

Level of Dependence on

a Buyer

Switching Costs

Possibility of Buyers Vertical

Integration


number of buyers

Decreasing buyer concentration Increasing number of buyers relative to

suppliers Example: Chinas 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


number of buyers


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 consumptionBut not one single buyer can

determine prices


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. LVs VIP clients receive free gifts


Possibility of backward integration

Extremely low possibilityCustomers purchase luxury

products for direct consumption No business reason for backward

integration

Size of luxury companies usually way out of a buyers purchasing power



Porters Five Forces

Model


Rivalry among



Power

Buyers Bargaining

Power

The Threat of

Substitutes

High

Moderate

Low


suppliers bargaining power

Number of Suppliers

relative to Buyers

Level of Dependence on

a Supplier

Effective Substitutes

Switching Costs (Switch

suppliers)

Possibility of Suppliers

Vertical Integration


number of suppliers

Limited high skilled workersSkills shortage retiring

craftsmen, not many youngsters willing to learnCouture-level embroiderers in

France: ~10,000 in 1920, dropped to ~200 now


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 wouldnt find a better one


effective substitutes

Highly specialized atelier darts with a narrow scope of expertise E.g. Feather-maker Maison

Lemari, Costume jewellery and button-maker Desrues

Very hard to replace


switching costs

Cannot easily switch to another suppliers Past cooperating experience is

important Risk a lower quality of products

after switching to new suppliers


possibility of forward integration

Extremely low possibilityLuxury companies, especially

large groups, are much more powerful and wealthier than their manufacturers



Porters Five Forces

Model


Rivalry among



Power

Buyers Bargaining

Power

The Threat of

Substitutes

High

Moderate

ModerateLow


rivalry among existing competitors

Competitive Structure

Demand Condition

Exit Barriers


market structure

Oligopoly A few large luxury groups

dominate Large number of small

independent brands Big Three LVMH Richemont PPR Gucci


Top 10 Industry players

*Size of bubble= Revenue Bloomberg, 2012


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



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


exit barriers

Specialized Assets May be difficult to sell the highly

specialized supply chain components

E.g. Chanel has 6 atelier darts under it Specialized machines no

alternative purpose



Porters Five Forces

Model


Rivalry among



Power

Buyers Bargaining

Power

The Threat of

Substitutes

High

Moderate

ModerateLow

High


conclusion

Luxury remains one of the best-performing, highest-growth sectors

Pwc, 2012

The End

luxuryindustry

Documents

luxury sector

luxury brand management

concept of luxury brands

luxury product categories

luxury tourism bain

brand loyalty brand

company brand portfolio

high economies of scale