Is Luxury Even Luxury Anymore?

I would argue that customers really should be better informed with regard to what it is they're paying for. For the most part multinational luxury brands no longer produce in traditional, heritage markets. Many have now opted to source from lower-cost, large-scale manufacturing.

Luxury is not what it once was, nor will it ever be.

From a small, niche market for the genuinely rich the global personal luxury goods market is now valued at over €250bn. It now caters to the much larger mass affluent class.

There have been a number of drivers in luxury market development as discussed in our blog. However the main drivers that have transformed the industry in recent years are:

  • The Internet and, more specifically, Net-A-Porter which eliminated the need for consumers to take shopping trips. Luxury now arrives at the shopper's door. It had become convenience.
  • Smartphones have made luxury shopping available 24/7.
  • Social media has multiplied the number of advertising platforms and created a window for people to covet and/or emulate the perceived lives of others and, in particular, celebrities.

This has led to a change in the profile of the luxury consumer.

Even 30-40 years ago those of the original purchasing class of luxury were much more focused on the intrinsic quality and artisan-manufactured element of the product they were buying. This was because:

  • They weren't exposed to all the peripheral advertising of today.
  • People were buying products, not only for their aesthetic appeal, but also because they expected they were made to last. A customer would take time inspecting an item and would expect a brand's sales staff to be well informed about details, quality and construction.
  • In contrast today's luxury consumer is different because:
  • The rise of the mass affluent class has coincided with lifestyle competitiveness.
  • While more people have more money there is also added peer pressure to demonstrate wealth and to visibly consume personal luxury goods which are seen as items of social signaling and status.
  • They are more focused on the label than the product.
  • We live in more of a throwaway culture; purchases aren't meant to be kept and re-worn but rather replaced and seen to be replaced (especially on social media platforms where re-wearing outfits is generally frowned upon).
  • They have become richer younger - with higher spending power either through cash or debt - and so are a less experienced, and generally less discerning, consumer.

The industry once served a niche customer base of the old rich. Its leaders realised that there was an emerging class of mass affluent consumers which was multiple times larger but which could not be address by the traditional cost structure - one which was much more weighted to the product.

This new consumer had different purchasing habits, different drivers of what they bought and how they bought it. They were much more aspirational and marketing-driven.

In order to access this growing market brands abandoned the old artisan model. Effectively they stripped cost out of the product and invested in advertising and swanky /trophy shops.

They were able to do this efficiently because they had also started to enjoy the benefits of scale.

Most luxury brands are owned by financial investors who have acquired numerous brands partly in order to maximise buying power - one large conglomerate can negotiate a much more competitive price with suppliers if it owns a large stable of luxury names.

To add changes of ownership have also led to changes in the management culture of these brands.

Luxury brands are now public companies listed on stock markets or owned by private equity groups whose investment horizons are a few years rather than generational. For many companies the pressure by performance-hungry portfolio managers at each quarterly earnings announcement results in them often having to pander to the whims of the stock market.

There are very few brands that remain family /founder-controlled and which keep to the old style artisan model - recognisable by the very high prices of their products which continue to remain out of the reach of the mass affluent.

The outlook appears challenging

I would argue that the way luxury has evolved has made it more vulnerable to an economic downturn essentially because the luxury business model is now one of high fixed costs and marginal customers.

  • Switching costs out of the product and into expensive advertising and retail overheads has changed the luxury business model such that variable costs have been swapped for fixed costs.
  • To add advertising has become more of a fixed cost given the new mass affluent customer needs to be sold a lifestyle and not just a product.
  • The room to cut product costs further is likely to be limited given brands have already minimised costs through low-cost production.
  • Luxury companies are most exposed to the risk of a fall in prices because the new mass affluent customer is more susceptible to an economic downturn. The 'real' rich were a much more defensive customer.
  • In recent years prices of personal luxury goods easily exceeded rates of inflation (on the promise of the Chinese and other emerging market consumption). It would seem that their pricing power has reached its limits - as evidenced by recent price cuts by several brands.
  • This means that when prices fall margins and profitability come under pressure.

But what does all this mean for the consumer?

I would argue that customers really should be better informed with regard to what it is they're paying for.

For the most part multinational luxury brands no longer produce in traditional, heritage markets. Many have now opted to source from lower-cost, large-scale manufacturing.

From my own experience of dealing with factories ensuring quality thresholds are met is a constant challenge. And Rose & Willard is a small brand that has only ever produced at our studio or close to home.

The longer the supply chain the harder it becomes to control quality, especially when there are language /cultural barriers and that many factories will outsource to sub-contractors - not to mention the added garment worker welfare risks.

Some even employ a workaround. For example brands can have almost all of a product made by a lower-cost manufacturer overseas and then transport the product back to a traditional heritage /luxury market to have a minor element applied, e.g. a button along with the final 'Made in' label which will reflect only the luxury market. This practice is perfectly legal.

In any event supply chain management is likely to continue to come under pressure given design and production cycles are becoming ever shorter as the consumer demands new styles more frequently.

The global economic outlook is concerning, Chinese growth is slowing and the oil price remains relatively weak. At the same time the real rich are now switching more of their spending to luxury experiences over personal luxury goods.

This may leave luxury brands contemplating how they manage these additional large, fixed costs.

With margins at risk this may put further pressure on product costs which will make it difficult to maintain luxury standards.

Bearing this in mind I would suggest that consumers look more carefully at what they buy - check where the product was made, check the seams, the stitching, the finishing, etc.

Consumers should also perhaps ask themselves whether it's worth paying the same premium for long-established heritage brands versus those that didn't exist even a few years ago.

Of course, some customers may only wish to buy a product because it has a luxury label - that is their prerogative.

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