If I were to believe what I read, which I frequently don’t, the luxury industry, specifically the makers of hard goods, need to look in the mirror as they face unprecedented hurdles, some they can’t control, others of their own making.
Amongst the headwinds are the challenges in Russia, Ukraine and China, plunging oil prices that could cut back on consumption from wealthy Gulf nations and spots like Nigeria, Azerbaijan, Kazahstan and Indonesia that have been over-delivering uber wealthy customers to the malls of Hong Kong and shopping streets of Paris, London, Milan, New York and Beverly Hills.
Questions continue about how strong the economic recovery in the U.S. truly is. Unemployment reports are structured so many that are looking for jobs aren’t counted, and there is little question that the lion’s share of economic gains go to the top of the pyramid. A recent Bloomberg article noted, “While the merely rich haven’t seen their share of society’s wealth increase since 2000, the Super Rich have seen their slice of the pie soar.”
A part of UHNW gains can be attributed that the cash rich wealthy are best positioned to jump in a buy low when there is a crisis, enabling them reap oversize returns when the curve ticks up as it inevitably does.
More troubling, the article described the overall middle class has been on a decline for a while now, like the two halves of the Titanic, the upper end white collar middle class at slower trajectory, but still the same downward track of their blue collar cousins.
If you want more bad news, a number of European economies remain shaky, and the situation in Greece and now with refugees isn’t exactly the type of news luxury goods executives wish for.
A macro-issue is when the occasional luxury consumer needs to make a choice on how to spend their limited discretionary budgets, money is apparently shifting to experiences, a boon to the luxury travel industry, at the expense of thousand dollar handbags and mechanical watches under $10,000.
A recent piece in The Guardian was titled “Luxury Brands Must Redefine The Way They Do Business.” The writer argued, “The silver bullet for luxury retailers isn’t e-commerce. It’s redefining the business they are in….With luxury consumption becoming global, digital and experiential, the role of luxury retailers irrevocably shifts from products to services and experiences. The core value unit that luxury retailers designed their businesses around isn’t a luxury item anymore – it is seamlessness, convenience, speed and quality of personal service.”
For luxury executives it must seem like driving a Formula One car at full speed with junk being thrown on the course in front of you.
My take is pretty straightforward:
- There is no new China or Russia ready to burst on to the scene and save the day so this time around, the answer won’t be rushing into new markets (although to be fair, many brands spent many years to ensure they were well positioned when the rush started.).
- Most luxury goods companies still have a country or regional approach, that ignores high-end travel is the common denominator of the big spenders. Even when an UHNW community takes a hit as they are in Russia, those that still have money are still traveling. There may be less, but they still have lots of money and still spend. Most luxury goods companies rely on local market advertising in home countries to hopefully impact those that are traveling. Just as luxury brands are spending more resources to digital, they need to shift more marketing focus on dollars to global print and airport (don’t forget private jet terminals), still the best way to be top-of-mind with the high-spending travel target.
- Travel’s gains in its share of the luxury-spending dollar didn’t happen by accident. After getting hammered in the American recession and not having the same flexibility to simply chase new markets (it’s hard to move a hotel, for example), they stopped selling beds and started to view themselves as “vacation stylists.” Groups such as Four Seasons created unique experience-led programs, such as being able to play basketball with retired Hall of Famer Hakeem Olajuwon if you stayed at its Houston hotel, or having a private dinner overlooking the Arne from the Ponte Vecchio if you stayed at its hotel in Florence.
I think The Guardian piece was maybe a bit too dramatic. Luxury goods in my opinion will always be closely aligned to the “It Bag,” the star designer, the celebrity who wore it, artisanal craftsmanship, heritage, limited inventory, innovation and great stories.
At the same time, by dedicating more resources to the high-end global travel market (beyond Duty Free) and taking a page from the travel industry to create experiential offerings exclusive to customers (there are dozens of on-brand, simple ideas as well as some very high-impact more complicated ones) I think the hard goods side of the luxury industry will find clear track ahead.